A Building Boom In The Middle Of A Housing Bust
Bloomberg reports from Florida. “In the middle of the biggest glut of condominiums in more than 30 years, Miami developers keep on building. ‘Florida is the epicenter for all the problems that exist in the housing industry,’ said Lewis Goodkin, a property adviser in Miami for the past 30 years, who also foresees a recession. ‘The problems we have now are unprecedented and a lot of people will get burnt.’”
“Thirty-seven new high-rise condos and 20,000 new units are being built in Miami’s 1,040-acre downtown, where sales fell almost 50 percent in May, according to the Florida Association of Realtors. The new units will join the 22,924 existing condos in Miami-Dade County that were for sale in April, according to (consultant) Jack McCabe.”
“‘Have you been to Miami lately?’ Florida Governor Charlie Crist said at a homebuilders’ conference last week in Orlando. ‘It’s like we have a new state bird: the building crane.’”
“Florida’s robust economy of 2001 to 2005 was driven by the thousands of well-paying jobs related to the real estate market and homeowners who used home-equity loans to pay for items such as boats and big-screen TVs, McCabe said.”
“‘All those jobs are going away now, and we’re seeing the trickle-down effect in declining sales in big-box retailers and home-furnishing manufacturers,’ McCabe said. ‘Florida is headed to a recession.’”
“Puig Development Group, a closely held company that converted rental apartments to condos, filed for Chapter 11 bankruptcy protection on May 29. The Hialeah, Florida-based Puig and its subsidiaries controlled 2,900 units in Florida, including 980 condos, worth about $210 million, said Ronald Glass of Atlanta-based GlassRatner Advisory & Capital Group LLC, chief restructuring officer for the Puig properties.”
“‘Puig got a little overzealous and a little overly optimistic, and was caught when the market slowed,’ Glass said.”
“Florida banks posted a 43 percent jump in the first quarter in loans no longer paying interest compared with the last three months of 2006, while the number for banks nationwide rose 13 percent, according to the FDIC.”
“Loan payments that were one to three months overdue to Florida banks increased 30 percent in the first three months of 2007 from the fourth quarter of last year.”
” Miami condo sales fell to 599 in May, a drop of 46 percent from a year earlier, according to the state realtors association. Condo sales in Orlando have plummeted 80 percent, said (economist) Mark Zandi. ‘The statistics are scary,’ said Michael Wohl, a partner in a Miami developer that has stayed out of the condo market. ‘There’s going to be a lot of blood in the water in the next 18 months.’”
“Lenders typically require enough advance sales to cover the cost of a construction loan. Customers’ deposits, however, don’t always mean the sales will close, said Ian Bruce Eichner, a developer whose latest Miami Beach condo tower is scheduled to open in November.”
“‘The market is as close to a depression as Miami has seen in 30 years,’ Eichner said. ‘There’s a gargantuan supply of homes and the overwhelming preponderance were built for speculators, not for people who are living there.’”
“As much as half of those putting down deposits for Miami condos are speculators looking to flip units, or sell them quickly for a profit without living in them, said McCabe.”
“With sale prices falling, McCabe said he expects up to 50 percent of them to walk away from their deposits in the next 18 months rather than complete the sales. ‘What’s going to happen to all those units?’ Eichner asked. ‘God only knows. You couldn’t give me a piece of property in Miami for nothing. I like sleeping at night.’”
“Condo developers encouraged short-term investors, whose deposits helped them secure funding, Goodkin said. ‘The developers didn’t get to start building until they had a certain number of contracts signed, so anyone putting down money was good for them,’ Goodkin said.”
“Many ‘flippers’ closed on their units and now can’t sell them, said Michael Cannon of Integra Realty Resources-Miami Inc., leaving completed condo towers with floors of dark windows and empty balconies.”
“The Jade Residences at Brickell is an example, Cannon said. The 338-unit, 48-story waterfront tower opened in August 2004 with buyers willing to pay as much as $5 million snapping up all the units. Now, the new owners have listed 112 condos for sale and 17 units totaling $15 million are in foreclosure.”
“The skyline of Miami is visible from Key Biscayne, the barrier island where John Rosser lives. Some nights the real estate broker scans the new buildings and sees more dark windows than lighted. ‘This is dumbfounding to me,’ Rosser said. ‘It’s a building boom in the middle of a housing bust.’”
The Naples News from Florida. “A standing-room-only crowd turned out Thursday night to tell Collier County officials, for nearly three hours, that a planning moratorium is premature. They may have been successful, or it could have been that planning commissioners themselves walked in questioning the intelligence of the plan. Either way, it was defeated.”
“Richard Davenport, of Waterways Homes, said Collier County is already in a de facto moratorium because of the business climate resulting from rampant real estate speculation a few years ago.”
“‘A planning moratorium ordinance sounded sort of innocuous. A planning moratorium ordinance is not innocuous. It’s playing around with peoples’ lives and livelihoods,’ Davenport said.”
“Developer Walter Crawford wondered why county officials believed the greater Naples area population is increasing.”
“A friend told Crawford to tell the county to ‘wake up and smell the recession.’”
“‘In my world, people are moving north…to Tennessee, to North Carolina, they’re moving to the mountains,’ Crawford said.”
“Lou Vlasho, VP of the Naples Area Chamber of Commerce, said this proposal would damage every business in Collier County. ‘The economy of this community is idling at best right now,’ Vlasho. ‘When you’re in a valley, that’s not when you turn off the gas.’”
