This July not only marks the start of the third quarter of the year but an increasing debate amongst industry watchers about when the bottom of the Miami real estate market will be reached.
In Florida where residential sales peaked in November 2005, the real estate market has struggled ever since with a combination of weak demand and plummeting prices for 33 months and counting.
Optimists yearning for a recovery point to the fact that a typical real estate cycle lasts between seven to 10 years, meaning the chances of a gradual improvement in Florida could be near.
Pessimists respond that this real estate cycle in Florida is not like others given the widespread speculation that occurred unchecked between 2003 and 2006, and ultimately produced the excess inventory that now plagues the market.
Given the conflicting ideas, calling the bottom of the market with any accuracy in the overbuilt markets of Florida is unlikely to occur until months after prices have already leveled off.
Real estate isn’t tracked in a real time manner such as publicly traded stocks so it is only weeks or months after a deal has been negotiated and closed that the analysts can accurately gauge the market based on completed transactions. This lag time leads to the inefficiencies that make investors skittish.
Anxious buyers are concerned that the lengthy lead time in closing deals could work to disguise the most opportune time to buy at the deepest discounts. A fear shared amongst investors is that the bottom will only become known after the low watermark has been reached and the leveling off has already begun.
Adding to the uncertainty for investors is a concern that competitors are likely to learn of the bottom simultaneously, effectively eliminating any buying advantage given the depth of the pent up demand.
Investors searching for any kind of advantage are looking at a variety of factors to better understand how to recognize the bottom. For each buyer, the telltale signs are sure to be different.
“We don’t envision the bottom being reached until all of the new product is delivered, residential lending is restored to the market, and at least one small Florida bank is severely reprimanded related to lending on condo construction or conversions,” said Peter Zalewski, a principal with the Bal Harbour, Fla.-based consultancy Condo Vultures® LLC. “Once an institution – and it will be a small one so as not to trigger any panic - is reprimanded, we think the other lenders will understand the message and quickly move to unload their troubled loans out of fear of facing similar repercussions.
"At that point, the distance between buyers and sellers could be bridged.”
New Inventory Delivered
In vertical condo markets such as Miami and Sunny Isles Beach, the easiest way to assess the amount of undelivered inventory still left to be delivered is to count the number of construction cranes still standing at development projects.
In a place like Miami, the cranes are being removed at a steady pace as most of the new glass skyscrapers near completion.
Today, the Greater Downtown Miami area has only four construction cranes still standing from nearly 40 cranes less than 18 months ago. Of the 22,737 new units built in Greater Downtown Miami since 2003, only about 10 percent of the units are yet to be delivered, according to the Condo Vultures® Official Condo Buyers Guide.
Buildings that have functional floor plans, state-of-the-art amenities, and quality materials are closing at a rate greater than many in the industry imagined. (Condo Vultures® LLC is concluding a study to be issued in July that details the average closed sales ratio and price for every new condominium tower in Greater Downtown Miami.)
Towers with dysfunctional layouts, below-average finishes, and minimal amenities are proving to have a more difficult time with closings than the more desirable product. It is the inferior buildings where the greatest deals are expected to be negotiated, both by individual buyers but more likely bulk investors.
Residential Lending Restored
The return of credit to the housing markets in Florida should be a key indicator as to when the market is on its way toward stabilizing, and eventually recovering.
Many of today’s individual buyers who hope to purchase at deep discounts byway of short sales, foreclosures, and Real Estate Owned by banks aren’t currently able to obtain financing from traditional banks.
Today’s discount buyers who have hearty downpayments and above-average credit scores still have few financing options other than hard-money lenders that charge interest rates in excess of 10 percent plus expensive origination fees.
Some industry watchers predict the recovery to begin in earnest when well-qualified buyers are once again able to purchase residential properties using traditional financing with moderate underwriting requirements.
Once financing is again available, cash buyers would lose their current negotiating advantage of being the only viable purchasers in the market.
Small Bank Reprimands
Probably the most telling sign of the bottom will come when federal banking regulators reprimand a small bank or two in Florida that had been involved in financing residential construction or condominium conversions. The Wall Street Journal foreshadowed the coming troubles in a July 2 article.
The banks that are likely to feel the wrath of regulators will be those institutions that facilitated the condo construction and conversion booms in places such as Miami or Tampa.
In many cases, the amounts owed by developers are greater than the projects are actually worth today, yet some lenders are rumored to have not accurately characterized the loan valuations or status properly.
As regulators conduct regularly scheduled examinations of these small banks, expect some institutions to rapidly revise their characterizations of condo construction and conversion loans and shift capital into loan loss reserves as a precaution or a solution.
Until an institution has been reprimanded, local lenders are likely to continue to maintain an optimistic posture and dismiss credible offers from qualified buyers who want to purchase bank-owned assets or loan portfolios at prices that reflect current market conditions.
“Regulatory reprimands in the banking sector will be the clearest signal that the bottom of the real estate market is near,” Zalewski said. “The problem is most buyers are waiting for that action and are ready to strike.”
Peter Zalewski is a principal with the consulting company Condo Vultures®LLC and a licensed real estate broker with Condo Vultures® Realty LLC. Peter can be reached at 305-865-5629 or by email at peter@condovultures.com. Be sure to check out Peter’s blog at CondoDump.com. Don't forget to sign up for our weekly Market Intelligence Report
Copyright © 2008, Condo Vultures® LLC
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