HBB Rates The Media: Florida
The HBB continues it’s look at the media and the housing bubble, with Florida.
The good:
Palm Beach Post, March 2005: “Don Todorich is one of many Palm Beach County residents who find themselves suddenly wealthy on paper yet trapped in their homes.’I'd have to spend $500,000 to $700,000 (for a new home),’ he said, ‘and my taxes would go to at least $12,000.’”
“‘It’s not an obstacle for people moving out of the area,’ said agent Lauren Hollander. ‘They just can’t afford to move down the street.’”
“Mark Trudel, owner of a construction services company and a Palm Beach County native, says he has finally been priced out of the area. When his son graduates from Lake Worth High School next spring, the family is moving to North Carolina. Even though Trudel says his house in suburban West Palm Beach is worth $400,000 more than he paid for it in 1998, he can’t make enough on it to buy what he wants and stay here.”
“Instead, he recently purchased a large, lakefront house on an acre outside Charlotte for $340,000. The same house here would cost at least $800,000, he said, and his taxes would be close to $16,000. His taxes in North Carolina? About $2,000.’This bubble has got to burst sometime,’ Trudel said. ‘I just hope it’s after I leave.’”
“(R)eal-estate investment is what has allowed the Ackermans to move from a modest $165,000 home, purchased in 1999, to the six-bedroom stunner they live in today..The Ackermans bought three of their houses the same way: They financed 80 percent of the purchase price with an interest-only loan. To avoid paying private mortgage insurance, they put 20 percent down on each home, but only 5 percent of that was out of pocket. The remaining 15 percent came from simultaneous second mortgages, called ‘piggyback’ loans.”
“The double loans have left them carrying eight mortgages..If interest rates go up, ‘we could be in trouble,’ admitted Gregg. ‘If that happens, our exit strategy is to start liquidating homes. Right now, I’m just playing the game,’ said Janey. ‘But we have an out. We can always sell.’”
The Herald Tribune, May 2005: “With home prices in Bradenton and Sarasota appreciating faster than anywhere else in the nation, you’d think residents and Realtors would be cheering. But they’re not. In fact, many are finding the trend downright unsettling. ‘It’s upsetting people,’ said Tracy Seider, a realtor.”
“‘Is this a bubble, or a ramping up in prices that will continue?’ asks Craig Smith, a Sarasota property appraiser and real estate investor. ‘All I know is that we’ve never been through a run-up in Florida that has been this extreme. The farther up we go, the greater the risk that we’ll be subject to a correction.’”
St Petersburg Times, May 2005: “Of the people who bought existing homes, townhomes or condos in Hillsborough County last year, an unprecedented 40 percent didn’t move into them. It was 30 percent the year before. ‘The returns have been unbelievable,’ said Alan Schreier, who buys rundown houses. ‘A lot of people are jumping into the business.’”
“Sammy Tuffaha has lived in Tampa Palms but coveted historic Hyde Park. But when Tuffaha shopped for a condo there, he couldn’t stomach the prices. For two years, he watched the market and stewed. This year, Tuffaha concluded that prices will keep climbing. ‘It’s at least double what I would have been willing to pay two years ago,’ Tuffaha said. His faith in the market extends to New Tampa. Tuffaha is keeping his house there, seeking a tenant.”
“Wanda Vann of Cheval also is becoming a first-time landlord. She paid $132,000 four years ago for a home in Cheval West. She couldn’t bear to part with it. As for being a landlord, she said, ‘I’m getting a little brave.’”
“Linda Nowicke a real estate agent, entered the business after moving here in 1998 from Michigan, where she owned a day spa. ‘I help people all the time with investment properties. They’ve been burned by the stock market, and they’re looking for places to protect assets.’ In the process, Nowicke began buying investment houses for herself. Nowicke prefers houses she can see. ‘My firm opinion of this market is, it’s crazy.’”
“Wayne Spencer noticed movers loading a van in the driveway of a doctor’s home. Spencer bought the house with his fiancee. He said, ‘I believe Florida will be the next California.’”
Miami Herald, May 2005: “More than 114 major projects, most of them high-rise condos, are under construction or in the planning stages in the urban core along Biscayne Bay. Citywide, developers are proposing more than 61,000 new condominium units, eight times the number built during the past decade.”
“‘You have a wave of development underway here in Miami that is unprecedented, bigger than anything, bigger than Hong Kong in the boom years of development,’ said Charles Hales, a transportation consultant.”
“‘We are building an instant city; what should take 15 years will take three,’ said Michael Cannon, a Miami real-estate analyst. It all amounts to a multibillion-dollar gamble, outdoing in risk and bravado the 1920s boom that made Miami a modern city”
“‘As much as 85 percent of all condominium sales in [downtown Miami] are accounted for by investors and speculators,’ housing analysts at Raymond James warned in a March report. Philip Spiegelman sold the condo units in the Marina Blue condo going up on Biscayne Boulevard. ‘One hundred percent of the buyers were investors and speculators,’ he said. ‘Anyone who tells you their projects are different are deluding themselves.’”
April 2005. “A writer at the Miami Herald is spooked about the dark, empty condos. “I looked up at the tall new residential tower by the New River and shuddered. It was a 31-story tower of darkness. Lights shone from no more than a dozen of the 315 condos. The rest were a study in black windows and empty balconies.”
“Last month, Raymond James & Associates warned that ‘anecdotal reports’ indicated speculators and investors accounted for 85 per cent of Miami high-rise condo sales. There are reports of condos changing ownership two or three times without an actual human being ever moving in.”
“When the bubble bursts, South Florida will have a ready-made solution to its affordable housing problem. After the big bust in the 1980s, a regular Joe could land himself a luxury high-rise condo on Miami’s Brickell Avenue for 60 grand.”
The bad:
Sun Sentinel, April 2005: “I’m getting my hair cut last week, and the owner tells me she just bought two condo conversions. Now she’s frightened and wants to know if I think she’ll be able to sell them in a year or so and make a killing.”
“Jeff Merlin, a car salesman turned real estate investor, plans to buy two townhouses with the $71,000 profit he just made on the sale of a Coral Springs townhouse he purchased last year. ‘I don’t believe’ there’s a housing bubble, he said.”
“Jason D. Brown…quit his job as a waiter after earning about $80,000 last year doing four real estate deals part time. Now he spends six days a week searching for homes to purchase by knocking on doors. ‘I don’t plan on going back to working a regular job, I’m doing great.’”
The Orlando Sentinel, March 2005: “The market is moving so fast, they [appraisers] can’t keep up with it,’ said Greg Pingston. The situation has led to behavior not frequently seen in the housing market, ‘People are buying new homes before they sell their old house,..They’re confident their old house will sell.’”
“Many buyers are more concerned about finding something to buy, not rates,’ said Dan Dunn. Grant Simon “sees interest rates as becoming less of a problem, ‘It’s not about rates, it’s about monthly payment.’”
May 22: “‘It’s insane,’ said Gary Balanoff, broker-owner of Re/Max Select. ‘Where does it end? I don’t know.’ The 21-year industry veteran said he has never seen such price escalation.’”
“There was a sign that change could be coming, with April sales throughout the region falling nearly 5 percent compared with April 2004. That was accompanied by a 5 percent increase in the inventory of available homes. Barbara Vance said she is dealing with more investors than ever before, with many buyers quickly becoming sellers.”
“If there is a slowdown, Brenda Rogers of the Lake County Association of Realtors wouldn’t mind: ‘I kind of wish we would. We’ve been so busy.’”
Market observers, you decide:
October 2005: “According to county property records, 68 of 287 units in River House remain unsold. What’s more, records suggest that only about 25 percent of people who purchased a condo at River House live in the building. New condominiums in South Florida, particularly in Miami-Dade County, have come to represent commodities more than homes. ‘Just doing straw polls, it’s been about 70 to 80 percent of the units bought by speculative investors planning on cashing in on the South Florida real estate pot of gold,’ says Jack McCabe, a real-estate industry analyst from Deerfield Beach.”
“McCabe predicts a 10 to 30 percent correction in South Florida luxury condos in 2006. A glut of available units, coupled with a dearth of affordable housing, could precipitate a fall, the analyst says. ‘The problem is that developers have been led to believe there’s a much greater market for luxury condominiums — particularly $700,000-and-above units,’ he says. ‘But the majority of people who were buying them were not true end users. What it’s done is overinflate the true demand. So we’ve built this oversupply, because developers have had a lot of cheap money to do it with.’”
May 2005. “Like most economists, Joe Keating used to downplay the likelihood of a housing bubble. That was before sharply escalating home prices in markets including Florida started adding up. ‘In selected markets, housing prices have risen 40 to 50 percent . . . some isolated cases for waterfront properties are up 100 percent in a 3-year time-frame,’ Keating said during a visit to Tampa last week. ‘Personally, I do believe there is a chance of a bubble. I’m a better seller than buyer in real estate for the moment for speculative purposes.’”
“Keating zeroed in on those buying condominiums and single-family homes intent on flipping them for a fast profit. They’re entering eerily familiar, and dangerous, territory. He equated the situation to the dot-com craze ‘when everybody was rationalizing about why these properties could only go higher in price. When you start building rationales for why it can go only higher, it gets a little bit scary.’”
