Posted on 05/14/2006 9:37:09 AM PDT by ex-Texan
South Florida was once so hot speculators flocked to buy and flip properties. Now the market has cooled so much they're walking away from $80,000 deposits (Welcome to Miami).
The U.S. housing market has endured a boom of historic proportions over the past few years. Adjusted for inflation, real price increases have been the highest on record, letting consumers extract equity in their homes to fund spending like never before. But many of the hottest markets in California and Florida have cooled. Jacqueline Thorpe travelled to Florida's east coast and found the mood souring faster than in Silicon Valley in the spring of 2000.
Florida's condo king, the Trump of the south, the largest developer of multi-family dwellings in the United States, is under no illusions about the property market that appears to be softening right beneath his stylishly shod feet.
Jorge Perez, 57, whose Related Group of Florida has ridden the recent U.S. property boom perhaps faster and further than any other developer -- including Donald Trump himself -- knows the market has cooled.
"Things are definitely slowing," says Mr. Perez in an interview in his office south of Miami, where an army of his luxury condominiums sits on almost every street corner and bulldozers frantically dig the ground for more.
Mr. Perez has about 14,000 units in 19 buildings worth US$8-billion either under construction or about to be started, most in South Florida.
"There has been a great amount of construction, some overbuilding," concedes Mr. Perez, pink shirt still crisp, despite a dash from the blast furnace outside.
"To be part of that great growth, people have done projects in secondary sites, and the media [have] on a daily basis told prospective buyers the bubble is going to burst," he says. "I think people are taking a much more measured look at real estate. So our universe has shrunk. Speculators have almost dropped out of the market and sales have slowed down. And I think those people who should never have been in the development business -- because everybody became a developer in the last few years -- will suffer."
Only time will tell whether prices will correct with a slow leak, a bang or even re-accelerate after a brief pause.
But as Canada gears up for another brisk homebuying season, U.S. figures show a sudden weakening since the end of last year.
Nationwide, new-home sales are 11% below last year's peak and existing home sales are off 5%. The inventory of single-family homes for sale has risen to a 5.3-month supply from 4.0 a year ago and the condo supply has nearly doubled to 6.9 months. Prices are still rising in most regions of the United States but no longer at a scorching pace; median resale prices are off 5% from their peak.
On the ground in Florida, which, like California and Washington, D.C., has posted double-digit sales declines in the past months, the mood is souring as fast as Silicon Valley in March, 2000.
Where developers in the Sunshine State once held lavish sales launch parties, with champagne, canapes and dancing acrobats in a market every bit as raucous as the high-tech frenzy, they're now throwing incentives at buyers. Where buyers camped out for days to get first dibs on some homes, they are now selling at auction. And where investors once turned to housing after their equity portfolios melted, they're now walking away from deposits.
"I think, in 18 months, as sad as it would be, there will be 30% fewer mortgage brokers in this business," says Richard Shaffer of Prestige Mortgage and Investment Group in Palm Beach, Fla.
An estimated 25% to 50% of all U.S. jobs have been connected to the housing industry in recent years, but jobs are not the only thing at stake.
Consumers have used the rising value of their homes to tap equity and fund spending in a way unknown a decade ago. A slump in prices could turn that tap off, causing a sharp slowdown in the economy, which could sideswipe Canada.
"This is the first cycle that you could actually instantaneously crystallize the rise in the notional price of a home and use it for current consumption," says David Rosenberg, chief North American economist for Merrill Lynch & Co.
"The mortgage market today is bigger than the government bond market; housing is valued at double the level of household equities on the household balance sheet," he says. "Never before has housing come to permeate the economic and social fabric to the extent that it does today. So that's why, if you ask me, what the No. 1 risk is to the U.S. economy: It is going to be what the house-price landscape is, what happens to house prices."
With most of his condo developments 100% sold, Mr. Perez believes he has deep enough pockets to weather any downturn. But take a trip a few miles north, to 444 Brickell Ave., where the whole building appears devoted to real estate -- searching titles, copying documents, lining up mortgages -- and the mood turns less hopeful. Go farther up the Florida Turnpike to less glamorous but equally real estate-obsessed markets such as Stuart or Port St. Lucie and the mood turns downright desperate.