The State from South Carolina. “Home sales are bottoming out in South Carolina, real estate experts say, and should rebound slowly starting next spring. In June, typically a hot home selling month, sales slipped in 14 out of 15 S.C. regions.”
“So far this year, sales statewide are down 8.3 percent. The coast continues to get hammered, while several other scattered areas also saw decreases.”
“‘I’m reluctant to label it a slump,’ said Mark Vitner, senior economist for Wachovia, the Charlotte-based banking giant. ‘The problem is, two years ago sales were unbelievably and unsustainably strong. In a slump, sales would have dropped another 50 percent.’”
“Despite consecutive months of double-digit statewide sales drops, Nick Kremydas, CEO of the S.C. Association of Realtors, said he expects sales to creep up in coming months. ‘It seems the worst of the soft landing has occurred,’ he said.”
“Todd Beckstrom, an agent in Chapin, said he is seeing more inventory on the market than normal because houses are being built faster than they are being sold.”
“Kremydas said the market, driven up mainly by investors along the coast two years ago, is continuing to normalize as speculators have pulled out en masse. With the investors gone, a more realistic home market is emerging, he said.”
“Beckstrom said another factor affecting the coast is the number of second homes there. ‘Second-home markets are affected first when people get a little iffy,’ he said. ‘I think it’ll come back. We’ve had a slight correction.’”
“Median home sales price — the point in the market where half the homes sold for less and half for more — slid 2.2 percent statewide in June to $166,000. Hit hardest last month was the Anderson area, which saw sale prices plummet 31.5 percent.”
“Kremydas said the overall market in South Carolina is still good, despite the declines. ‘There’s no signs or indications that we need to be panicking about anything. Going into the next year and as we round out this decade, I think we’re going to see just another explosion.’”
‘In a move with big implications for Southwest Florida, State Farm Insurance plans to drop about 50,000 homeowners policies next year in what it considers risky areas along the coast.’
‘Having already cut 250 jobs to save money, Volusia County school officials are now looking for ways to trim another $9.2 million from their budget because of slumping state tax collections. And Flagler school officials may have to look at job cuts, too.’
‘Williams said the state tax shortfall illustrates the need for a more reliable way to pay for schools and other government services. ‘We’re basing everything on tourism and it’s not working,’ Williams said, referring to the shortfall predicted in state sales taxes, much of which is paid by tourists.’
‘Tourism is not going to be the way to keep Florida going,’ Williams said. ‘We’re going to have to get industry in here some way.’
‘Phones are ringing off the hook at the south Pinellas County Salvation Army. Progress Energy said this type of scenario is taking place throughout the state, not just in the Bay area.’
‘Last month, 22,000 homes statewide had their power service interrupted because they couldn’t pay their bill. That’s a 15 percent increase from last year. Also on the rise is the number of delinquent accounts - more than 100,000 accounts. That represents a 12 percent increase.’
‘Tourism is not going to be the way to keep Florida going,’ Williams said. ‘We’re going to have to get industry in here some way.’
It’s funny to me how a state will drive out businesses and not care, but now that tourism is down because of the recession and the housing bubble has popped, all of the sudden they want businesses back. Good luck with that one.
Right, and ridiculous housing prices are adding to the pressure on businesses to leave. And as if tourism is a strong economic base in the first place. First thing to go in a recession.
Excellent comments Ben, two different subjects and both very accurately stated and summarized.
MEW may not make alot of difference in most people’s daily expenditures*, but plenty of people HELOC’ed their trips to the mouse over the past few years.
*I, for one don’t believe that three income (Molly and Me and the HELOC makes three) families are as common as the anecdotes here would make them appear to be.
And as if tourism is a strong economic base in the first place. First thing to go in a recession.
hehehe…take a ride thru Maine about Ogunquit Beach right now.
Tourism is totally dead.
Locals will be eatin’ their shoes this winter.
The way life should be…
Thanks for the info - may just plan a trip there this year!!! (Old vacation grounds for our family…)
How much does it cost to insure a 40,000 sq-ft warehouse or a glassbox office building in a hurricane zone. I saw a ton of roofs ripped off of warehouses and broken glass on the upper stories of office buildings in Ft. Lauderdale a year and a half ago.
Another interesting thing, check out Google Earth and look around the Ft. Lauderdale neighborhoods. The satellite photo must have been taken right after one of the hurricanes. In some neighborhoods like one out of every 4 or 5 homes has a blue roof. I can guarantee you that blue roof is actually a cheap blue tarp from Home Depot.
Actually you’d be surprised - blue tile roofs are not that uncommon in Florida.
Yea right!! Try again.
I used to live near Ft. Lauderdale. I know of what I speak. As I look now at some neighborhoods next to the New River - I see several blue roofs, but they’re tile not tarp.
A good way to see is to look at the “bird’s eye view” of the houses on zillow.
Perhaps you do see some with blue tarp, but I don’t think there’s a big preponderance. Not to say there couldn’t be though. Ft. Lauderdale hasn’t been hit by a big hurricane in quite a while though.
Not trying to argue with you however I lived in SFL for 37 years and trust me, those sat pics are tarps not blue tile roofs. I would say there may be 1 in 8,000 homes have such a roof. After the storms a few years ago you could travel from southwest florida to central florida to south florida and you would see blue tarps everywhere.
Uhhhh…Ft. Lauderdale got HAMMERED by Wilma in October 2005.