“Don’t get him wrong. Keating still believes in real estate investing, particularly the buy-and-hold strategy for people with their primary homes. It’s still the top tax break for most people. But short-term investors trying to capitalize on Florida’s real estate run-up may soon find the pool of prospective buyers is tightening. ‘If you were to invest in housing speculatively, to whom would you sell? That pool of “to whoms’ is shrinking,’ Keating said. ‘I’m not saying the sky is falling. I’m just saying go into it with your eyes open just like some never did in 1999 with the dot-coms.’”
March 2005: “More than 55,000 residential condo units are in some phase of development in Miami, and..increasing monthly. In contrast, Miami has built about 7,000 condo units in the last 10 years. Downtown developers have brushed off worries about rampant speculation..’I don’t see it backed up by empirical statistical data’ said Pedro Martin, CEO of Terra Group (which) recently signed a contract to buy 10 acres..for $190 million. ‘You don’t put 20 percent down on a $500,000 condo when you are a speculator’ said Martin, who has two other high-rise projects in downtown Miami.”
April 2005: “‘Regardless of how good market fundamentals are, we’re running out of land,’ said David Dabby, a Coral Gables-based real estate analyst. ‘With the kind of land restraints we have, it’s no wonder single-family starts are down.’”
April 2005. “Buddy Hucks’ research shows oceanfront closings numbered 1,100 last year, with more than $300 million in total sales volume. His research shows there are another 4,000 units either planned or pre-selling. There were 123 multifamily permits issued in February compared with 33 the same month last year. You’re trading maybe a 30 to 50 unit motel or hotel to a 200-unit condo complex.”
“Tom Maeser, president of Fortune Academy of Real Estate says, ‘Everyone I’m talking to says it will continue. Of course, that’s predicated on the buyers being there.’”
May 2005. “Craig Pepin-Donat has purchased two homes in Jacksonville to rent and predicts the city’s real estate bubble will only blow up even bigger. ‘I don’t foresee too soon that they’re just going to burst and the market is going to take a dump. I don’t see it happening in the next 3 to 5 years.’”
“While the three killer B’s - balloon, bubble and bust - are in everyone’s active vocabulary, so is that rosier “B” word, boom. The rationale for the boom continuing is the nature of Greater Miami, which panelists see shielding us from trends including rising interest rates that will constrict housing demand throughout the US. Michael Cannon of Integra Realty Resources (said)…foreign buyers account for more than 60% of South Florida real estate buyers.”
“NeoLofts residents clearly work locally while Four Seasons buyers don’t live there. But can we infer anything about booms and busts from markets at individual developments? ‘We are having a recession with certain developers right now,’ Mr. Cannon said, ‘because they’re out of business.’”
“According to Miami Commissioner Johnny Winton, this is the first time since the first wave of Cuban immigration in 1959 and 1960 that Americans other than New Yorkers have been moving into Miami in greater numbers than have been moving out. ‘They’re from mainstream America,’ he said. ‘That segment has found Miami.’”
“But will a bust follow the boom, as has happened here over and over? ‘You can’t use historical data to predict the future because we are in uncharted territory,’ Mr. Winton said.”
“Will new condos succeed? Or will they, like Four Seasons units, remain on the market for years? ‘Build ‘em,’ was Mr. Winton’s sage advice. ‘If they fail, we’re going to end up with affordable housing.’”
“In the past, investors bought gold as a hedge against inflation and other unpredictable economic misfortunes, David Lereah, chief economist for the National Association of Realtors, told some 150 people at a Saunders Real Estate forum called ‘Florida Land . . . How High Can It Go?’ at The Club at Eaglebrooke. ‘Now they buy real estate,’ said Lereah, author of the book, ‘Are You Missing the Real Estate Boom.’ ‘The stock market has disappointed everyone over the past five years.’”
“Host Dean Saunders of the Lakeland real estate company agreed. ‘People are coming to Florida,’ Saunders said. ‘We can’t keep them out, and they’re going to come where the land is more affordable.’”
“Lereah spent most of his 30 minute speech debunking Cassandras warning about the coming collapse of a bubble market in real estate. Housing values have indeed risen substantially since 1991, the end of the last market contraction, but that’s because of factors that don’t look to change during the next five years or more, he said. ‘The air will come out of the balloon, but it will not burst,’ Lereah said.”
Don’t tell me I’m FIRST ???
Yes, you’re first Pismo.
BTW, I’ll forward this post tomorrow, but I had so much fun with it I couldn’t wait.
Craig Pepin-Donat! Must be very cool for you to go back through the Florida posts and watch it all play out like a Carl Hiaasen novel. This is great stuff. Thanks Ben.
“Dean Saunders of the Lakeland real estate company agreed [with Lereah]. ‘People are coming to Florida, we can’t keep them out.’ ”
Never occurred to these guys that this was not a one-way valve.
If you look at the history of Florida, the population explosion was a one-way valve. I can’t remember the exact time frame, but the population of Miami doubled within a few short years. This is in the 1920s.
I guess it was only natural to assume that Florida was a utopia. But the growth became unmangeable with a lot of other factors rearing their ugly heads.
From my perspective, much of Florida had fairly inexpensive living costs for many years during the ’50s, 60s, and ’70s.
A retired couple, of modest means, could move to Ocala, or some other areas of central Florida, and live comfortably.
However, the living costs were NOT inexpensive in Miami-Dade, Broward, Collier, and Sarasota counties.
For whatever reasons, there was a big lull in hurricane activity for possibly three or four decades. That kept insurance costs low. But the lull in hurricanes started to unravel especially after Hurricane Andrew.
More and more retired folks started calling Florida home, either part-time or full-time. Real estate, once affordable, became unaffordable.
I really don’t know how so many building permits could be issued for Miami condos. There must have been a lot of money flowing under the table. And Miami has a history of unsavory characters. A lot of these unsavory characters used to eat at Wolfies.
But I have the impression that people are leaving Florida now. Is that incorrect?
Circa 2005:
Spencer bought the house with his fiancee. He said, ‘I believe Florida will be the next California’.
Circa 1933:
Hitler tells the crowd upon taking power: “Give me ten years and you won’t recognize Germany”.
People’s forecasts of the future may be literally true but still not what they anticipated.
Actually, I think his prediction did come true. Florida and California are both heading towards insolvency .
When his son graduates from Lake Worth High School next spring [2006], the family is moving to North Carolina. Even though Trudel says his house in suburban West Palm Beach is worth $400,000 more than he paid for it in 1998, he can’t make enough on it to buy what he wants and stay here.”
“Instead, he recently purchased a large, lakefront house on an acre outside Charlotte for $340,000. The same house here would cost at least $800,000, he said, and his taxes would be close to $16,000. His taxes in North Carolina? About $2,000.’This bubble has got to burst sometime,’ Trudel said. ‘I just hope it’s after I leave.’”
I wonder whether he was truly able to bail in time. It would be interesting to track him down and interview him a second time.
“I wonder whether he was truly able to bail in time. It would be interesting to track him down and interview him a second time”.
I wondered that also, if he got out in time and bought the place on the lake, he may be in pretty good shape. Even though the wheels came off the bus in Charlotte, lake property has been holding up price wise, so far.
If he was a cash buyer based on making so much from his Florida house, it shouldn’t matter if the wheels come off the bus even on lakefront property.
He hadn’t sold his FL house at the time the article was written - he was putting it off for a whole year.
“Instead, he recently purchased a large, lakefront house on an acre outside Charlotte for $340,000.”
From today’s Charlotte Observer:
“Sales prices continued a downward trend, falling 9.5 percent from a year ago, to an average of $196,204. Foreclosures and other distressed sales are weighing on prices.”
“Jason D. Brown…quit his job as a waiter after earning about $80,000 last year doing four real estate deals part time. Now he spends six days a week searching for homes to purchase by knocking on doors. ‘I don’t plan on going back to working a regular job, I’m doing great.’”
Nope, no ‘regular’ job for Mr.Brown, wonder if his plans changed.
My Florida Flipper clients are still in this mode. Not content to have lost a little money on a flip that took five months last winter, they have just bought another $60K house from Deutsche Bank with $48K of my money. Or perhaps az_lender has bought a $48K Florida pool house, who knows. But the flippers did pay me all my prin-and-in last year. Ho hum, I won’t try to discourage them, just won’t lend them money on more than one house at a time (though they have asked). If they wise up, I wouldn’t want to be stuck with more FL houses than I can use.
I would imagine Mr. Brown’s life is a little different now. A lot different!
What’s kind of ironic is that some Las Vegas waiters, probably in 2005, were making $130,000 a year on the job. The amount of money they were making was unbelievable. These waiters weren’t flipping homes. They were simply flipping drinks.
During the boom years, a lot of rich high rollers were flying their private jets into Vegas for a day or a weekend. And many of the high rollers were tipping huge tips. I guess a $100 tip was not that unusual. Maybe even more than that? These rich folks had money to burn.
I do wonder what happened to these high rollers. I suppose some of them are still rich. But no doubt less rich.
Referred to as “whales”.
Reading thru all the familier names in that post; wow!
I can’t wait for the Florida crowd to comment. Should be a scorcher.
