Myths and Truths about the Miami Real Estate market

Currently the market is suffering from the burst of the “housing bubble” as it has been describe by the media since late 2005. In fact the Miami area witnessed its largest real estate boom since the 1920s between 2001 and 2005. Real estate prices were rising at a pace of over 10% per year, creating one of the greatest speculative run on real estate ever seen. The sub-prime mortgage crisis as well as the general market slowdown in all the United States have obviously hit Miami with a market of over 23000 condo units for sale an increase of more than 80% in foreclosure rate to last year, and a ranking of 8th worst market in the nation for foreclosures.

What does it really mean? Is the real estate market in Miami dead? Is it going to become worse? Let’s analyze this in detail.

The Sub-prime Meltdown
In 2001 to 2003 interest rates in the United States were at absolute historical lows, with enormous amount of money available in the capital markets seeking for higher yielding returns, many banks and mortgage lenders started to lax their lending standards allowing people with no or very poor credit and or income to take out loans, in particular special loans with very low initial “teaser” interest rates that would make monthly payments for the first few years very affordable , to be adjusted after a few years to way higher rates. In an extremely bullish environment as it was in these years people were seeing real estate growth of 10% or more per year, creating an unwarranted confidence that after a few years they would just be able to refinance on the higher equity and avoid the “payment shock” that would inevitably happen. These loans were created originally mostly for wealthy highly educated individuals who would use them as an instrument to manage their cash flow and use the lower payments to invest their money alternatively and have higher returns, and eventually payoff the ‘negative amortization’ meaning the unpaid balances that accrue and add to the debt instead of reducing it. Instead these loans were sold to almost everybody including individuals who did not understand the nature of them, hence living with the wrong assumption they would keep on paying the low teaser rate for years, and people who could have never afforded the fully amortized loan payment in the first place, but were “qualified” for the reduced rate. The truth, to sum it up, is that sub-prime loans were created out of greed of banks and lenders without scruples that financed people who would have never been able to buy a house in the first place. When finally these loans started ‘resetting’, meaning switching to the full way higher payments on one hand, and the market started slowing down, reducing property values below the actual loan amounts, because these properties were financed at 90 to 95% of Loan to Value, but Value of an inflated market, suddenly the default rate started to spike sending a massive wave of foreclosures trough the country.
So big that many banks and lenders started to fold and go out of business creating a serious financial crisis that impacted all capital markets.
Being in an election year this sparked obviously an intervention of the government to “save” the economy, creating a similar situation as during the Savings and Loan crisis in the 1980s as over 1000 savings and loan institutions failed and the taxpayer ended up bailing out the industry. President Bush announced a plan to freeze interest rate “resets” on sub-prime mortgages, hence preventing people to lose their homes. Nice political move, unfortunately it will not benefit many homeowners who deserve to be helped, but will most likely just postpone the problem for a few years, because, as we said, these people should have never been able to buy a home in the first place.
How does all this really affect the housing market? In reality this affects only medium to lower income subjects, hence the lower end of the market. In fact if we analyze the data for the real estate market in Miami we can see that what radically went down in the last 24 months are the asking prices for properties for sale. But if we analyze the selling prices of properties actually sold, especially if we remove the low end of the market, (properties for less than 250.000 US$) prices per square foot in November of 2007 were higher than in November 2006.
Still, inventories of unsold homes are climbing and will continue to climb in the next months, but does it mean prices will fall? Many say they will, many say we’re heading into a full blown economical recession, many foresee prices to fall way into 2008 for more than 20%. But if we analyze the situation we have to consider one very important thing, everybody has been talking about the bubble burst since 2005, dreadful scenarios of recessions have been painted by doomsday advocates for years, the truth is that historically recessions always hit unexpected and can be identified as such in hindsight. See the Dot Com bubble, the 1987 Stock market crash and so on. Once the consensus is that the economy might head into recession everybody braces, and adjust to prevent the recession. That’s what has been happening already for all of 2007, the Fed intervened reducing interest rates, companies reduced their productions to not increase inventories, policies were enacted in the private and public sectors to advert recession.
Yes indicators show evidence of slowdowns, the real estate market is in crisis, the capital markets as well, the stock market is very volatile, but maybe, just maybe, we’re already at the bottom of it all? As Donald Trump said…the time to buy is now.
Most people buy when the market is rising fast, strong of an evidence of boom, but that’s already late, the real investor buys when the market is in crisis, slow, when real bargains are evident, when the sentiment is negative. On may like or dislike Donald Trump, but one has to admit, when it came to real estate, more than once he demonstrated that to succeed one has to have the courage to invest when most people won’t. But is it really that risky now? Let’s analyze further.

The weakness of the US Dollar.