I agree. I know I’ve seen actual blue roofs, but not a preponderance of them. They’re usually seen on higher end larger homes to give them that island look. The ouses I’m talking about are obviuosly ranchers. Those blue roofs are in fact tarps.
I stand corrected. I’m looking at Mapquest, which must use a different set of photos from a different time. Google earth crashes my PC so I haven’t been using it. Or perhaps we’re just looking at different sections of the city.
It was that…from the shoddy construction that got approval from the building inspectors who were taking money under the table…none of those houses upon close examination were built to code…if you buy a home in Florida you can’t get one that was built between 1978-1992.
I can guarantee you that blue roof is actually a cheap blue tarp from Home Depot.
The “blue tarps” were distributed and installed by FEMA.
If you were lucky the installation crews used the correct length fasteners to attach the tarp.
If you weren’t, you got nails driven thru your underlayment neccessitated replacement of the entire substructure-when and where you could ever find a professional roofing crew.
Government work at it’s best.
Anecdotal Evidence:The limo driver taking me home from Tampa airport yesterday commented that in his 6 years as a driver that this was the slowest summer he had ever seen.
Also, a new face on the Waste Managment truck . He was transfered to residential pick-up from his constuction route because of lack of construction.
Probably because the Tampa airport is having the busiest summer with parking. Parking rates are low enough the entire taxi/limo business is hurting. Just try to park in ANY of the garages, it’s a crapshoot. TPA has been very busy this summer.
Good observation Moman. That long-term economy lot is popular. The last few times I’ve parked there I’ve been on the roof or at the far end of the surface lot.
By the way, that airport is incredibly efficient. Even from the economy lot…
I forgot to add that the taxi/limo companies are very mad at the airport right now because they are relagated to the ends of the terminals for pickup. They are no longer able to drive in front of the baggage claim soliciting customers. But at least you admitted it was anecdotal evidence and not some statistically-proven correlation, as others have insinuated with their anecdotes.
Last week I offered a similar anecdote about how for sale signs and how quiet it was up at a lake I knew well in NH.
Sunday I played golf at a course in MA just north of RI. Hadn’t been there in a few years, nice, above average, course. Usually a five hour affair on Sunday…made it in 3.5 hours…it was dead. Going to the course, for sale signs were continuous. Afterwards, we went for dinner at a local pub. Great, CHEAP food in this blue collarish area. Always packed in the last 10 years each Sunday evening we went.
Dead. Completely dead.
Its an anecdote, yes, so take it with a grain of salt. All I’m saying is that I’m seeing things in marginal areas that look pretty grim based on a decade or so of experience with them.
wonder if that waste management truck is running on natural gas?
see, you gotta put together T-Boone and David Batchelder to find the connection…..goes al the way back to Mesa making outrageous oil moves in the 80’s
anacot steel loves CLNE and Waste Management
Like all things that happen in Florida the message was loud and clear years ago..over the past 10 years major corporations have left in droves..motorola, arby’s,Ryder to only name a few..and did Florida take notice..no…as the price of homes rose and complaints started coming in years ago about property taxes did Florida take notice..no..When insurance companies starte hitting Floridians with high premiums and everyone started complaining did Florida take notice..no..so it is simply a matter of repeating a pattern…the problem is that now their chosen ignorance of the problem has blossomed into a unprecedent mess…good luck for Florida to get out of this one in the next 5-10 years….and if you are in any business associated with the housing market, from builder, to realtor to finance..well..the perfect storm has arrived..buckle down…
People have voted with their feet. NW Pennsylvania is my top choice. Nice $50k houses(may be cheaper by 2010)
It’s funny to me how a state will drive out businesses and not care, but now that tourism is down because of the recession and the housing bubble has popped, all of the sudden they want businesses back. Good luck with that one.
The main factor driving business out of Florida are the high costs of buildings and leases, lack of affordable housing for employees, followed by a labor shortage due to the high cost of living. It’s hard to run any business when the costs are this high!
‘Phones are ringing off the hook at the south Pinellas County Salvation Army. Progress Energy said this type of scenario is taking place throughout the state, not just in the Bay area.’
Progress Energy is HORRIBLE - their rates are high and going higher. I pay $70 a month for a small apartment. A couple years ago it was $35, so my rates are up at least $15 a month over the past couple years.
‘This is dumbfounding to me,’ Rosser said. ‘It’s a building boom in the middle of a housing bust.’”
Pssst, Hey Rosser…the word is: “inconceivable”
Pssst, Hey Rosser…the word is: “inconceivable”
I do not think that word means what you think it means…
ROTFL.
How often can the sheeple be surprised?
Got popcorn?
Neil
“How often can the sheeple be surprised?”
How often can you say BOOOO?
The other popular word is “unexpected.” As in.. “unexpected defaults,” or “unexpectedly difficult market.” Harumph. WE expected it.
Everybody is watching the condo market in Miami and assuming the single family market will do okay. If a glut of luxury condos become compelling cheap, it has to affect single family prices as well, as many will see the cheap condos as a better value. All Miami real estate is vulnerable.
“The Jade Residences at Brickell is an example, Cannon said. The 338-unit, 48-story waterfront tower opened in August 2004 with buyers willing to pay as much as $5 million snapping up all the units. Now, the new owners have listed 112 condos for sale and 17 units totaling $15 million are in foreclosure.”
Yep, it’s contained to subprime. NOT!
Is “snapping up” real estate a similar action to shooting oneself in the foot?
those real estate snappers wont waste good shot on a measly foot…
They are much like Red Snappers, that will follow your boat around waiting for somebody to flush the head providing another tasty ’snack’ for the fish.
rule #3, never underestimate the others guys greed.