Yes it was neat to see all the old familiar names. We listed our Sarasota house in late March or early April of 2005 and it took a WHOLE MONTH to get an offer. But what an offer- all cash, no contingencies and the buyer didn’t even want a home inspection. His attitude was, “What can be wrong with a three year old house?” Nothing, but still…
The funny part is that I/we weren’t even aware of how bad a bubble it was. I just wanted to get out of Florida to avoid the hurricanes after those two very active seasons. I didn’t find the HBB until late 2005.
Sometimes it’s better to be lucky than good.
Sp*. “familiar”
(Yeah yeah, spelling error! Considering it’s a 2:30 am flu-ridden bleary-eyed post from a tiny keyboard, I’m ok with it.)
“The double loans have left them carrying eight mortgages..If interest rates go up, ‘we could be in trouble,’ admitted Gregg. ‘If that happens, our exit strategy is to start liquidating homes. Right now, I’m just playing the game,’ said Janey. ‘But we have an out. We can always sell.’”
Great exit strategy, there’s always a savvy investor looking to snap up a few homes. Prue genius.
ESPECIALLY easy to start liquidating a few homes when interest rates suddenly rise. (Not.)
“‘Regardless of how good market fundamentals are, we’re running out of land,’ said David Dabby, a Coral Gables-based real estate analyst. ‘With the kind of land restraints we have, it’s no wonder single-family starts are down.’”
Of for the love of everything holy. The “out of land argument again”. For anyone who really thinks FL is out of land, please pull up Google maps, type in “FL”, put it on satellite view, and look at the ocean of green that is FL (yes, even S. FL).
What a moron.
There was a huge drive down here (during the bubble) to pack it up and move to CLT (or some other Carolina city). I wonder how that’s worked out for the people who moved, and for the people who were already in those cities? I travel to southern cities quite a bit for work, and, let me tell you, S. FL is NOT a southern city. I just wonder how places that are normally exceedingly polite and “proper” (CLT, for example) are getting on with a bunch of New York’ers pouring in from FL. I’d heard that nobody really “wants” the “halfbacks”; but anyone have any “on the ground” in these cities to discuss? Are the locals happy about the retirees from FL coming up there?
I just wonder how places that are normally exceedingly polite and “proper” (CLT, for example) are getting on with a bunch of New York’ers pouring in from FL.
Anybody who owns a back-waxing salon has got to be ecstatic.
Anybody who owns a back-waxing salon has got to be ecstatic.
ROFLMAO
Mike it’s good to see you on here again. A lot of the Carolinas folks I run into are headed back here. It’s an amazing reversal.
“I just wonder how places that are normally exceedingly polite and “proper” (CLT, for example) are getting on with a bunch of New York’ers pouring in from FL. I’d heard that nobody really “wants” the “halfbacks”; but anyone have any “on the ground” in these cities to discuss? Are the locals happy about the retirees from FL coming up there”?
Real-a-tors where and are plenty happy with the half-backs. However many locals that I know including myself here in S.Carolina would much rather they stay in Fla. or go back up north. Plenty tired of hearing how “cheap” our property taxes are and that real estate is such a bargain. They along with others helped drive them up, and the locals don’t make nearly as much money on average.
As our bumper stickers read… “We don’t give a damn how you did it up North” “Thanks for visiting, now get along”
“North = 1 South = 0 … Halftime” score
Oh, and since this is a FL thread, I didn’t see this posted already:
http://www.miamiherald.com/business/real-estate/story/1324267.html
Almost 50% of S. FL homeowners owe more than their home value. Unreal. How do we as a society deal with that problem? Obviously, it’s in their best individual interests to walk away (the underwater homeowners), but if they all did so, it would be really bad for the banks, and for FL RE (although, it would be the best thing that ever happened to me, so maybe, for everyone loser, there’s also a winner?). But, the social strife that would cause..
And, more importantly, the fact that 50% of FL (if they don’t walk away) is going to be underwater for a LONG, LONG time. Prices aren’t going anywhere but down, more unemployment, tax rates are increasing. There’s no driver to push prices up, and the amount paid on a MTG (even with just flat prices) will take a long time to make up the negative equity. This is going to become the least mobile society in history because of this bubble; nobody will be able to move anywhere because everyone’s going to be upside down on their home!
Good post, Michael. Interesting that the percent underwater declined slightly (QoQ) despite prices’ continued decline. The story attributes this to continuing foreclosures that simply eliminate some of the “homeowners”. I wonder if anyone has looked into a slightly different explanation, viz., SOME “homeowners” desperately paying down their loans as fast as they can, rather than walking away. I have a few (AZ) clients who have been making big lump-sum payments this year, as they seem to have realized that getting rid of debt that carries a 9% interest rate is likely to be a more favorable “investment” than others they could choose. Of course, my rates are very high and perhaps the rates being paid by typical FL “homeowners” are not…but if second mortgages figure into the statistics reported by the Herald, then I may be onto something.
If you can afford your house and like your house, there is nothing wrong with being under water.
Until you have to move for some reason.
Sure. But if you can rent a place for 10k a year less, why are you paying all that extra per year to own? On an asset that is unlikely to appreciate for a decade or more. Let’s face it, when your only 10-20k underwater, it’s probably not worth defaulting on your loans. But when you’re 100k or more underwater, the math changes.
They ARE walking away from underwater homes. The media is just downplaying it. Banks don’t really act like they care (what can they do about it anyway). The idea seems to be that the banks don’t need any money from the bad loans - the government will do what it takes to make up for it. Besides the main show is in the NEW bubble (stock market) where as long as these assets contiune to rise, the banks can show (pretend) they are making profits hand over fist. Throw in a dash of accounting shenanigains (mark-to-fantasy) and there is no cause for alarm. Meanwhile many continue to live in delinquent-mortgage/foreclosed homes with no monthly payments whatsoever with the “savings” being spent on iphones, eating out, partying, and so-forth. Somehow all of this is good for the economy.
Really? Show me proof of all these foreclosed families NOT evicted from their homes?
Ok. Come to my house and I will show you two on my street alone. I live in a neighborhood with $400-800k homes (highs) in a quiet beach town in FL (not S or W FL urban sprawl. Come visit anytime - we can do the tour on my golf cart.
Great job as always, Ben.
I’m going to post some quotes from my personaal digital library that I hope HBB readers will enjoy, especially in retrospect.
From the 9/20/04 Fortune magazine; article titled “Is The Housing Boom Over? by Shawn Tully:
But so far the speculators are prospering, and their success is luring hordes of new amateur gamblers. “Electricians are flipping condos for $100,000 profits after a year,” says Jack McCabe, who heads a Florida market research firm. “They’re becoming millionaires.” Both Goodkin and McCabe fear that investors who put down just 10% or so to reserve a condo that will be built in 18 months will simply walk from contracts, swamping the developers with unsold units.
And in many strong markets supply isn’t constrained at all. Take condos in Miami. Today the high prices are doing just what they should, stoking a rampage in construction. Instead of shunning developers, Miami and many other cities are encouraging them to rebuild their ravaged business districts into gleaming clusters of residential and office towers. In southeast Florida no fewer than 25,000 new condo units are planned for construction or conversion in the next 18 months. “Since about 5,000 new condos sell a year, that’s about five years’ supply,” says real estate consultant McCabe. “Miami will have an enormous oversupply of condos in a couple of years.
Good going, Jack, we continue to appreciate your (earlier) foresight. My question is, what do you expect now? Have you any inclination to guess when FL RE will “bottom” ?
Thank you Jack. It was your analysis of the condo situation in Florida that made me realize what a significant aspect of the mania the so-called urban living “shift” was. It isn’t easy to remember how ordinary and “inevitable” it was considered back then. I especially remember you saying in 2005 that condos were always the last to take off and the first to crash. And the condo conversions were the tail end of even that last gasp. Of course, that is probably true of every housing cycle, but this event wasn’t just any cycle, as the world now knows.
There were lots of analysts that were catching on by the time I started this blog, but you had already figured it out and held your ground when so many disagreed.
Thank you Ben.
By the 3rd quarter of 2004, I could tell South Florida (as well as the state) was headed for a glut of product that in itself would drive prices down. coupled with an artificial demand from speculative flippers utilizing toxic loans they couldn’t afford, the recipe for disaster was cast in stone.
Only Lew Goodkin (Goodkin Consulting) and myself came forward to describe the situation and future consequences.
When I decided I couldn’t sit still and had to discuss it in the media, I looked at my wife/business partner and told her one of two things would happen; either we would be looking for jobs in the paper soon, or clients that wanted to know the truth about Florida real estate, good or bad, would seek us out.
We lost a lot of bussiness at that point. Developers and lenders didn’t want to hire me to perform feasibility studies anymore when I was quoted in the media saying the marketplace was already overbuilt.
I had to lay off some of our researchers which was very painful because they shared my passion for numbers and providing data and analysis that was honest and not driven by vested interests.
I became know as “doom and gloom Jack McCabe”. Realtors, developers, lenders, etc all attempted to downplay my analysis as excessively negative.
Nowadays, they come from around the globe to hear me speak and cling to every word.
Funny how times have changed in the last five years…
Thankfully, as the cycle has evolved (or de-volved), and my predictions became reality, the truth seeking clients found us and our business has flourished.