Fueled by unsustainable growth in current account deficit, meaning the US importing way more goods than they are exporting combined with an extreme increase in government issued debt hold by foreigners, the US$ has been sliding since 2002 against all major currencies, in particular the Euro, from 0.88E/$ at its introduction to about 1.48E/$ in November of 2007. Current account deficit almost topped $800 Billion this year, or about 7% of gross domestic product, the highest it has ever been.
Fueled over the last decade, by an economy relying strongly on debt, be it credit card or equity that was drawn out of a booming real estate market, for the first time since after 9/11 consumer spending is slowing and the economy is bracing for recession.
The truth is that the slowdown in consumption is actually helping the trade balance deficit to diminish, as the US dollar is probably bound to stabilize after falling a little more in the next months. Current expectations are that the Fed will most likely keep cutting interest rates well into the next year to sustain the housing market and prevent further crisis in the financial markets as well as trying to curb domestic production boosting the US economy overall, which in turn should lead to increased attractiveness for foreign investors.
What it means that in 2008 expectations on the US Dollar might finally invert to positive sentiments, creating a larger inflow of foreign investment, releasing the capital markets and real estate markets pressure.
The only real big variable that keeps the market uncertain is where the oil prices will actually move for the next year, which puts the fate of US inflation more in the hands of the Middle East than in it is the Federal Reserve.
Doomsday activist predict the end of the US$ supremacy as the worlds reserve currency and the rise of the Euro in its stead, while it is inevitable that many countries already adopted the Euro and increased its power on the world markets scene, in the near future it still seems unlikely that the biggest US$ reserves holder, like China (over 1.5 Trillion) and Japan (1 trillion) , will actually dump their assets held in favor of a currency that does not even have one common monetary policy but a plethora of countries that influence it, where many of these even struggle to keep their economy functioning inside that currency.
What does it mean ultimately when investing in US real estate? That considering purchasing power equivalence goods and services in the US are undervalued by at least 35% against the Euro, 25% against the Brazilian Real, 15% against the Japanese yen and so on for most currencies.
Again, especially for foreign nationals, the time to invest in America is now.

What to buy?

Considering that what made Miami grow is still unchanged, it still is a dream destination for most baby boomers in the country who want to escape pollution and bad weather, most Europeans who dream of retiring in sunny Florida and most south Americans who desire to leave behind the social and political instabilities of their countries, not to forget emerging markets like a new generation of Chinese millionaires who want to secure themselves a place next to the world’s jet set.
Because that’s what Miami is becoming, the vacation home and winter retreat for the international who is who, actors, models, political figures, entrepreneurs, jet setting between, Montecarlo, New York, Beverly Hills, Las Vegas and Miami.
As such the luxury market in Miami is still booming with no end in sight.
Geographically the greater Miami Area is split up in different Areas which are quite diverse from one another, world known South Beach is the lower end of the Island which holds most of the waterfront high risers, especially on the southernmost tip, an area called South Pointe, where developments like The Continuum, Murano, Portofino, Apogee and Icon are. Then there are a few luxury condominiums spread out along the Ocean on Collins Ave, like the Setai, Il Villaggio and the W, with more to come as we go more north along that road. For example The upcoming Cipriani, the Carribbean, the remodeled Fointenbleu, all the way to Bal Harbour, where across from Miami’s most luxurious Shopping Mall the new St.Regis Hotel and Residences is being build. Continuing our journey north along the Ocean we leave Miami Beach and come to Sunny Isles, an area which has seen one of the most dramatic developments in the last few years, a wall of newly build or under construction luxury high risers present itself to us. There we find luxury condo developments like Jade Ocean, Trump International. Turnberry Ocean and many more.
A Two bedroom condominium in Miami Beach most prestigious developments like The Continuum sells for 2.2 Million Dollar or $1200 per sqft, the exotic Setai Condominium (in the heart of South Beach, walking distance to shopping and restaurants on Lincoln Road) averages $2000 per sqft, so far the highest prices for existing developments, to be matched by new constructions to be finished in the coming 36 months like the W on south beach (heart of south beach, on the ocean), the St Regis in Bal Harbour (across the world famous luxury shopping mall, north Miami beach).
Whoever does not want to spend a premium to be in the “trendy” developments can still purchase one bedroom condominiums with fabulous views in full amenities buildings like Sunset Harbour and The Floridian (on the bay side of Miami beach, walking distance from Lincoln road) for about $300.000 and up, and two bedroom condominiums for $490.000 and up. These condominiums all tower along the Bay side of South Beach, facing the amazing downtown Miami skyline across the bay.
Many deals can be found just there, crossing the bay, in Miami, along the Biscayne corridor and the new developments in Downtown. For example, one of the most exclusive developments in the heart of downtown Miami with amazing views and unsurpassed amenities, the EPIC, sells at $600 a sqft, scheduled to be finished by the end of 2008 it will represent the standard in luxury living in Miami. Dirt cheap bargains will be available in the coming months when most of the high rise developments along the Biscayne corridor will be finished, like Marina Blue, Ten Museum Park, 900 Biscayne, Opera and Quantum to name a few. (All walking distance from the new Performing Arts Center) Where early speculators who riding the boom bought into contracts they never had intention or the possibility to close, but expecting for the boom to continue, wanted to “flip” making an easy gain, are now forced to either walk away from their deposits or cut their losses, making units available at prices lower that pre-construction.
For example a one bedroom unit on a high floor with fabulous unobstructed views of the bay at the marina blue which was selling for 390.000 to be snatched up at 280.000 now.
Not to forget that not necessarily these units have to be bought for cash, as foreign nationals for example companies like PARINVEST can provide financing up to 65% of the purchase price, making leverage accessible to the investor.
PARINVEST is a Mortgage Lender and Real Estate brokerage company, and can provide all services to foreign nationals, from consulting, to brokerage, to financing to property management. Our goal is find the right investment for you. The time is now.