The State from South Carolina. “Home sales are bottoming out in South Carolina, real estate experts say, and should rebound slowly starting next spring. In June, typically a hot home selling month, sales slipped in 14 out of 15 S.C. regions.”
You know the housing bust is starting to really build when the states ‘that everyone is moving to’ are down. It appears S.C. is in need of more Floridians.
Here in the mts. of NC, I was talking to a local builder the other day who hadn’t been able to close 3 home sales because the Florida people hadn’t been able to sell their homes. Everyone in southern Florida may WANT to move to NC or TN, but unless they can sell their home first, many will have to stay put.
It is a sign of the end run when the “fast growing” states fall apart.
Everyone in southern Florida may WANT to move to NC or TN, but unless they can sell their home first, many will have to stay put.
Or… they can walk away.
Which many will have no choice about. 
Florida isn’t going into recession.
You see, my definition of depression is greater than 25% unemployment. Florida is going there. Sadly when people note Florida is toast, its no joke. What’s twisted is that without AC, those homes will mold into worthlessness in less than six months.
Florida will bring down the US mortgage system and hedge funds on its own. California is but the nails in the coffin.
Got popcorn?
Neil
Neil,
Almost everyone I know still in Florida are looking for the exit. The problem is they are “stuck” there. Until the jobs leave (and they are) Florida’s citizens are in purgatory. I have been saying for awhile the state is one bad storm away from the tipping point.
Not the renters!
BP
I don’t think it requires a storm to tip over Florida. At this point RE can do it on its own (given enough time). Or a stock market dip…
Or just enough employers leaving Florida (anyone who wants to expand has to be struggling to get good workers).
Personally, I think the tipping point is going to come due to a reduction of snowbirds this winter. Maybe not how many go down to Florida, but for how long… and how much they spend.
Got popcorn?
Neil
Borntoski:
As a renter in PB county, I definately am glad that you pointed that out. I love FL (for all it’s flaws, it’s still a wonderful place to live) and my rent is equivelent to the cost of owning a 200K home; so I have plenty of disposable income and great weather and climate in which to find something to do with that income.
RE is going to put FL into a recession; there is almost no doubt about it at this point. The FL housing market is just a nightmare/disaster, and will be for years to come. Many people will lose 50% of the price they paid for the home when they try to sell, either tommorow, or 10 years from now (when inflation will have eaten all the gains).
It’s a sad thing to watch. But I am very happy that I am not on the frontlines of this one! Thank you HBB!
Mike, you must be single. Once you have wife and kids you will think “what the hell am I doing here”? Now if I was single and renting you couldn’t pull me away SFL. By the way what is the deal with crime down there? I know it was bad when we left but it seems like it is on the verge of “Escape from New York” level violence!
Well as far as crime is concern..it its just like any other city with problems that stem from the movement of the low income renters that were in East Ft. Lauderdale who had to move when their landlord sold out to the greedy developers..those that did move became subprime homeowners in cities like Tamarac…they bought with them the high crime that is now moving to the middle to upper suburbia of west South Florida. Went to my old stomping grounds and saw several building with graffiti on them..sign of the times in the “safe” cities..
“Everyone in southern Florida may WANT to move to NC or TN, but unless they can sell their home first, many will have to stay put.”
Exactly.
That is very true. I already have a house in a community where the family was suppose to move in the beginning of this month on a new construction and instead loss their deposit. They were suppose to be in a community where the “homes sold very quickly.” Guess not.
Please keep us updated on stories like this, thanks!
As soon as I saw the quote, I knew what the attribution would be. “Real Estate Expert” is proving to be an oxymoron
“Home sales are bottoming out in South Carolina, real estate experts say.
Yea right, I live here. There bottoming out alright… NOT! We have a Condo glut and still building in of all places, Columbia, S.C.
On another note. I saw a fairly new work truck (not a pickup, but like a F-350 worktruck tricked out with all the easy access built in toolboxes and whatnot) for sale on my way into work this morning.
Eating the seedcorn. But of course they’d have been in much better shape if they’d kept the old, crapped-out rusty F150 instead of buying a new F350.
The timing seems about right. Even though Florida is the blue-hair state, those that were old enough to remember 1926 are now about 90 years old, thus most have died off. Apparently no one reads history books anymore (and/or the history books don’t contain the information).
Incredible still.
The latter. They include as little as possible about the roots of the 20’s boom and later bust in the history books. It’s a political thing.
TV doesn’t help because you get the impression that WWII lasted for 50 years.
I ended up reading a number of books, some by rich, educated yankees wondering what the h@ll went wrong, and HARD TIMES by Studs Terkel, an oral history of the Great Depression.
I really wish there were more material, but it’s hard to find even combing through the library.
There’s a great book “Ten Lost Years” by Barry Broadfoot and it too is an anecdotal book of personal commentaries. It is Canadian but totally relevant and you can probably find a cheap copy on Amazon or at Abebooks.
A great read that includes the impact of the 1920’s Florida land boom on the Great Depression is “Only Yesterday” by Fredrick Allen. History is repeating.
the truth is finally out. miami is a concrete ghost town. i go down there every week and it is amazing. but, the stupid city officals are not cleaning up the downtown area and macys is saying that they are going to leave if nothing is done. people dont magically show up to live just anywhere and especially at the prices they were asking. can you imagine the horror in the next year. i have predicted that the worst of the housing market will occur by the end of 2008. and i dont see any recovery soon after.
people dont magically show up to live just anywhere and especially at the prices they were asking.