A lesson to be learned taught to me in childhood, telling the truth whether people want to hear it or not will help you build a business and you’ll sleep well at night.
Jack, you did manage to call things on the condo craze. I think you, as well as I (who bought a house in 2006 of all times) didn’t call it right on the single family homes. I think we both saw a flat line or slight decline that has turned into a free fall. I’m curious if you think we’re finding a bottom now. With all of the foreclosures I still see waiting to come to market, I think we’ve got a long way to to go.
Recently, we had an inebriated man stopped while driving his 3 wheeled scooter onto the ramp of one of the most dangerous freeway inter-changes in Wisconsin at 5 mph. He had a history of drinking and being a danger to himself and others with his vehicle.
Upon being questioned by a sheriff’s deputy if he was impaired the guy replied…
“No,” he said, “I’m drunk.”
Perhaps 1/2 the GF and FB in this nation are driving on the hwy of debt “impaired” and don’t even know it.
…and they’re still zooming along at 65-70 mph !
http://tinyurl.com/yb53ccw
I wish Jack had been counting Florida presidential votes in 2000 instead of condos.
“The double loans have left them carrying eight mortgages..If interest rates go up, ‘we could be in trouble,’ admitted Gregg. ‘If that happens, our exit strategy is to start liquidating homes. Right now, I’m just playing the game,’ said Janey. ‘But we have an out. We can always sell.’
Secret RE Commission Axiom 101:
For an “out by sale” by a constant GF to work, another GF variable, with equal to or greater stupidity, is required to perform and complete this fanticiful operation.
Hugs and Kisses from The Virgin Islands,
Suzanne
From the June 6, 2005 National Real Estate Investors magazine article “Speculation grows that the frothy condo market is nearing its’ peak, by Matt Valley:
Washington, D.C. — Short-term speculators flooding the condo market in Southeast Florida have created a tidal wave of investor enthusiasm that will most assuredly lead to oversupply and downward pressure on pricing within the next few years, predicts Jack McCabe, CEO of McCabe Research and Consulting.
“Is panic selling a real possibility in South Florida?” McCabe asked rhetorically during a panel discussion at the Hilton Washington Embassy Row on Saturday morning. “It’s kind of hard to believe at this point because everything has been going great guns. Publicly you won’t find a developer or a lender who tells you that they’re concerned about the market at this point. Privately, they will all tell you that they are concerned,” emphasized McCabe, whose comments were delivered to more than 100 editors and reporters gathered for the annual convention of the National Association of Real Estate Editors (NAREE).
So great is the concern in the financial community about the overheated market that one lender, Bank Atlantic, has decided that it will at least temporarily stop funding of new condo construction in South Florida, according to McCabe. Meanwhile, developers are beginning to include clauses in contracts that prevent condo buyers from flipping the units for resale before projects are completely sold out.
Such bold moves are in direct response to the wave of new construction and condo conversions taking place. Palm Beach County currently has over 10,000 new condo units scheduled for delivery between now and 2007. Broward County has 13,000 units slated. Meanwhile, a whopping 25,000 new condo units are expected to come on line in Miami-Dade during that same period. Another 64,000 condo units have been announced or are in early planning stages for development throughout the region.
Those figures don’t take into account the large number of condo conversions of commercial-grade apartments — communities with 100 units or more. Over the past 18 months, total apartment conversions have reached 31,000 units, more than double the three years prior.
Significant price appreciation and cheap debt are helping to fuel the condo craze. In Southeast Florida, homes have appreciated 20% to 37% over the last three years, according to McCabe. Condo units today sell anywhere from $300 to $1,200 per sq. ft.
Conversion units are selling at the lowest price points in the region. “That’s why the American dream is no longer a single-family home in South Florida. It’s a condo conversion because that’s what the majority of people can afford.”
The condo developers are gobbling up any developable land. They are paying 20% to 35% premiums over and above what the long-term rental operators can afford, according to McCabe. “The converters also are swallowing up all the apartment complexes that are existing. They are paying premiums far and above what a long-term operator can justify to pay and make a profit on.”
From the July 10, 2005 Associateed Press article “Housing markets pricing out middle class” by Jill Barton:
“Many of the overheated real estate markets throughout the country have become unaffordable for the majority of the population,” said Jack McCabe, a housing industry analyst in Deerfield Beach. “Many people are paying well over 50 percent of their income for shelter. It leaves no money for savings or sometimes even for recreation.”
From the August 7, 2005 South Florida Business Journal story “Conversion guru expects squeeze” by Ed Duggan:
South Florida’s conversion market may have trouble absorbing the more than 7,500 condo conversion units selling now or expected to come to market within the next 90 days, according to conversion research specialist Jack McCabe.
Last year, there were 17,106 conversion units sold. Through July, 22,213 are on the market or will be shortly, he said.
The market is in danger of overflowing supply as owners rush their projects to it in hopes of hitting a bonanza before it tanks, said McCabe, CEO of Deerfield Beach-based McCabe Research and Consulting.
“Multi-family property owners see it as the likely end of the gold rush and want to cash out,” he said.
Since most of the newer rental communities have already been sold, McCabe sees slashed profits and challenging times ahead for many would-be sellers.
“Converters are getting squeezed on both ends,” he said. Ratcheting higher prices for properties and repairs on the less desirable, older buildings are becoming costly and challenging.”
A year ago, McCabe predicted a 2005 fourth quarter slowdown in conversion activity as prices and interest rates advanced and the market for users and small investors became saturated.
“I haven’t changed my mind,” he said. By the end of the fourth quarter, the mad rush should be over. Developers are in a price squeeze, the good stuff is running out and speculators will find themselves in a bind if they are leveraged to the max on home equity lines and zero-down mortgages.”
Jack:
Telling the truth as you saw it may have hurt your business but at least you could hold your head up when the SoFl condo crash was coming to fruition. That’s more than can be said for Learah, Yun, et al.
Your reputation is worth more than money.
Are you sure about this reputation stuff? What a revelation!
I thought in America the guy with the most marbles always wins.
Thanks for the Florida thread and for advise a couple of weeks ago. I’ve been reading (lurking) here since 2005, and asked last week about rent or buy in Lakewood Ranch area.
Well, we went there last week and applied for a rental for 1 year. I spoke with 2 very experienced realtors (I would trust them both) while looking at houses on the market. I know they necessarily have a positive bias. One thinks the market will bottom in 2010, based on the absorption she sees happening; the other thinks market will be very soft for another year or two.
I’m glad to be renting (lease is pending) for about 2/3 the cost to buy. As you folks advised, my wife and I will have a chance to look around, and we may or may not even like the area.
Still I wonder, will the market bottom next year? I have my doubts, as they keep platting new areas for building going to the east.
You just talked to TWO realtors & neither parroted the mantra ” It’s a GREAT time to buy” !?
Astounding
their don’t-BS radar lit up
Maybe he wore one of Ben’s t-shirts to the meeting.
ride, you’ll never know the market has bottomed until after the fact. But no big deal. The climb back up will be VERRRRY slow.
Exactly. The very best combination of selection and price will probably occur shortly before the bottom. But the HUGE overbuilding will mean that places like South Florida will not appreciate much in real terms for a decade or more IMHO.
Ride - watch out for the “CDD” fees/taxes. I’ll post more about them below.
From the November, 2005 Apartment Finance Today magazine article titled “Condo crash coming” by Bendix Anderson:
While eager condominium buyers still line up outside sales offices, Jack McCabe wonders how long that’s going to last. McCabe is CEO of McCabe Research and Consulting, LLC, in Deerfield Beach, Fla.
He thinks the price of the average condominium in South Florida will drop 30% between 2006 and 2007.
Speculators might also be forced to sell their condos even if the market is weak if they purchased their properties with a mortgage that had a balloon payment due at the end of a short term. Buyers with floating-rate loans are already suffering as interest rates rise, and many don’t have the financial resources to keep paying their mortgages.
“Florida and Utah currently lead the nation in terms of fore-closures,” McCabe pointed out. “Florida is going to have that title for quite a few years.”
heheheh….ahhhh…mmmm more coffee…
Amazing….yep, another cup.
Last night I met some relatives of my girl friend’s. They live in Venezuela but own an ocean front 3/2 condo in Bal Harbor (just north of Miami Beach). They paid $750K for it in 2005. Mortgage around $4000 plus $1100 in HOA fees. Not sure what taxes are but I would guess at least another $1000 per month. So the grand total is about $6K plus/minus. They are trying to rent the place for $3k/month. This week they had some lady looking at it that offered them $1500. “She must be crazy” was their response. I told them that the market will most likely remain challenging and that they should consider a short sale. I was really thinking, don’t walk, run away for this money pit. Nope. They want to rent it for $3K and not a penny less. Glad that’s somebody else’s problem and not mine.
“Not a penny less” = zero. Lots of alligators in Florida.
That’s a good story. To my amusement at the time, South Florida condominiums were heavily marketed in the in-flight magazines of Latin American airlines, even though in my judgment the number of wealthy Latin Americans is greatly exaggerated, as is their desire to buy commoditized property here.