Harry Rodstein, president of H.R. Mortgage & Realty Co. at 444 Brickell, says the market has turned on a dime.
He has sold seven of 12 US $600,000 to US $1.4-million units in a nearby condo project, but sales at his condo conversion in Sarasota have ground to a halt. Conversions are apartment buildings converted to condos, the latest real estate fad to hit the state.
"What I've seen is that sales, particularly in condo conversions, have fallen off the end of the table," he says.
He blames the retreat on excessive media coverage of the bubble and a U.S. Federal Reserve that does not know when to let up with interest rate hikes.
A 30-year fixed mortgage has risen to 6.49%, 100 basis points above its generational low in 2003, but nowhere near the 10%-plus rates that sent housing over the edge in the last major U.S. real estate slump in the late-1980s.
"People are mentally spooked and the argument is: 'Why does the Fed have to continue to beat it to destroy it?' " he says. "I don't get it."
Mr. Rodstein neglected to mention one crucial factor -- oversupply. Across the United States, there are 3.5 million single-family homes and condo units up for sale, a record, and up 30% from a year ago.
In Miami-Dade County alone, there are 25,000 condos under construction and another 25,000 that have already got their financing and are likely to go forward, says Jack McCabe, chief executive of McCabe Research and Consulting in Deerfield, Fla. In addition, 50,000 more have been announced.
In the whole period from 1995 to 2004, only 9,079 units were built in Miami Dade.
On the Turnpike going north from Miami, those numbers are reflected in the blizzard of billboards flying by, enticing homebuyers on every budget: "From the under US$900,000s. Great value, from the under US$100,000s." Golf community, gated community, the best in condo living, your private getaway by the beach.
And 160 kilometres up the coast, Stuart and Port St. Lucie bake in the humid air; a collection of delicate islands glitter off shore.
Once a sleepy hamlet, strong job growth and immigration made Port St. Lucie the fastest-growing city in the United States in July, 2004 -- its population having swollen 12% to 118,000.
Home prices swelled, too. They have risen 142% over the past five years, the third-highest among 30 cities in a recent study by Merrill Lynch. Florida has 16 cities with the greatest price appreciation, the most of any state.
Trouble is, the housing stock has been growing even faster. Building has been frenzied. Row upon row of "master-planned" developments fan out in every direction from the centre of Port St. Lucie.
In nearby Stuart, the joke among the locals at the Tikki Bar at the Ramada Inn -- complete with thatched roof and a cast of characters straight out of the movie Barfly -- is that the new Wal-Mart can't keep its shelves stocked because the only people the retailer can find to work keep failing the drug tests.
Mike Morgan, broker-owner of Morgan Florida Real Estate in Stuart, says the region had also been a magnet for the flippers who have played a key role in driving prices higher across the United States.
Buyers would put a deposit down on a house in pre-construction and quickly sell as the price rose, "flipping" the contract to the next person even before getting a mortgage.
"It was like a gold rush," says Mr. Morgan on a tour of "Martin's Crossing," a slapped-together-looking development of $260,000 to $300,000 homes and townhomes, wedged between a trailer park, drainage ditch and the highway.
"I was doing an open house for the townhomes we had listed there and these four elderly ladies told me they bought four of them. They said: 'We drove up from Miami and Ft. Lauderdale, we got off the I-95 and this was the first thing we found.' They bought four."
According to the National Association of Realtors, sales of second homes for investment or vacation purposes hit records last year, accounting for four of 10 real estate transactions.
Mr. Morgan has had investors from the U.K., an actress from Los Angeles and buyers from all over the United States wanting to buy, sight unseen.
"Here's the pool," he says wryly, pointing to a swamp at the back of the development, a 21st century twist on that old line, "If you believe that...."
The garages are so tiny Mr. Morgan can't fit his truck in and there's no room to park on the street because the driveways are jammed together. A knot of gas pipes is an interesting front-yard ornament.
There are "For Sale" signs on every block and many homes are obviously empty, without curtains on the windows.
Obsessively checking his BlackBerry for potential leads, Mr. Morgan says people wouldn't ask him the questions they normally ask when looking for real estate, such as details about the location, amenities and taxes.