Baffling is the apparent lack of market research, sales projections, all that wonky stuff that gets done before a backhoe even shows up on the site. What plausible data justified all this construction? It appears that the developers really believed there were planeloads full of South Americans and Brits licking their chops for a chance to own a Miami condo.
My guess is that the research simply didn’t take into account other builders who had the same plans - it only took into account existing condos, and possibly projects that were currently in progress - not other planned projects.
I can imagine the VP’s going to visit their project, looking down the street and seeing 10 other similar projects in the same stages - and cussing. “Where the *&^^&@@! did they come from!”.
No offense to the working class, but in my experience city and county planners are unimaginative bureaucrats whose sole job is enter data in boxes required by the ‘Master Plan’.
Actual research and analysis is not something they do, and isn’t something that city or county hall intends to pay for. Take in the proposal, make it fit, collect the fees, pass it on. Repeat.
Guess I was thinking more of research that would be done by the builder. If I were a builder at least - I would be researching the market very thoroughly before I undertook one of these huge projects. My research would include all potential projects - even ones that haven’t been submitted to the planning commissions. That’s aside from research on the pricing levels and demand support. The builders just got greedy and didn’t do their due diligence.
I can tell you almost no research takes place by the builders. Their “research” is along the lines of “lots of homes are selling and we need to take on a lot of debt so we can increase our spec inventory available for all these buyers, and we should make the homes as big as we can too because that’s what “everyone” wants!”
Individual builders are so lazy market research-wise that they don’t even look at the NAHB median income/median home price numbers that have clearly shown prices becoming unafordible over the last few years. Most builders are just drivers who are good at pushing their subs to “get-er-done”, but not much else.
Research is definitely being done by the walmarts and targets of the world..I have seen several of them SHUTDOWN in Florida..not a good sign when you see those guys run..
In which areas have you seen them shutting?
I’ll add to that anecdote; CompUSA has shuttered their store at The Falls location in SE Florida. I don’t know if it’s a casuality of the housing bust, unfavorable local business climate, or negative macroeconomic trends taking hold in South Florida.
Compusa is gone just about everywhere, they got killed by the best buys of the world
CompUsa’s downfall is not due to housing bust. They are closing all but a fraction of their stores, due to competition from online outfits for parts and software, and Best Buy/Walmart/office stores for computers. Good riddance.
Plausiable (well not really, but please overlook) data to support building of 40K condos:
The boomers are coming.
Problem is, even if they boomers do come, they don’t want to live in SoBE club district!
.. miami is a concrete ghost town., I wish. Its anything but a ghost town. So many frickin people you can’t turn in a direction w/o knocking into one. Its worse than Disney on christmas break. The thing that always made me wonder in regards to the condo boom was “we’re are all these new people going to drive? Are there some hidden roads I don’t know about? “
go down to downtown miami at night (other than bayside or a heat game night. sadly the homeless and no lights in the finished condos is all you really see.
Florida, oh boy, what a complete mess. I just checked the listing per population ratio of Lee County (Fort Myers) and got a ratio of 1:16! Even with Vegas you’re looking at a ratio of 1:64.
anyhow, for much of this week BMIT is focusing on a family of REALTORS® from Rancho Santa Fe, start reading from “Mr and Mrs D’s Wild Ride” on Tuesday and progress to “The Mega Flippers of RSF” and “Trapped in a Death Spiral in Florida”
enjoy, folks.
This is the way credit driven real estate cycles work. Past residential cycles were not so severe because they were not primarily credit driven. Supposedly the REIT market has disciplined the commercial market. But what we have now is akin to the commercial re bust of the late ’80s early ’90s, with the developers driven by dumb condo flipper equity and cheap debt.
The developers, once they get the financing in place and start building tend to continue well past the point that everyone recognizes the market is bust. Long lag time to build makes the boom/bust cycle more severe. At this point, the developers have nothing to lose by continuing to build since their equity is worth $0 (ie. if they put down 10-25%, they could not sell at anything but $0). The lending banks (bag holders) are obligated to fund construction since there is (not yet) any breach or default.
Right. Anyone who starts a project now is an idiot. But big buildings have big lead times, and once you are half way done you keep going, because a 70% loss is better than a 100% loss.
The question is, who is pulling permits at a 1.5 million per year rate? Who is financing?
100% loss on a $10 million investment is way better than a 70% loss on a $500 million investment. The problem is that most of these developments should have quit before they started construction, after seeing existing inventories go up combined with tons of new similar projects starting.
I think the boom has created big inefficiencies in the building industry. As the industry has expanded people have been promoted beyond their competence. High liquidity meanwhile has been covering up a lot of sins.
I design large Ethernet switch routers. The kind that ISPs and large corporations use. It takes about 25 million to design and develop a product, but 50 million to market it, manufacture the inventory to fill the sales channels, and train the sales and support personal. At-least twice in my career a product working in the lab has been canceled. If they have enough sense and expertise to shut down a non-performing project in the dot-com industry, I do not buy that the construction executives cannot shut down already started projects.
Except they can’t stop, espically in cases where the owner is not the builder.
1) If the ower balks during construction the owner is still on the hook to pay the builder: there is a contract in place to deliver a building to the owner, if the owner doesn’t want it, too bad. The owner can pay the builder to walk away, or alternatively the owner can allow the project to continue and hope that the finished product produces less cost than walking.