A “rich” person in Ecuador is not neccessarily a “rich” person elsewhere on the planet :>
I did the same thing with 2 rental condo props. Offered $1,100 for (this old unrenovated pos)a 2 yr lease (asking $1,600) Agent guffawed. Still to early to tell, but seriously, there are much nicer houses further down valley that have ‘granite’, meaning new and completely upgraded with a 2 car garage.
It is to early to tell if junk and smaller units will clear the CL. Seems to be full.
From the August 26, 2005 South Florida Business Journaal article “Bubble talk just babble, some say” by Susan Stabley:
Hundreds of real estate agents crowded into a condo sales center on a recent hot August morning to hear industry experts opine on the bubble myth.
It ain’t happening, promised Ron Shuffield, president of Esslinger Wooten Maxwell.
Don’t believe the media, warned PR pitchman Seth Gordon.
Speculators and investors are what built these cities out of swampland, added Mark Armstrong, director of Florida operations for development company Leviev Boymelgreen.
The sales agents nodded their heads in agreement. Surrounding them were models of luxury towers and views of the city, shimmering Biscayne Bay and construction cranes tending to partially built buildings.
The speakers expressed concern about national and local media reports of a possible housing bubble.
Gordon said he took some developers over to The Miami Herald to meet with new Publisher Jesus Diaz Jr., expressing concern over negative coverage.
“The bubble is a term without a definition,” Gordon said. “Some think it’s a leveling of prices. Some think it’s the end of civilization as we know it.”
He thinks developers haven’t done a good enough job explaining how the industry works, that timetables for building take about three years, and that all the units won’t hit the market at once. And that in Miami, the market isn’t selling just to locals, but to the world.
“Developers spend millions and millions, selling champagne dreams, naked women and naked boys and the good life with stainless-steel kitchens,” he said. “But there’s been really no effort at all defending the market.”
Leviev Boymelgreen’s Armstrong, speaking from inside the sales room of Soleil, one of his company’s high-rise projects, said naysayers have been around since the founding of Miami and Miami Beach by the Tuttles and the Brickells, the Collinses and the Fishers.
Catastrophe was predicted then, he said.
“Boy, would I have liked to have invested in Miami back then,” Armstrong told the audience, largely composed of people born outside Florida.
The speakers did not include projects in Coral Gables, Sunny Isles Beach, the rest of Miami-Dade County or the rest of the region. They also did not include condo conversions under way in the tri-county area. Deerfield Beach-based McCabe Research and Consulting expects 25,860 conversion units to sell or hit the market this year.
Another naysayer in the audience was Jack McCabe, the local conversion guru and real estate analyst.
“They didn’t talk about dark towers,” he said. “They didn’t talk about projects that were in trouble.”
Nor anything about increasing interest rates. Or the weakening euro, which, when much stronger than the dollar, spurred a buying spree from Europeans. No mention of a tightening by lenders either, he rattled off.
The market is at its pinnacle and a correction will be seen in the first half of 2006, McCabe said.
Consider: In the eight-year span from 1992 to 2000, 7,092 new units were absorbed in Miami-Dade County, McCabe said. Just one project was built in 1996.
But in 2003, that number skyrocketed to 7,210 for just one year. In 2004, 7,425 more. The total for this year may push 15,000, he said.
“Why question the visionaries, given that population has increased and we have job growth,” McCabe said. “Do you honestly believe that explains a tenfold increase in sales overnight? And twentyfold in the last two years? Or do you believe a more reasonable explanation might be that 70 to 80 percent of these sales are actually driven by speculators?”
Jack,
You’re killing me. I feel like a kid in the candy store, there’s so much good material you’ve just posted up; I don’t know where to start. So, like an overloaded kit, I’m stunned into inaction!
Great articles, thanks for posting them back up! I’d also like to see the PB Post headline when our median home price crossed 400K; IIRC, that was quite a day for the RE mafia!
400K median home price with a 50-60K median household income. Yeah, that’s gonna work out GREAT!
And that in Miami, the market isn’t selling just to locals, but to the world.
“Developers spend millions and millions, selling champagne dreams, naked women and naked boys and the good life with stainless-steel kitchens,” he said.
Another fancy way of saying “it’s different here”.
Personally Florida is my least-favorite state but that’s just a personal opinion.
Jack are there any stats on the total number of condos completed in Miami over the past 7 years or so?
Our count is 23,186 condominiums in the City of Miami, and 38,166 total in Miami Dade County since 2003.
There were less than 10,000 condos built in Miami Dade County in 1990-2002…
The last time condos were overbuilt in Miami was in 1988-92. Prices dropped 25-30%, and remained flat the following decade.
Only one new condominium project was started in Miami Dade County in 1996.
Speaking of dark towers, can anyone in Miami tell us what those newer high-rise condos look like these evenings? Less than 5% lit? 10%? More?
Are there many “T-cranes” on the skyline these days or has high-rise construction truly ground to a halt?
…naysayers have been around since the founding of Miami and Miami Beach by the Tuttles and the Brickells, the Collinses and the Fishers. And the years 1925-~1955 were…just a hiccup? When I first started posting here, I considered using Prinz Valdemar as a name, after the ship that capsized, blocking Miami harbor, and considerd by some to be the pinprick that burst the LAST Miami bubble.
How can anyone think that a speculation rate of 85% is not a problem?!
Or why, after knowing how many condos were built over the prior decade, that this time it was ‘different’?!
Too see this bubble, no in-depth analysis was required, only common sense.
Another similar stat was golf-communities in Sacramento area. Five were built the prior decade, 24 during the bubble…{facepalm}
I remember reading an article a few months before that time featuring a gleeful Miami-area lawyer who apparently had flipped a condo before ground had been broken. I remarked to a colleague “how can anybody be making tens of thousands of dollars buying and selling an apartment that doesn’t exist yet and before anyone has even brought out a f_____g shovel?”
I’m surprised there wasn’t more written on the overtly sexual nature of bubble-era advertising and construction. Some of the print ads looked like they belonged in Maxim, or as a slideshow presentation on YouTube accompanied by Barry White singing “Let’s Get It On.” In Tampa there are a couple of downtown condo towers that, with their parking garages, clearly resemble erect phalluses. I know it wasn’t Florida, but one of my all-time favorite stories here was the San Diego condo sales event where realtors strategically placed eye candy in the adjacent building: a woman doing aerobics in Spandex and a shirtless man sitting in a chair reading a book.
I know it wasn’t Florida, but one of my all-time favorite stories here was the San Diego condo sales event where realtors strategically placed eye candy in the adjacent building: a woman doing aerobics in Spandex and a shirtless man sitting in a chair reading a book. I remember that! I also remember some unflattering comparisons between the models next door and the realtors in the open house.
This from Diana Olick at CNBC Tuesday shocked me, even though I’ve been reading this blog for years, live in South Florida, and know things are bad:
“Among individual states, Florida posted the most troubling results with 10.4 percent of loans in foreclosure, and more than 22 percent of loans reported as non-current.”
Do you add those two numbers together and get 30% of all FL mortgages going under (assuming 90% of the non-current will never become current), or is the 10.4 part of the 22? If it’s 30%, and also assuming about 1/3 of have no mortgage, about one in every 5 houses and condos in FL will be foreclosed on. That’s staggering. And that’s best case, if nobody from this point forward stops paying.
Combine the two. Over 30% of Florida homeowners with mortgages are currently either in foreclosure or default (late on payments).
It should be noted that app. 38% of loans in default eventually wind up in foreclosure.
There will be over 1,000,000 foreclosure filings in Florida in 2009.
Thanks Jack for the posts. I’m just shaking my head back and forth while reading them amazed by what
you actually saw and wrote about. Congrats.
Thank you. I feel even better about renting for a year!
Is that a contrarian indicator? Things got so bad, they can’t get any worse?
Jack: I recall you being 1 voice of reason in this debacle. Thanks for the sanity, too bad no one wanted to hear it. As a commercial appraiser in central FL, I can relate, being shunned for my doom/gloom predictions. After asking a few developers ‘just who is going to buy these 400 non-water front twnhms for $300-400K?’, and being looked at like the anti-Christ, I just shut up verbally and put my opinions in the report. Their typical answer to that ? was ‘wealthy baby-boomers and retirees’ – Ya, right!
But, developers had their fave banksters, who had their fave appraisers, and work would be shuttled to the deal makers and around the deal breakers.
It came to a point when getting another fantasy A&D loan appraisal request, I just wanted to write one word – forgetaboudit! Or 2 – ‘Are you nuts?’ Even after we began reporting in 2005 highest and best use was to HOLD –DON’T BUILD, and extending sell out periods far beyond the developer’s fantasy, the project would be funded and built. Now these projects sit like hulking barren reminders rotting in the FL sun, foreclosed and unwanted…
“In the past, investors bought gold as a hedge against inflation and other unpredictable economic misfortunes, David Lereah, chief economist for the National Association of Realtors, told some 150 people at a Saunders Real Estate forum…… ‘Now they buy real estate,’”
I’m sure glad I don’t have a big pile of that nasty $480 per ounce 2005 gold!
I’m going to make two more article posts, both are rather lengthy, but I hope you find them worthwhile. sorry about taking up so much web space today, but this particular thread is very dear to my heart.
From the October 15, 2007 feature article in the Miami Herald titled “Real estate experts debate S. Florida market by Matt Haggman. It anecodotely represents the clueless hyperbole expressed by many well know industry “experts” that were caught up in believing their own myths. Hope you enjoy!