"They would only be concerned whether it was pre-construction," says Mr. Morgan. "Pre-construction became the buzzword, like dot-com. They only wanted pre-construction. I'd say I've got these units that were already built and they'd give a good income stream, but they'd say, 'No, no, I want to flip the contract before I close.'"
When builders clamped down on flipping about a year ago, forcing buyers to produce a mortgage contract before agreeing to a deal, many turned to such exotic financial products as adjustable rate mortgages and interest-only loans that allow minimal payments at the beginning of the term.
If a buyer flips before the mortgage is reset and the price of the home is higher, the investment can work beautifully, but the risk is the house doesn't sell and the buyer is stuck with a jump in rates.
The Merrill Lynch study found non-traditional mortgage products accounted for 60% of loans last year in California, the hottest market in the United States.
"That's really bizarre," says Mr. Shaffer at Prestige Mortgage. "When you think about it, you should be fixing at historically low rates."
Many flippers are now walking away from their deposits or trying to wiggle out of their contracts, using shoddy workmanship as a loophole. Mr. Morgan says he now has 43 investors who are walking away from deposits of $35,000 to $80,000.
Bruce, a telecom manager in Los Angeles, walked away from two deals in Port St. Lucie earlier this year. He had flipped half-a-dozen properties from L.A. to Arizona, making from US$75,000 to close to US$200,000 on each.
"At the beginning of last year, I came to Port St. Lucie," he says, wishing to keep his last name unknown. "I looked at the situation but I didn't really get the same feeling."
Against his gut instinct, he went ahead anyway and bought three townhomes in a low-end development. In an indication of how lax the market was, the developers were asking for deposits of only US$1,000 each. He kept one and pulled out of two, and Mr. Morgan reimbursed him the deposit.
In Port St. Lucie, staff in the model homes along Bayshore Boulevard are plying their trade like snake oil salesmen on Saturday night at a county fair.
The homes, certainly gorgeous with granite in the kitchen, marble in the bathroom, sunken tubs, walk-in closets and lap pools out back, are practically deserted on a Wednesday afternoon. The sales reps pounce on the few stragglers and the incentives start flying.
Mercedes Homes is offering to pay up to $10,000 worth of closing costs and a buyer can get a 5.5% mortgage versus the going rate of 6%. Star Homes of Florida is throwing in granite counters, maple cabinets and stainless steel GE appliances. At the Portofino at Jensen Beach, the developers are offering 2% of the purchase price toward closing costs, and offer to cover one year of home-ownership dues.
It's a far cry from a year ago when the money was flowing and developers tried to outdo each other with their elaborate launch parties.
"It's been nuts down here," says Mr. McCabe at McCabe Research. "It's just been a circus. We've seen grand openings where projects, hundreds and hundreds of units, were sold out in one day or in a weekend. We've had celebrities brought in for these grand openings. We've had lotteries."
In Miami, Cabi Developers erected a fog-strewn jungle complete with fauna -- a Florida panther, baby alligator and squawking parrots -- to draw buyers to the Everglades on the Bay in late 2004, according to a story in The Miami Herald.
Recently, three new homes at PGA Village, an exclusive golf community in St. Lucie West, were sold by auction.
Jeff Banack, 38, an investment salesman, picked up a two-bedroom home for $235,000 plus the 10% buyer's premium after some intense bidding on a balmy evening. He got a deal.
Al Deleeuw, a builder from Detroit, had two similar houses for sale on the same street for $350,000 and $345,000.
Mr. Deleeuw says he thought the price was right because he's had price agreements on both, but they fell through.
"I think the criteria is getting a little bit difficult for people to get mortgages," says Mr. Deleeuw, on the phone from Detroit. "South Florida is not as affordable as it used to be. It is taking a lot longer to sell. The days of flipping these things in two or three weeks are over."
At the auction, one of the associates at Karlin Daniel & Associates Inc., the auctioneer adds: "We are the price reality check."
The locals at the Tikki Bar in Stuart shake their heads in amusement at the craziness that descended on their city.
"Port St. Lucie used to be the country -- now you can't get through the traffic," says Lesa Woodall Pence, a Mary Kay beauty consultant whose luminous skin is a rarity in this sun-drenched place. "I'm looking to move."
Her mobile home was trashed by Hurricane Wilma last year. She's thinking about Tennessee.
