Florida Condos May Be ‘Dumped For A Loss’
A pair of reports on the Florida housing bubble. “More proof of the South Florida housing slowdown: roughly a quarter of the 379 condominiums at The Moorings in Lantana are for sale. A real estate agent with a listing there says many of the sellers are investors looking to bail. Analyst Jack McCabe doesn’t have specifics on The Moorings but said some condo projects have even a larger percentage of units for sale.”
“The Moorings was one of Palm Beach County’s hottest condo developments when Related began marketing it a few years ago during the real estate boom. Buyers camped out overnight for chances to buy there. Related even needed a police presence to maintain order.”
“Plenty of real estate speculators across the region are getting nervous because they can’t afford the payments on these investment properties. The time may come when they’ll have to dump the condos for a loss, McCabe said. A lot of people are on the hot seat,’ he said. ‘They got into real estate but were not that solvent.’”
The Palm Beach Post. “For anyone not convinced that the housing market has lost some pep, now there’s this: A growing number of the ‘condo conversions’ that eroded South Florida’s supply of rental housing during the past two years are reopening their doors to renters.”
“With the condominium market flooded, at least three Palm Beach County complexes have abandoned their conversion plans and turned back to renting, said Jack McCabe. In all, they represent almost 1,300 units.”
“McCabe documented another 284 units in Broward County, and he suspects there are 500 more would-be condos reverting to rentals in the two counties. ‘We’re undergoing a tremendous transition in the marketplace right now, and the sales velocity has slowed,’ McCabe said.”
“With condo sales slowing, the need for another source of revenue is especially pronounced, since most condo converters went with 12- to 18-month financing, McCabe said. To refinance with longer-term loans, developers will need income. ‘I think that some developers and owners have decided that the best route to go is to go back to apartments, to fill them up,’ he said.”
“The Treasure Coast also has seen hundreds of apartments converted to condos, and, now, some returning to rentals. The Estates at Stuart, a 237-unit complex that converted to condos last year, has opened a leasing office and is advertising its rentals. Stuart real estate broker Mike Morgan said he thinks the owner was forced to return to renting because the condos didn’t sell as quickly as expected. The company set a Martin County record when it paid $45 million for the complex early last year.”
“‘I think it’s going to take some time to go through this adjustment, maybe it’s a year, maybe it’s a year and a half. Nobody knows for sure,’ Brad Hunter of MetroStudy said. ‘It kind of depends on the psychology of home buyers.’”
Thanks to the readers who sent these in.
OT but worthwhile to think about:
Excerpt from:
Paradise Lost
Johnny Silver Bear
http://tinyurl.com/hzpxm
“The turn of the century brought with it a paradigm shift in economic policy in America. With the flight of the domestic manufacturing sector, America’s balance of trade rapidly became extremely unbalanced. In an attempt to keep the economy afloat, the Fed targeted the American Consumer as a replacement for the American Producer as the chief contributor to the U.S. economy. To insure the American Consumer would be, at least temporarily, capable of such a task, “Bubbles” lowered short-term interest rates to their lowest level since 1958. This action, combined with the introduction of a plethora of reckless mortgage products, (ARMS, interest only loans, etc.), provided for an unprecedented number of new home purchases. Over thirty percent of those purchases were made by lower income individuals who had previously been unable to qualify for mortgage loans. The result was a boom in residential construction, and all related industry. The domestic housing market had effectively filled the void that resulted from the flight of the manufacturing sector and, in doing so, became a primary contributor to the American economy. That, coupled with a wave of refinancing, spurred on by the lure of cheap credit, allowed homeowners to bury themselves in debt. The application of this new found cash provided borrowers the means to buy new SUVs and invest in stocks, which effectively held up the automotive industry, as well as helping to keep the markets inflated.”
Wow! Rentals with granite countertops!
I wonder what they need to charge for those rentals . Can’t imagine people they kicked out of the conversion wanting to move back at a higher rental rate . Do they have to offer a unit back to people they kicked out ?
And worse, what if you were a renter that bought?
A lot of recent rentals in Connecticut have granite countertops. 3 bdrm townhouses for $1500/month.
Wow, a rental in a nice bldg in Miami for $1,500/mo would be very nice indeed– GCTs, stainless, hardwood, the works!
We had everything but the hardwood for 1500 here at the Collins at 69th and Collins. We have marble floors instead…which are cold and hard frankly.
We are moving to a 2/2 Penthouse at the Turnberry in Aventura for the same price. Carpet instead of marble, but I have an ocean and intracostal view, and 2 plasmas…same money. Its a good deal, but by no means the ONLY deal around. They abound right now.
If you are looking for a deal, there are 25 units up for rent in my building, and its on the ocean. Which may be a problem if we get heavy storm surge.