Is South Florida’s housing slowdown simply a correction or is it headed for a crash?
Michael Cannon and Jack McCabe — the bull and the bear of local real estate — make their cases.
Cannon says he called the last housing bust in the 1980s. But the real estate analyst who has studied the South Florida market for four decades says he’s not ready to say that about this downturn.
For more than two years, analyst Jack McCabe has loudly and consistently said the housing market is going to deliver a hard fall.
Who’s right? Read on, and decide for yourself.
For more than two years, analyst JACK McCABE has loudly and consistently said the booming housing market is going to deliver a hard fall.
HIS CASE
• Cheap money artificially fueled the boom. Exotic mortgages with low introductory interest rates were gobbled up by speculators as well as borrowers stretching their wallets to afford pricier homes. Those loans are now resetting to higher rates, pressuring many borrowers into foreclosure.
• Speculation is rampant. Visits his staff made to sales centers for new condos showed that 70 percent to 80 percent of all buyers were in it to flip. Single-family housing developments and used homes saw plenty of speculation, too. This fake demand spurred record development, and now between 30 percent and 50 percent of purported buyers — many of them speculators who can’t flip their contracts — will simply walk away.
• The oversupply is worsening. Thousands more condo units under construction — 37 buildings are scheduled to be completed in the next two years alone — will further drag down a market where already it would take nearly three years to sell the condo units listed right now, at current rates. Plus, many who bought in other buildings will continue to put units up for sale to escape higher mortgages, taxes and insurance; others will end up in foreclosure. The result: Prices will drop significantly.
• The buyers just aren’t there. Baby boomers will flock to South Florida to retire, but that is years away. For now, declines in public school enrollment in Miami-Dade and Broward counties are bad signs for demand. More people are leaving the state to escape higher costs of living.
PREDICTION
Prices will drop 10 percent to 15 percent each year into 2010. Few buildings and areas will be insulated from the downdraft. Foreclosures will spike. Not until the decade is over will prices start to stabilize. These problems will send the area into a recession in the third quarter of 2008.
BUY OR RENT?
Rent. Given the price drops foreseen over the next three years, it doesn’t make financial sense to buy. All the speculators who can’t sell their properties will rent at below costs, so rental deals will be plentiful.
MICHAEL CANNON says he called the last housing bust in the 1980s. But the real estate analyst who has studied the South Florida market for four decades says he’s not ready to say that about this downturn.
HIS CASE
• Sales are stopping their slide. Since, the market peaked in the second quarter 2004, the number of sales has declined dramatically. But in recent months, sales have flattened rather than continue to dip. That suggests the market may be stabilizing, although it’s still too early to tell if it’s a trend.
• Project failures are isolated. Condo projects built by inexperienced developers in over-saturated markets will fail, to be sure. But overbuilding in the new condominium market that draws so much attention is actually relatively contained compared to the overall body of new and used homes across South Florida. For the vast majority of homeowners who bought before or in the early part of the boom, their homes are still worth far more than they paid for them.
• Walkaways are fewer than predicted. The number of speculators who bought new condos isn’t as high as other analysts claim; it’s roughly in the 30 percent range. And buyers aren’t walking away from their sales contracts as often as alleged. For all condo buildings constructed and completed in the past five years, 96 percent of the units have closed, his research shows.
• The economy is strong. Unlike in the 1980s, South Florida is now part of a world economy that is flush with cash. There is more wealth in South Florida than many realize. Studies reporting more moving trucks carrying people out of Florida than into the state miss the tremendous international in-migration.
PREDICTION
Prices are rolling back to around 2004 levels — where they would have been anyway if the boom hadn’t produced unusual, and unsustainable, price gains. Few will lose real money. A readjustment to normal market conditions — a better balance between buyers and sellers — will continue for the next 18 months. But, so far, this relatively orderly transition has not produced panic sales.
BUY OR RENT?
Buy, if you plan to stay for at least seven to 10 years. There are good values out there, but negotiate hard and you must be thinking long-term.
Posted on Mon, Oct. 15, 2007
South Florida real estate outlook
By MATTHEW HAGGMAN
Jack McCabe and Michael Cannon covered a lot of ground in their nearly two-hour conversation about the South Florida real estate market last week at The Miami Herald. Here is a sampling:
SPECULATORS - HOW BIG A ROLE DO THEY PLAY?
McCabe says he would poll buyers at new condo sales centers, where buyers would camp out over night to get a unit or pay people to save their place in line, and “without a doubt the great majority were all in it to flip the property.”
Speculators getting out will put more downward pressure on prices over the next two years. ”It is survival of the fittest at this point,” McCabe said.
Cannon contends his own study of new condos has not found nearly the number of speculators. Whatever the number, though, he says speculation in new condos isn’t as important as people make it out to be. That’s because the housing market is more than new condos.
New condos make up about 15 percent of the overall market; 10 percent are new single-family homes. The rest are existing houses and condos, which were speculated on but are already starting to roll back from artificially high levels, he says.
”Speculators are a fractional portion that is being blown way out of proportion,” he said.
DEMAND - ARE PEOPLE COMING OR GOING?
McCabe: “The majority of people who live in South Florida can no longer afford this market, and they’re leaving. They are not coming, they are leaving. We have [fewer] children in our public school systems in all three South Florida counties, but in particular Dade and Broward, now than we did five years ago. Private schools that didn’t have openings for a year or more, you can now get your kid in easily.
“The vast majority of families are finding it a financial struggle, almost to the point of hardship, and they are leaving this marketplace and moving elsewhere. The [number of] electrical hookups [for homes has] not gone up. When you talk to the moving van line companies or look at their latest reports — Atlas, United and the third major one — all are saying they are moving more households of furniture out of the state of Florida than they’re moving in.”
Cannon: “We are having an influx of a different demographic group here. That is the biggest uncertainty we don’t know. No. 1, we are in between the Census. And even when we do have the Census, we don’t know how many people because municipalities sue the government because they say they are undercounting. . . .
“[In a similar way,] the school statistics are wrong. They say there is a decline in school enrollment in the public schools. Do you know why? Because there is increased enrollment in charter and private schools. . . . We don’t know how many people are here. We don’t know what our net migration is here.
“And you take pieces, with all due respect, you take pieces of statistics and make it an absolute guarantee, and it’s not true. Because I don’t know, and I don’t know if you guys know.”
LENDING - HOW WILL RISKY LOANS IMPACT THE MARKET?
McCabe fears that risky mortgages — particularly adjustable rate mortgages slated to reset to a much higher interest rate — could deliver another blow to an already struggling housing market. He says $2 trillion dollars in adjustable rate mortgages are slated to reset across the country, including a big chunk in South Florida.
Cannon’s not so sure. He says such fears are overblown, and it’s wrong to assume adjustable rate mortgages will result in catastrophe. Cannon said his research reveals between 70 percent and 75 percent of the entire South Florida housing market is not affected by risky mortgages currently making headlines. He claims the dicey loans offered by high-risk lenders were only in a corner of the overall market.
”If you go to legitimate lending institutions and look at foreclosure rates, it is de minimis,” Cannon said.
DANGER ZONES - WHICH REGIONS SHOULD WE WATCH?
McCabe says the majority of the downturn is still ahead of us and will be widely felt. Not even the best buildings will be spared, he believes.
Cannon disagrees, saying there is no basis for such a sweeping conclusion. Yet, he says, a sub-market by sub-market analysis does reveal there are some areas to worry about.
”Miami Beach overall is not doing bad; Coral Gables overall is not doing bad,” said Cannon. “Downtown Miami and Brickell Avenue, that is an area to watch. Aventura, certain buildings. Coral Way, I would watch very carefully. Dadeland I would watch very carefully.”
“But I have not seen any panic selling yet.”
CONCERNS - DO THESE GUYS AGREE ON ANYTHING?
Yes, Cannon and McCabe do agree on some points. Here are concerns they share for South Florida’s housing market:
• Fraud: Bogus sales may have artificially boosted prices and made discerning what’s really going on in some neighborhoods difficult.
• Property taxes: Taxes are high and getting higher, particularly for second-home owners who make up a significant chunk of the market. Concerns over taxes are delaying home purchases, and lawmakers still have not agreed on a plan.
• Insurance: Premiums remain too high for many property owners and could quickly rise again with another busy hurricane season, further increasing the cost of owning a home here.
• Foreign visas: Rules that make it more difficult for foreigners to travel here will impede their purchases of second homes.
• Bailouts: The government should not bail out speculators, developers or lenders, many of whom made bad decisions.
OTHER HIGHLIGHTS
• On investing: ”If buying for investment, go buy commercial real estate,” Cannon said. Buy residential property only if you plan to remain in it for the long-term.
• When will the bear turn bullish? ”In 2010 and 2011 is when we will see real demand from real end-users in South Florida,” said McCabe. “That is when the baby boomers start to retire. That is when baby boomers will want to live in these buildings.”
• On the weak dollar: ”It’s good news for Europeans and Canadians. That’s really where the lion’s share of the buyers are coming from,” McCabe said.
Cannon says Latin Americans continue coming as well.