Non-Florida residents, such as Canadian snowbirds, are also facing mounting municipal taxes while hurricane insurance is hard to get and expensive.
Mr. Morgan is convinced the retreat is going to be ugly and Mr. McCabe is trying to set up a vulture fund of sorts to buy up depressed property.
He's hoping to raise $250-million in equity and borrow $750-million to buy up to $1-billion in new condos, possibly some projects or development sites. Interest has been strong, he says.
But there is also a decent chance markets could just cool down for a bit and the balance restored as supply is absorbed, especially if the Fed is nearly done with the rate hikes, as many expect.
Florida has only had four quarters of declining prices in recent times -- two in 1976 and two in 1994-95, the least of any state, according to the Merrill Lynch study.
But it has also had the mother of all U.S. housing crashes, the land bust of the mid-1920s as buyers dried up after an eerily similar property explosion.
For his part, Mr. Perez forecasts a secondary boom once the excess disappears.
"We're confident that we have produced so much product that we have delivered, or [are] ready to deliver, [and] our financial position is so strong we will be able to weather any downturn in the market," he says.
Related Group, privately held with Mr. Perez as main shareholder, had reported sales of US$3.2-billion in 2005.
He is now looking at land in Atlanta as well as other parts of the country, and has certainly not given up on Florida.
He recently announced a partnership with Donald Trump, a friend and collaborator in the past, to build a 40-storey luxury condo in Hollywood, Fla. Prices range from $1.6-million to $6-million.
Reality Check! Your home will be worth 4 times what you paid for it when you have the escrow check in your hand.
Um, nonsense. I think it meant to say "net new jobs". Construction is $550 billion a year, all real estate (including sales, rental, etc) is $1,375 billion. That's about 4% and 10% of the economy, respectively.
Prices also vary wildly if you are buying either stocks or real estate with money that you can afford to spend or if you are buying real estate or stocks at speculative prices you cannot afford except by buying on margin or with interest only loans.
You will always have a differential on value. However, you should not allow that to blind you into paying twice what the true value is just because Guido the Loan Shark is handing you $600,000 to buy a $300,000 house that speculators say will sell for $1.2 million next year.
This property "flipping" reminds me of the day trading craze just before the dot com bubble burst. The difference is that overvalued property is still worth something while imaginary companies are worth nothing. Still, a lot of people have "flipped" themselves into property they will have to sell at a loss.
"Nobody" wants to live in Miami??
LOL, tell that to Jorge Perez, with his projects 100% sold.
Broward is far more left wing than Dade, and a worse place to live.
insurance is crazy but taxes are really low, total opposite then nyc
A. Don't call names, it's rude.
B. I wasn't go by zillow, I was going by the county appraiser. The houses in my immediate area in my square footage are selling for at least $30,000 than they were last year. And some quite a bit more.
At least $30000 less. I left a word out.
Where?
One thing you got to admit you were'nt in a bubble area.
Maybe my math is off. Actually, it probably is. But I can tell you houses right near me that went for over $210 last year are now going for low $160's. What does that work out to? I don't feel like multiplying today.
That's good. Because what you've got to do is divide.
Is this a new debate tactic. Claim 25%, claim to back it up with real data. Then say 'Sorry I skipped 4th grade math, I don't do percentages' (along with new data). Nice trick if you get away with it.
Unless of course you do it algebraically.
I'm tired of this. If you can't see that the difference between 210 and 160 is substantial, and you want to argue percentages with me, go ahead. I've got better things to do.
Have it your way. My house value is just fine, thank you, and selling a house for 210 suits me just as fine as selling it for 160. No difference at all. Geez. Good bye.
Cereal...
The whole sector is less than 1/7th of the economy and might see changes at the margin of 20% at most. Nobody outside the sector will notice that very much. People will notice less cash coming out of refinancings, which is simply the knock on effect of higher interest rates and the whole reason the Fed is tightening to start with - because that easy-money gusher was setting off general inflation. That's sort of the point.
Several million leaving the golden state should free up some rental property & start Cal. R.E. values to tank.
I wouldn't hold my breath on that! Politicians don't have the guts to do the right thing and you'll soon find that out.
I would think residential real estate downtown (LA) would be more stable than in the outlying areas.
But a big terrorist attack would definitely bring prices down for awhile.
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