“a rental in a nice bldg in Miami for $1,500/mo would be very nice indeed”
I was in Miami this morning and it’s a hellhole.
I insist on my very own squirrel to feed.
Brad Hunter of MetroStudy said. ‘It kind of depends on the psychology of home buyers.’”
Can you say -frozen in place?
[quote]“‘I think it’s going to take some time to go through this adjustment, maybe it’s a year, maybe it’s a year and a half. Nobody knows for sure,’ Brad Hunter of MetroStudy said. ‘It kind of depends on the psychology of home buyers.’” [/quote]
And maybe it’s six or seven years, like the last bubble that popped.
Woohoo! Florida condos for everyone!
Check out this Gallup poll dated today–will we see this reported anywhere?
http://poll.gallup.com/content/?ci=22609
Great link Nikki, sentiment is shifting but it is like turning around the titanic…
I would like to see the historical survey results charted with interest rates to see the correlation.
Also, the curve of the chart is skewed. It implies a bell type rise and fall, but the number of years to the left of center are vastly larger than the number to the right. If it were to scale, I think the drop off at the right would appear much more dramatic, relative to a lazy slope up.
Did you notice that the losers (less than $75k) have caca on their necks when it comes to thoughts of buying. They always have it on their necks. They’re the uneducated with public school mentalities , I call them the sheeple.
“South Florida,” he said, ”is working off of a totally new economic model than any of us have ever experienced in the past” according to a realtor who predicted that a land shortage will support higher prices indefinitely.”
- New York Times, Trading Places: Real Estate Instead of Dot-Coms, 3/25/05
This is amazing how everything is starting to play out in a manner that was predicted months ago on this blog . Math always wins out over spin in the long run . I really don’t want to see anymore people /banks screwed by the buying of overpriced homes . I still say housing should not cost anymore than 25% of gross income . I know this is old fashion but that’s how we use to underwrite 25 to 30 years ago .
I must agree with you. I am one of those aged baby boomers. Have been very fortunate in life. What has been bothering me is where are all these other baby boomers getting all this money to afford second homes. Based on yours and my model of home ownership you would have to have an enormous income to afford it. God bless them, but are there really that many people with so much money.
“…but are there really that many people with so much money.”
No there are not. Lot of the current buyers are young people in their 20’s. Went to 3 condo open houses in Boston 2 weeks ago - condos @$800K - $900K. Baby boomers like me were just lookers - none looking seriously. Only people that were seriously talking to the realtors, and looked interested were in their mid-20’s, early 30’s. Overheard realtors telling them how they can afford with ARMS, I/Os etc - same spin we have been hearing all along.
Peter (Excuse me if I’m incredibly ignorant on this one
) I’m confused about your question about if there are really that many people with money. I guess I assumed that so many people had done well w/stocks and other investments in the last few years that housing was just one of the many ways they increased their net worth.
I am pretty conservative. Own my home. It has taken a long time with pretty decent income to get to this position. I do not understand how people can just go out and purchase second homes or condos for 500 thousand or a million dollars and support the investment. It is expensive to maintain 1 home let alone 2. You need a huge income to support 2 homes.
Substituting the American consumer to replace manufacturing is only a temporary fix. Sort of when you are hungry and eat a chocolate bar. It’s a short “sugar rush” before your body crashes. The same way the housing market is a sugar rush and must crash also.
The trade imbalance will be fixed with a war over and in the Taiwan straits. And either way it goes Chinese imports won’t be as atractive.
The people who prop up Florida’s bubble IMHO generally come from the northeast corridor. I observe here in Boston that as houses sit then there is no money to go down to Florida to buy. Want to know how desperate individuals on my street are? One guy could not make his mortgage payment on a house he bought for 136,000 dollars in 1995. He has HELOC it up to the hilt over 500,000+ according to his boast. Last week Boston police busted his Meth lab,GHB date rape drug, etc. Which was being run inside. And this is a nice upper middle class area near the JFK library. Florida can’t be too far behind. Just the latest from “Bean town”.
How about the ‘beaners’ coming across the border carrying meth, cocaine, weed, ecstasy, and other exotic pills Build the Fence and put the ARMY on the Border. Fine the employers $5000 per employee(and NO deduction). Fine the Wet Backs for unpaid taxes. No protection for their spawn under 14th amendment. No health care and No education benefits.
Your president is too busy using the army to kill brown people in the middle east so they arent available to stop anybody from coming over the border from Mexico.
Hey how come you havent signed up to kill brown people yet….why arent you “defending our freedom” in Iraq?? You hate brown people so much….there is a wonderful opportunity for you to do something about it.
You want to solve the “immigration problem”?? I know you really don’t but lets pretend for a second.
Put everybody in the chain up to and including the CEO of the company in Federal pound me in the A$$ prison 1 year for each hiring of an illegal immigrant…and that includes Ma and Pa America or Friendly farmer Joe who hires one as a gardner or a poolboy—-no exceptions/no excuses.