• On foreclosures: ”We will see foreclosures double next year and double the year after that,” said McCabe, citing a shakeout from excessive speculation, overbuilding and risky mortgages resetting to higher rates.
Said Cannon: “There are foreclosures, but I still can’t reconcile the numbers I read in the media. Did you know in 2006 there were [fewer] foreclosures than in 2002, 2003 or 2004? . . . Locally, the real lenders are overloaded today processing refinance mortgages. The majority of people are being taken out of these high-risk loans.”
Interesting that Cannon pointed to increased enrollment in private schools. At the time, I could not understand how so many people were able to afford it in a state long notorious for low wages. Now I know it was home equity extraction.
” in the 1980s, South Florida is now part of a world economy that is flush with cash. There is more wealth in South Florida than many realize. Studies reporting more moving trucks carrying people out of Florida than into the state miss the tremendous international in-migration”
While it might have been true that there WAS more supposed equity vapor wealth in Florida than many realized, there was one helleva lot more Flips and Fraud in Florida than many supposedly sane people realized too.
FB : “Hello 911…My house just delevoped a serious equity vapor lock, I’m trapped and I can’t get out !”
911 : “Sir, That appears to be a non-emergency Personal Problem.
Please feel free to hang up and call the FED at 1-800-Dial-a-Prayer…and have a nice day”
Sheesh
Bubbles are for bathtubs, silly!
Holy Kendra Todd quote! I just love that one. What a twit and spokeswoman for the FB flipper contigent of our greedy society.
Real estate face off redux
Posted on Mon, Dec. 15, 2008
By MATTHEW HAGGMAN
Last year we invited local housing market analysts Michael Cannon and Jack McCabe to The Miami Herald to discuss the housing boom’s fizzle. The bull and the bear of South Florida’s real estate market didn’t agree on when things would start to turn around — or much of anything else.
In this week’s cover story we brought the pair together for another face-off after a year of unprecedented upheaval in the housing and credit markets. The fur flew, and once again Cannon and McCabe didn’t agree about much of anything.
Here’s a look at what they predicted last year:
McCabe: Prices will drop 10 percent to 15 percent each year into 2010. Few buildings and areas will be insulated from the down draft. Foreclosures will spike. Not until the decade is over will prices start to stabilize. These problems will send the area into a recession in the third quarter of 2008.
Cannon: Prices are rolling back to around 2004 levels — where they would have been anyway if the boom hadn’t produced unusual, and unsustainable, price gains. Few will lose real money. A readjustment to normal market conditions — a better balance between buyers and sellers — will continue for the next 18 months. But, so far, this relatively orderly transition has not produced panic sales.
What has happened since last year:
Home prices rolled back to 2004 levels. Lower prices — driven by banks unloading foreclosed properties, short sales and individuals sellers slashing prices — resulted in a pick-up in stagnant home sales starting this past summer. That, in turn, led to the outsized inventories of unsold homes beginning to shrink slightly. There’s still an enormous excess of homes for sale locally — both single-family and condominiums.
The National Bureau of Economic Research declared earlier this month that the economy was in recession and had been since December 2007. The big problem undermining the economy: a collapsing credit market. Lenders funded way too many risky mortgages that went bust, resulting not only in a spike in foreclosures but in a historic meltdown among large banks and Wall Street investors who lent or invested in home loans.
The economic fallout included the biggest bank failure in U.S. history — that of Washington Mutual — and the largest bankruptcy — that of Lehman Brothers. The financial distress spread into all sectors of the U.S. economy, prompting massive intervention by the federal government including bailouts of big U.S. banks, investment firms, and an insurance giant.
Locally, builders like TOUSA in Hollywood and WCI Communities in Bonita Springs filed for bankruptcy protection. Levitt & Sons in Fort Lauderdale was liquidated. South Florida city and county governments received $161 million in federal funding to purchase and rehab foreclosed homes.
Real estate face off redux: Jack McCabe
By MATTHEW HAGGMAN
For several years, Jack McCabe loudly said trouble was brewing in the housing market. Last year, he predicted the U.S. economy would fall into recession. This year it was officially announced that it did. But the real estate analyst says there’s more trouble to come.
HIS CASE
South Florida’s housing market is in recession, if not depression.
Prices have come down, but will go down further because they are still too expensive. A conservative ratio of a home price to a buyer’s income is about 4:1, meaning the typical buyer should be able to afford a home priced at about four times their annual income. But these days the price-to-income ratio is 5 or 6 to 1.
While sales have increased due to lower prices, it’s mostly due to higher levels of distress. In other words, sales are being driven by short sales and foreclosed properties being unloaded at steep discounts. As a result, it’s too early to say we are seeing a consistent increase in sales activity.
There is still a long way to go before the housing market recovers due to the giant excess inventory of homes for sale. In Miami-Dade County, there are 33 months of supply for single-family homes and 42 months of supply for condos. In a healthy market, with stable prices and an equal balance of buyers and sellers, there should be about six months of supply.
PREDICTION
The coming year will be as bad as 2008. Expect price declines of 10 to 15 percent through 2009. Prices are already at 2004 levels and will likely see a retreat to at least 2002 levels. The foreclosures and inventory will continue to drive price declines. Sales have not hit bottom yet. Yes, there will be sporadic periods of increased sales, but it will amount to false bottoms. For 2009, sales will be slightly above 2008, but that’s only because of lower prices, and there are still years and years of inventory to absorb.
BUY OR RENT?
Rent. You have far greater choices for rentals. As long as prices are coming down, and you can rent for half the price of ownership, it makes no sense to buy as an end-user unless you’re planning on staying in a home for at least five years or longer.
Real estate face off redux: Michael Cannon
Jack McCabe and Michael Cannon covered a lot of ground in their conversation about the South Florida real estate market recently at The Miami Herald. Here is a sampling:
DISTRESSED PROPERTIES
How bad is [the real estate market] and are the vulture investors swooping in?
Cannon: All these so-called vulture funds got created and ran down here. There were headlines in the newspaper, and there has been only one transaction that has occurred — the Lubert-Adler and Related deal at 50 Biscayne [a downtown Miami condo deal in which Philadelphia-based investor Lubert-Adler and Miami-based builder Related Group bought 146 units].
Now why aren’t the developers selling, even the ones in bankruptcy? The reason is the developers with unsold inventory are renting units out; they have their cash flows. They are not making a profit but they are doing exactly the same thing as vulture funds: hold for five years, see what happens and then try and get their rate of return.
From what I have seen the biggest price cuts have been spotty; I have not seen it widespread… What I am finding is we are going through the adjustment period… that will be 12 to 18 months.
Once we count the trees in the forest… the total number of real distressed properties won’t be nearly as much as being reported in the media or in Washington, because no one knows.
McCabe: In Dade County [through Sept. 2008] there are 17,176 single-family homes on the Multiple Listing Service. I took a three-month average and it’s currently averaging 513 sales a month. That is a 33-month supply. For condo and townhomes, it is a 42-month inventory.
In a good market there is a four- to six-month supply of inventory, maybe eight.
Right now I am working with a lot of lenders — big lenders at the top levels. I have over 50 different situations with loans they have taken back or they are looking to shop the loans because they are so upside down.
Last year [Cannon] said project failures are isolated. That’s not true. There are project failures all over the place. Perez buying his own condos [at 50 Biscayne] is a project failure. When he buys them at $250 a square foot, after he sold them at $400 a square foot, he has cut out the legs of all previous buyers. Everybody who previously bought and closed has been wiped out.
Cannon: Excuse me. When an auto dealership buys a bulk of cars, they buy on a wholesale basis and then sell on a retail basis. Do you see Lubert-Adler/Related dumping those units on the market now? No. That’s a wholesale price, Jack.
Do you think there is blood in the streets?
McCabe: You betcha.
Cannon: I don’t see anyone bleeding. Do you see people in soup lines?
McCabe: How about people losing their houses and losing their businesses? That is not blood in the streets? That is not enough for you?
ROOT OF THE PROBLEM
Cannon and McCabe shared a dim view of the system that evolved of lenders offering loans to borrowers with few restrictions and then selling the mortgages to Wall Street, which bundled them into tranches that were sold to investors over and over again. The result was a disconnect between the loan and the underlying property.
McCabe: Wall Street packaged them up with no rhyme and reason. It then went to Standard & Poor’s, Moody’s and Fitch to get rated, and that was another failure in the system. These bond rating agencies gave them AAA ratings when they were pure junk. They never should have been sold to investors, but they were….
We had trillions and trillions invested and they are now coming crashing down because the collateral behind them — the house — is not there.
Cannon: They would basket these into sub-prime packages. They would send them up to Wall Street, which would chop them up into security investment vehicles, SIVs… By the time brokers and traders started selling them worldwide, there was no real estate asset behind it.
Where the problem lies today is we have not found yet where underlying real estate assets are behind some of these securities they are trying to uncover. It is absolutely astonishing that even Fannie Mae, which bought these bulk packages, did not have the paperwork for the properties in the portfolio.
A lack of regulatory oversight caused this.
SPECULATION
While both agree on the causes of speculation, they take different positions on not only the impact but also how widespread it is.
McCabe, for instance, said he’s long believed there’s much more speculation in the single-family home and condo markets than Cannon has ever acknowledged.