2) If the owner is also the builder, imagine this senario: assume a builder pays $100k for a lot and plans to put a house on it and sell the unit for $500k with materials that cost $300k (so a $100k profit on a $400k investment). The builder orders all the materials *months* in advance for delivery in say, six months. Lines up subcontractors and sets the workforce aside. If the builder decides to balk, the subcontractors will still demand payment. Likewise, the materials will either have to be bought or alternatively require return and “restocking” fees. So, if the builder walks on the house, they’re out the $100k on the lot, plus the materials, plus the lawsuits from subs and suppliers - so assume if they walk on the house they lose $200k. Meanwhile, if they build it, their cost is $400k. So as long as they can sell for at least $200k for a home that may have been planned to sell at $500k, they’ll build, because the loss is less than if they walk.
This is why the builders are still building: it is often cheaper to sell at a huge loss than it is to not sell at all.
What you’re describing is if the development is canceled during the conceptual phase (civil/site layout, marketing began, etc.) The analogy to your example is if in your career a product was killed after it had already started shipping: you might as well sell the stock and run through the materials that are already out of the factory, even if you’re selling at a loss.
Good logic and is why builders still build. But no new projects are being started. Once all those earlier projects are completed, we should not see any building for several years. Those who already built will have to liquidate for almost any cost. I am hoping to get something nice for under $100k somewhere like Georgia or Tennessee.
If you’re thinking about finding a nice residence in Atlanta proper or one north of Atlanta priced under $100k, you can forget it. Atlanta is one of the most overrated communities in the country. Traffic is horrible and the influx of people from California, Florida and Northeast has driven up the cost of living. Kids are taught in trailors because of huge influx of students. Lots of good folks have moved to Atlanta from New York and New Jersey and they find Atlanta reasonably priced, however, I have been very disappointed.
Boom/bust cycles are a feature of markets where supply adjusts slowly. You can see the same thing in the coffee market, where it takes several years for trees to provide a harvest after they are planted. A natural disaster that wipes out a crop will lead to high prices that year. The next year EVERYONE plants coffee trees, anticipating becoming rich in a few years. Then all those trees start producing and the price plummets.
“It’s a building boom in the middle of a housing bust.’”
great weekend topic! let’s include san diego and where else?
Las Vegas, California IE, Phoenix, etc.
Merced, CA. #2 metro area nationally for foreclosure rate; #1 statewide YOY house price decline - and a new 100 unit SFR development just put up their first exterior wall framing on Monday. This is being built next to a much larger development with a hundred 1 year old see-through’s. Nuts!
We have a bunch of virtually empty megastructures in Tampa, too, especially in the Channelside district and on Bayshore. Since the prices are four times what they should be. the places will probably be pretty dated and junky before they fill up, and then it will be time to knock them down.
As for State Farm, I think it should limit its purge to new construction in coastal areas. The people who built or bought in these areas AFTER all the hurricanes a few years back were simply idiotic.
Um, not really as the chance of another hurricane hitting the same area is very low.
Not in the panhandle, which gets hit frequently. For areas where hits are rare, State Farm should leave well enough alone.
By the way, speaking of State Farm, I just got a new renter’s insurance policy with them. 35K policy for 450 a year; includes some liablity protection as well (I didn’t really care about this; more concerned with a hurriance destroying all my stuff). I am E of 95, about 2 miles from the ocean.
I am surpised they would write this policy; I guess they don’t want to be on the hook for house damage, but figure it is less likely that there is damage to the stuff inside the home? Anyone know the answer; why write a renters policy but not homeowners?
Thx.
Personal property coverage is trivial compared to insuring structures, especially since you will note on your policy that a lot of expensive stuff you might have is specifically exempted from coverage. Plus in FL you are being charged 3x the rate I’m paying for the same rental coverage limit in NM (although my policy is with Allstate).
My sis wants to buy a preconstruction condo in a high rise they’re building on the lake in Clear Lake City TX (Nasa area of Houston). I just sent her this article. Hope it sinks in.
What is the cost to buy? Rent? Tell her to buy a 2500 square feet brand new house for $150k
tell her if shes into the kool-aide it went out of style in Jonestown
i think clear lake is near houston
A friend of mine owns a truck service business and he handles fleet trucks for contractors. Business is off 70% and the companies have left dead trucks with him to cannibalize parts when one breaks down. He was told to take good tires off old trucks and put them on those still in use. No new parts under any circumstances as they have 70-80 trucks parked.
How come the “ants” always know when it’s going to rain?
I mean, they are so small and close to the ground…and the clouds are way up high in sky…pardon, I’m just having an “irrational conundrum” filled with “exuberance”… my brain is “leveraged” and my gut is make a “margin call”
And how do you know the ants know it’s going to rain?
I never see them floating down curb gutter water?
service trucks sell for 40k
when you buy one, your buying a job thats sucks, is dangerous, and you have deal with a lot of difficult personalities…
plus, all the real money is in the parts.
My Northern VA neighbor tried to get me to buy lake-front lots near Georgetown, SC. She bought them and said she’d “double her money in a year”.
My co-workers nephew fell for one of those “foreign lottery” scams. She explained how hard she had tried to prevent him from sending ~$200 for “Canadian taxes,” on their winnings. I said monkeys will fly out of my butt before they get their check from Canada. For months afterwards, I could just say “Still no monkeys?” and we’d laugh at the stupidity of youth.