Problem solved.
Now when are you going to Iraq??
Most South Florida Condominiums under construction are “sold out.” What this means is that investors put down, for example, $15k for the opportunity to close on a $500k condo when completed.
All the speculators went in hoping that $500k condo would be worth $750k by the time it came to close. But what if “the unthinkable” happens? What happens if the $500k condo is worth $450k? A speculator closing at their contract price of $500k would instantly be down $50k. The speculator who walks away from the contract will be down $15k. Which raises the essential question. If prices for new condos tumble below their contract prices, will anyone close? I think not. And when entire buildings see their “sales” walk away… we’ll start to see bankruptcies and distress sales at condominium projects from Brickell (Miami) to Hutchinson Island (Fort Pierce).
Wow, if we ever get to the point where most homes are worth less than thier underlying mortgages you will see masses of people walking away from thier homes=depression! How many of you think this is possible?
I not only think this is happening but that it is starting to accelerate (see Ben’s foreclosure report). This happened in Texas big time in the ’80’s - they bulldozed whole completed developments. The new problem for the borrowers with non recourse loans is that the bank will issue a 1099 to the borrower for the difference between the loan amount and the banks subsequent sale. The borrower will be liable for taxes on that amount - Taxes are not removed by BK. Truly a scary scene.
True that taxes will not be discharged in BK, but CC debt will. Just charge the taxes, and then declare BK. Same end result…
You just declare BK before they sell the condo. Problem solved. If they sell it for less, is it now THEIR problem?
Oh, yeah… and didn’t some laws just get passed making it more difficult to go BK?
It’s about time the bk laws got some teeth. If they refi’d a non-recourse loan they are screwed.Make them pay and take the deficency out of their pensions or social security (ha). What ever happened to the squirrel? Is he well?
Your prophecy is about to come true.
My impression of the sentiments from bloggers here the past several months is that just about all of us here think this is not only possible but probable.
“My impression of the sentiments from bloggers here the past several months is that just about all of us here think this is not only possible but probable.”
Like Samuel L. Jackson says in Jurassic Park “Hold onto your butt!”
Given that “most” would be more than 50% of owned housing in the entire U.S., I think that instead a “sufficient” number will walk away to create your scenario. There still are large numbers of homes owned by older folks, that are paid off. They just won’t matter much in the melee to ensue.
There still are large numbers of homes owned by older folks, that are paid off. They just won’t matter much in the melee to ensue.
I wouldn’t be so sure. Most are fixed income types, and inflation will hit them hard. Stocks? Bonds? Not happening. Pensions? Forget it. Social Security? Yeah, right. I’ll bet a large portion will eventually be forced to sell their homes too.
It is not “possible”. It is highly lkely over time. The risk is a downward spiral of debt default triggering further debt default and liquidation. This will trigger a run on fannie and freddie paper internationally. Very much like the bank runs in the 30’s.
Interest rates will spike even higher. If the US looses control of its currency, we could witness deflation and rising interest rates until it runs its course. This is not 1990 folks. Many smart people on this blog may underestimate the danger of this situation and attempt to buy into this market way too soon.
Help me out with this question. Am clueless to risk management except my old fashioned way. I keep reading about risk management professionals advising mortgage bankers and organizations like FNM. What does this risk management consist of? Some sort of hedging or use of derivatives? With enough bankruptcies, could we have some sort of financial crises?
In the case of Fannie and Freddie, most of their credit risk is by loaning less than 80% of the value of the home (all those up to their eyeballs in debt weren’t using the GSE’s money for all of it. The secondary lenders would eat the full loss before the GSE money is exposed. So if a house sells for 21% less than originally and the borrower stopped making payments right away, the secondary note lost everything and the enterprise would lose 1.25%. Also keep in mind that the note gets slowly paid off each month, so a note with starting LTV of 80% is down to 79% even if the house doesn’t appreciate.
The risk management you are talking about is mostly concerned with hedging the change in interest rates and the ability homeowners have to prepay their mortgage.
Risk management used to just mean doing due diligence before investing in an asset, as well as making an overall investment strategy, such as diversification. Within the last 15 years, however, it’s taken on a new tone with the development and application of the Black-Scholes option pricing model. Now firms are making huge bets in opposite directions to hedge risk–upping overall volume and volatility. There was a NOVA on the subject recently.
Thank you Bryce and Bluto. I will try and find tha Nova piece.
It’s this episode, that was first result in a google search so I don’t think it has a reccomendation if so, sorry.
http://www.amazon.com/gp/product/1578072301/104-4852449-7729535?v=glance&n=404272
You might be able to find more about it from various online sources. Wikipedia’s articles on all subjects financial engineering are top notch (it looks to me like some bored grad students wanted to procrastinate studying for a test).