McCabe: Mike thinks speculative investment was not that rampant; we believe it was always at an extremely high percentage — maybe more so here in Miami than any other city in the country.
It wasn’t just new product; it was also existing product too. That was why we saw sales since the height of the boom drop 50 percent or more — that was the artificial market that is no longer.
Cannon: Let me tell what’s happened in the condo market. In the new condo market, of all units built in Miami-Dade, over 75 percent of all units closed sales. If they were speculators, they closed the sales. The construction lender was paid off, the mezzanine lender was paid off … I can name the buildings in distress, but you cannot blanket the whole market.
COMMERCIAL MARKET
What is the next shoe to drop?
First, the housing market went into a tailspin due to more homes going up for sale than buyers who wanted them. Then, the credit crisis hit after too many mortgages went bust. The twin challenges are proving daunting for the real estate market and the wider U.S. economy. But McCabe said there could be another challenge looming for the property market. Cannon said he wasn’t so sure.
McCabe: The next big bubble out there in South Florida and around the country is going to be in office and retail. We are going to see a commercial property bubble that will begin next year with a lot of these new [retail and office] buildings being finished. The truth is we are not seeing job growth; we are seeing job declines. We are not seeing businesses expand; we are seeing businesses contract or go out of business.
Cannon: It depends if we have employment growth. And there are certain things that are happening here in South Florida and Miami very quietly that may forestall what Jack is talking about, if it happens… There is a movement to have international mediation in Miami. So quietly a lot of international law firms are coming to Miami… Retail development is blossoming where there is new housing. We didn’t have retail in downtown Miami and now we will see it coming there. Did we overbuild? We don’t know yet.
Cannon: I don’t see anyone bleeding. Do you see people in soup lines?
Wow…
“A conservative ratio of a home price to a buyer’s income is about 4:1, meaning the typical buyer should be able to afford a home priced at about four times their annual income.”
Oh, really? When we bought each of the six houses we consecutively owned from the late ’60s through mid-2005, we used a ratio of 2.5 times annual family income. We were of the mom-at-home generation, but I don’t see how that would make a noticeable difference. Had we ever bought at 4X income, I suspect we’d have had an unhappy lifestyle, since house prices were rising at the normal long-term rate of about 3 - 3.5% (except during the big run-up when interest rates dropped in the late 80s).
Even if the assumption that all buyers put a true 20% down (not likely), then the ratio would be 3.2X income. How does one pay that also pay for a couple of cars, save for college and retirement, eat out once in a while and maybe take a vacation once a year? We sure couldn’t have done it.
“A conservative ratio of a home price to a buyer’s income is about 4:1, meaning the typical buyer should be able to afford a home priced at about four times their annual income.”
First off, great posts Jack!
4 to 1 is conservative? In FL? That seems really, really high to me Jack, I’d just like to get your take on it.. Let’s use round numbers..
100K income, buying a 400K home in S. FL.
100K income = ~6K take home.
400K home in S. FL with 80K down, 2% tax rate, 1% insurance, and no HOA (unlikely) is going to run about 2,650/mo. So, I guess it’s doable, but man, that’s really cutting it close. I’d never consider that level of payment on 100K income, I’d probably cap it at 2K/month (or about 3X income).
Here’s a couple of links. first one is to several CNBC interviews this year and also links to other national print media articles.
Second one is to our website. There is a webpage on the site with links to other 2008-09 articles.
Best wishes to all. Will enjoy reading your comments on this thread.
Keep up the good work Ben!
Jack
http://search.cnbc.com/main.do?target=all&keywords=%22Jack%20McCabe%22
http:/www.mccaberesearch.com
Thanks for all of your raconteuring, Jack. Having been born and raised in Florida and being here for the entire bubble and bust, we saw it all play out just as you forecast and reported.
For anyone looking to buy in Florida, there is a potential oh-crap aspect to property taxes here, for the newer developments and particularly the large PUDs. I think there is more than one name and Jack, Mike and others here probably know way more about it than I do, but I’ll try to outline it as I understand it.
In the old days, the state and local governments would put in all the streets, lights and sewer and water lines for approved new subdivisions. To finance such expansion, they usually sold tax-exempt bonds. This worked well enough when growth “relatively” moderate. But post-Disney, some of the local government officials had a brief flash of common sense and told the developers that the latter would have to front some of the development money because the taxpayers-in-place didn’t want to be burdened with higher taxes for yet-to-be built housing.
That was a wise move in that it tended to protect existing taxpayers in the event a subdivision were to fall through, and put the incremental-cost burden on the buyers of the new properties.
The developers and gummint types figured out how to get it done via side-deal bond issues that were tied to Community Development Districts, or CDDs (I think there are other names, too, but same idea).
So Gigantic Corp cooks up a giant PUD, throws in all sorts of green areas and other stuff demanded by the local officials and CDD bonds are issued to cover the cost. So far, so good.
The glitch is that property Taxpayer Type 2 has been created - his property tax is a combination of a reduced local tax and a prorated share of the CDD bond payments. Presumably the taxes meld back into the ordinary type when the CDD bond is paid off. But what if all 2,800 units of the PUD don’t get built? What if Gigantic Corp had figured out how to be a guarantor with less than the assets of the entire parent corp behind the bond issue? Hmmm…. aren’t the stuckees the TT2s who bought into the PUD? Wouldn’t they see their CDD payments rise, perhaps astronomically? And finally, how many buyers are aware of the extent of the CDD taxes and their potential for increase?
Would be really interesting to hear about this aspect cause it is happening here too. See lots of Big dev PUD that is still under developed.
Wonder about the taxes?
Boy these posts DO scream for some “Where are they now,” reporting don’t they.
I could go on for hours about all the greed and stupidity I saw during the 2003-06 time frame. But with respect to the general public, I still get the sense that the message has not sunk in. Maybe it can’t sink in.
Ot and tired. Thanks beautiful Anansen and same, of course to SanFranQl for acknowledging my absense, gotta a lil’ serious health gig going right now.
Anyway, this was a comment from James Kunstler I thought was good. Not my words. Sorry if a little long. Happy Thanksgiving to my friends here!
Where’s OlyGal? Hi Oly, Palmy, et al.!
“The grand experiment called “Industrial Civilization” - the mother of all bubbles - has hit thermodynamic limits and is in the process of deflating: Faster in some areas, slower in others. Along with its sidekick, Globalization, it is showing its weaknesses and its many unintended side effects and they are vast and unsettling to say the least.
The idea that all 6,737,804,621 human beings - or even a substantial fraction of them - can enjoy all the trappings of “modern industrial society” including personal autos, vacations to distant lands, plasma TV’s, large houses, scads of electronic gadgets and all the electricity and fuel to power them all - all on a planet of finite size and resources - is just beyond reason.
Yet, this is the very illusion that Industrial Civilization bombards us with through the relentless commercials, billboards, branding, junk mail, icons, and “signs, signs everywhere there’s signs” - driving the wedge of hyper consumerism into the minds of every person the planet, 24/7. Today’s mantra is “buy baby buy”. Buy and consume like no tomorrow (assuming there is a tomorrow!).
As the participants of industrial civilization have been increasingly sleepwalking in the comfortable illusion of consumer society, the moorings have been breaking loose and the infrastructure has been creaking and cracking all around us. It is quite obvious to those of us who bother to look and listen “outside the box”. Or should I say “outside the Big Box”.
It goes without saying that as the world population continues to increase and more and more of the world jumps on the bandwagon of globalization and consumer society and the demands from our finite planet increase year over year that we are headed for a cliff. We surely appear to be headed for a train wreck of huge proportions. Just as the oil peaks, the climate changes, water shortages become more severe and many of the minerals and ores required to manufacture all the goods become terribly scarce, that is when the moorings will snap and everything will come undone.
We had a choice of either a “severe but tenable correction” or a “hard crash”. The Powers-That-Be appears to be priming the world for the “hard crash” scenario. Both the previous and the current administration in the USA appear to be set on sustaining the unsustainable - by reactively “running around and putting out fires” and “plugging leaks” as they occur, not realizing (or caring) that the pot the whole world is in is only getting hotter. The economic recovery they are touting is all about getting the “Global Economy back on its feet” and getting “consumers” back into the stores buying the cars, TV’s, homes and other trappings that make this huge, unsustainable monster work. They may even succeed - or appear to succeed - for a while. Incidentally, electric passenger rail, localized farming and walkable communities are not even on the radar. Again, that’s the matter of priorities.
That day will come when we have to ratchet our lifestyles way, way down to “match” the thermodynamic equilibrium of the little planet we are on. If we do this before too many extinctions and the entire plankton die off we may even have a shot at a future”!
Thomas Malthus, call your office!
That is off topic, but I have long been a fan of his. I don’t agree with everything he says, but I agree with a lot of it. As for Malthus, it is only the oil age that has kept him from being vindicated. Every other species is capable of outgrowing the resources that support it and we are no different.
Would be really interesting to hear about this aspect cause it is happening here too. See lots of Big dev PUD that is still under developed.
“Wayne Spencer noticed movers loading a van in the driveway of a doctor’s home. Spencer bought the house with his fiancee. He said, ‘I believe Florida will be the next California.’”
Yep. Florida is just like California…. but not in the way you imagined.