“Kremydas said the overall market in South Carolina is still good, despite the declines. ‘There’s no signs or indications that we need to be panicking about anything. Going into the next year and as we round out this decade, I think we’re going to see just another explosion.’”
Why do they even quote this guy - like he’s an expert or something? We know about the experts and their predictions. I agree that there will be an explosion, but not the mind he’s talking about. It will be an explosion of homes being foreclosed on.
“…Florida is the new California…”
David Lereah in a radio interview; 2005.
My girl friend lives in onr of those condos. She rents the place for $1600/month. It up for sale for about a year now, aksing price is around $600K for a 2/2 1200 sqft condo build in 1965.
Taxes are $12K a year, assesments $250/month (pool, elevator, etc. all 40+ years old) and $600 in dues that pays for insurance and security guards. So all in all the landlord shells out $1850/month not counting any mortgage payment. Why exactly would anyone want to buy this place? If you can’t rent it for what the monthly expenses are it’s a liability, not an asset. Hell, I wouldn’t give one penny for it.
Was visiting friends in Miami Beach, bumped into a Realtor in the lobby who asked if I wanted to buy a 2nd residence in a building that fit the exact numbers you are describing. Hell of an investment, he says! He walked when I doubled over laughing. I pissed him off when I asked what kind of discount do I get due to the fact that there are 2 sex offender’s manditory pictures posted in the common area? Nice……….
Well, because of the f**ked up FL taxing strucuture, if you could buy it for one penny, you could make it flow income (as your taxes would be 2% of 1 penny).
Sadly thats true. That condo has no value if the rent is cheaper than if you were to get it for free! Would you be able to sell it for even $50k? I think theres some sucker that probably will pay as much as $200k on a “$600k” condo LOL
I read the article cited here about the Condo bust in Miami causing a recession in Florida on Bloomberg. I live in Ft lauderdale and I can tell you there won’t be any reporting of this negative RE news in our home town online newspapers. Sadly about 500 people will buy a SFH in July somewhere in Broward county. They next thing we’ll hear is how shocked they were when they got their tax bill.
This may sound a little stupid.. but can somebody tell me what is a planning moratorium? I know what a building moratorium is….you stop building..but what is a planning one? The local government stops planning or the developers stop planning for growth????
No more rezonings (planning) as opposed to development orders (building)
Your right. Noticed that the local Sun Sentinel has been mighty quiet lately on the “Real Estate Reporting” side…
Look at this waste.
Something is wrong with the way we understand and characterize capitalism.
Loose money + low regulation = waste, waste, waste
What happened to the invisible hand? What happened to the all-knowing market?
The only thing that gives me comfort is the knowledge that the money is made in market inefficiencies … and there are a hell of a lot of them right now, and I’m a pretty smart person when it comes to numbers and reality checks.
But it’s cold comfort when I see the mess that we’ve made of the landscape building oversized ticky-tacky houses for buyers who have yet to materialize. It’s cold comfort when I’m surrounded by crumbling infrastructure–the kind of infrastructure that sustains the economy, like factories and railroads.
This isn’t a rallying cry to communism, because that system sucked a$$. If I had to look at what worked, mid-century US socialism worked pretty darn well. Too bad we’ve forgotten how to do it. But this is a digression. The real issue is, what is wrong with capitalism that we get these IRRATIONAL booms? Is economics–as I suspected as a college frosh–more about psychology than mathematics?
I’m reading an interesting book by Benoit Mandelbrot on why the “random walk” theory is bunk. He makes his case pretty definitely in a few paragraphs, since the 20th century is full of examples of “impossible” market events (by random walk theory). A chaotic system? Well, weather is a chaotic system, and wouldn’tja know, the stock market looks eerily similar…
Another digression, of course … the market isn’t the end-all and be-all. The marketplace, the environment in which HB’s keep piling in, seeing an economic incentive (even if illusory), that’s what I’m interested in. When no-one (ie government or a really powerful monopoly, a la MSFT) is holding the reins, shaping the marketplace and its incentives, the default environment turns out to be dysfunctional. Or am I wrong?
The liquidity glut was (intentionally) caused by the Fed after 9/11. The other primary root cause of the housing boom and bust was the relaxation of lending standards, the elimination of oversight, and the progressive offloading of risk up the food chain. The current (mal)adminstration has not created a “pure” capitalistic system by any means. They have simply tilted the playing field in favor of the business interests that pay for their campaigns.
imo, this boom was mostly due to the large, inherent innefficiencies of all RE markets.. one hand knows not what the other is doing until it’s too late.
Fast, accurate, up to date, thoroughly disseminated information woulda prevented a lot of the problems.
Yes, there is something about the way you characterize capitalism if you call it only loose money. In fact, I hesitate to point this out, but you could say the market is in effect now with (gasp) a correction. The problem with capitalism is the same problem that exists with every single other frickin’ institution on earth - people. Exuberance and depressions are both common, irrational, predictable reactions from people. That’s only as dysfunctional as the people in it, and the only way to get around that is ham-handed “intervention” of some kind, like socialism.