The Treasure Coast also has seen hundreds of apartments converted to condos, and, now, some returning to rentals.
One is reminded of businesses going through phases of bingeing and purging: waves of mergers and acquisitions followed in a few years by selling off “nonperforming” parts of the company.
What a sickening waste of resources.
“Brad Hunter of MetroStudy said. ‘It kind of depends on the psychology of home buyers.”
Gee Brad, how long and how many brain cells did you use to come to such a profound conclusion.What I think that you really meant was how many ‘useful idiots’ or ‘greater fools’,walking around cloaked as home buyers, are waiting to be sheared before you have to find another form of employment?
“The Moorings was one of Palm Beach County’s hottest condo developments when Related began marketing it a few years ago during the real estate boom. Buyers camped out overnight for chances to buy there. Related even needed a police presence to maintain order.”
“Plenty of real estate speculators across the region are getting nervous because they can’t afford the payments on these investment properties.
Looks like they’re about to lose their Moorings!
Those specuvestors in Florida condos are getting crushed. Don’t forget hurricane season is coming in a month. Its a huge mess down in Florida.
David
http://bubblemeter.blogspot.com
What eventually becomes of Florida land bubbles? Read about the devastating effect of hurricanes on the 1920s version here (”Home, Sweet Florida”):
http://xroads.virginia.edu/~hyper/Allen/ch11.html
(Thanks, Patrick!)
Wonderful history! Thank you for posting the link.
People wil be leaving S. Fl in mass next month for the summer, causing the number of homes for sale to sky rocket just when the resets will commence.
Anyone that does not live here cannot imagine how this place clears out during the summer. Usually the busiest months are March-April-May, as potential buyers want to move prior to the next school year starting. Add to that the fact that existing homeowners are screwed by the insurance and tax crisis here. The number of “FOR SALE” signs that litter the landscape has ballooned. The number of listings keeps growing rapidly- up over 100% in 6 months as the number of units coming to market also is unreal- something like 9 years supply of condos. Add that to the 30% or so drop in teh number of units sold. The cracks in the dyke are becoming unrepairable IMHO. We are approaching the breaking point which will be the first YOY decline in price very soon. I predict by June we will have a full on rout. Keep your powder dry.
Spoke with some homeowners on the west coast of Florida. They told me their taxes and insurance have gone out of sight. This stuff just has to hit home at some point.
What do you mean by out of sight? Can you give us some figures?
i’ve seen anecdotal figures on this board of $9,000/yr for insurance alone.
more accurate data is a quick google search away
Taxes are around 2% and insurance is about 1% . Assume you bought a house that has gone up from $250,000 to $450,000, about what the “average” house hs done in 5 years here. You are talking taxes going from $5000 to $9000 a year and insurance from $2500 to $4500. A total difference of $6500 a year or $550 per month. The insurance amount is before everyone is thrown into the state pool where they can charge the state max.
If you LIVE here in a primary home, you have the “Save our Homes” cap (3% increase or CPI % increase is max per year, whichever is smaller, if memory serves) and a $25,000 homestead exemption that lowers the taxable value a bit. But if you’re a specuvestor, you’re screwed, to put it politely, by the surge in assessed values. As for insurance, it’s bend over time in FL. My insurer is going broke (being taken over by the state), so that means I’m going back into the Citizens state insurance pool. I already pay about $2,100/yr. for $250,000 or so of coverage … expect that’ll go up another $500 between special assessments to cover hurricane losses from past storms, plus premium hikes for future ones. And don’t forget those hurricane deductibles. If you actually suffer damage, you’re out of pocket for up to 5% of the policy — better have a fat bank account.
If they bought and have the homestead exemption, their taxes won’t jump like that. If they sell the new owners, will see the huge increase. The jump in insurance, if they can find it, is unavoidable.
Flippers try too buy a house from a long time resident. They then only have too pay that resident’s tax rate for around 18 months until the county recalculates the land value. The flipper hopes too sell the property to a new sap inside the 18 months too avoid the higer tax.
A flipper might buy a house in Naples for $3,000,000. from people that have lived there for 25 years. The valuation for tax purposes might only be $500,000. resulting in a $7,000. property tax. (the rate is 1.4%). Once the new property is reappraised to $3,000,000. (Lots in Port Royal are more then that) The new bill will be $42,000. per year. Flippers are under great pressure too resell in the 18 month period or else.
There are hundreds of homes in Naples “valued” at $3,000,000. to $25,000,000. Many of their owners are speculators and can not affort the ratcheting up of property taxes let alone interest rates and insurance. The high end is very vulnerable in my opinion.
Would love to but they do not talk money. Person told me their insurance alone had quadrupled over the last few years.
to apartment dweller: that comment was for you. By the way, we are talking million dollar homes.