Actually, mid-century socialism didn’t work out so well. We didn’t forget anything; we’re still working with that old system. If you don’t like what we have now, then you really don’t like socialism. The fact that things were all right in the 1950s and 1960s had nothing to do with socialism and everything to do with a huge increase in the economy post-WWII. Socialism - from welfare to Medicaid to planned communities, and not even going into real socialist societies like England, Canada, France, or Germany or old programs like SoSec - is breaking down everywhere because it is not a good system and not sustainable. Socialism breeds generations dependent on social services and changes an entire culture from the inside out. It moves responsibility away from people, away from the market in the sense that it’s away from the direct control of the masses, so people have fewer ways to make their own choices. So we’ve had a housing/credit boom and bust that lasts 5 or 10 years. So what? People will go broke, people will recover, the economy will adapt. How is that worse than 70 years of slow decay like we see in Europe? The fact that socialism moves slowly doesn’t make it better; it just makes it harder to change.
I agree with the “post-WWII” point. Life was good for J6P when we had a global monopoly on quality mfg goods (and mfg still required a lot of skilled labor) because we destroyed all the competition (literally). You can pay for a lot of socialism under those conditions. You can also accept a lot of inefficiency within your corporations because they’ll still make money.
J6P doesn’t understand that was just a temporary condition, he thinks we could have had that forever if it wasn’t for “the idiots in DC” giving it all away. He gets fighting mad over his current situation because that’s still his baseline for comparison. Economics isn’t his strength.
It also had a lot to do with a young and growing population. Say goodbye to that, since all of the developing world is aging rapidly.
OOPS, meant to say “developed” world — Japan, Europe, USA.
Miami is ugly.
http://www.youtube.com/watch?v=P4Yl00JRUQ8
Had to dust this one off:
In Miami, Ron Shuffield predicted that a limited supply of land coupled with demand from baby boomers and foreigners would prolong the boom indefinitely.
“South Florida,” he said, “is working off of a totally new economic model than any of us have ever experienced in the past.”
Ooh, some other gems from the famous NY times piece:
Romano’s fiancé, said he was heeding Mr. Trump’s advice. “He says buy, buy, buy,” Dr. Nguyen said.
The same message is being trumpeted by David A. Lereah, chief economist of the Realtors association, who argues in his new book, “Are You Missing the Real Estate Boom?” (Currency), that real estate investors will “experience substantial and satisfying wealth gains” into the next decade.”
“I just don’t think we have what it takes to prick the bubble,” said Diane C. Swonk, chief economist at Mesirow Financial in Chicago, who was an optimist during the 90’s. “I don’t think prices are going to fall, and I don’t think they’re even going to be flat.”
Haha yea right. But who cares, I am not a fool drinking kool aid to pay those prices. I would not even rent in FL as I don’t want to stay there. Let the rich, retired fools stay. Hope they like the crime, miserable heat+humidity, bad drivers, illegals, hurricanes, taxes, etc.
Beware the sharp dressed man selling new paradyms.
“A gold mine is a hole in the ground with a liar on top.”
Mark Twain (i think?)
Bloomberg Article:
“The wave of baby boomer retirees is gathering momentum, and the weaker dollar makes Florida seem like a bargain to Europeans,” Denslow said. “With any luck at all that will sustain us.”
With any luck, Florida will not lose 50% of the current retiree base due to the high cost of living. The cost of living in Florida has outstripped wages and retiree incomes thus making Florida an extremely expensive place to live. The extremely high cost of housing coupled with the high cost of taxes and insurance is clearly going to put Florida into some severe economic times! Add in that State Farm and Allstate and some other unamed insurance companies are cancelling policies in the thousands adding even more downward preasure to the present situation. Those who thought the financial impact of Katrina was bad, just wait until you see the financial impact the housing bubble will have on Florida!
Here’s another implosion:
“Real Estate Investors Want to Know What Happened to their Money”…”Hundreds of millions of dollars gone, now hundreds of investors want to know where it all went. Investors, even those too afraid to go on camera, asked Eyewitness News to investigate. Vescor denies the allegations you’re about to see and is fighting back. In court documents, the Ogden-based company says it did not mislead its investors and did not use their money recklessly. The investors tell a much different story. It was an opportunity that comes along just once in while — a chance to get in on the Las Vegas-area real estate boom, a major development on valuable land in the Nevada desert.”
Hahahahahaha…I’m sorry but the punchline that it was “a chance to get in on the Las Vegas-area real estate boom” has been seen on this blog so many times…I’m guessing that with a little digging a similar story could be found from the press in every single state in the USA.
Has anyone even thought about the 2 trillion dollars worth of AAA rated Morgage backed securities/CDOs that even NOW are being down graded by the rating agencies that over rated them in the first place? Folks, these highly leveraged mortgage backed hybrid bonds are the colleteral for pensions, mutual funds, insurance companies, banks, and hedge funds. Already some of the trances that were rated BBB investment grade are on sale for 12 cents on the dollar. Real estate depends on liquidity, that’s what caused the tech bubble, real estate bubble, and indeed all bubbles of all kinds throughout history. This great unwinding is just getting started.
“The Jade Residences at Brickell is an example, Cannon said. The 338-unit, 48-story waterfront tower opened in August 2004 with buyers willing to pay as much as $5 million snapping up all the units. Now, the new owners have listed 112 condos for sale and 17 units totaling $15 million are in foreclosure.”
“The skyline of Miami is visible from Key Biscayne, the barrier island where John Rosser lives. Some nights the real estate broker scans the new buildings and sees more dark windows than lighted. ‘This is dumbfounding to me,’ Rosser said. ‘It’s a building boom in the middle of a housing bust.’”
Serves those greedy speculators/flippers/investors. Now prices can crash 50-70% and those condos can become occupied by owners who actually will live there! Miami sucks, I would never wanna live there. In fact I can’t wait to leave FL! Many have already done so(see article)