Miami & Miami Beach Condo Trends – November 2007
November 17, 2007 by Lucas Lechuga
I basically wanted to find out how many months of inventory we have in Miami and Miami Beach. I created a report for Miami-Dade County, one for Miami and one for Miami Beach. I broke each report down to various price ranges to figure out which category has been affected the most. I took closed sales for the month of October and compared it to the inventory that is now available. Below you will find the numbers for Miami-Dade County:
As you can see Miami-Dade County has about 55 months, or 4.58 years, worth of inventory. I wanted to see how much of this supply resides in Miami compared to Miami Beach. Below you will find the numbers for Miami:
Miami currently has a 48 1/2 month, or approximately a 4 year, supply of condos. That's actually much lower than I expected. However, keep in mind that there are thousands of condos that will come onto the market within the next 24 months. In fact, in July, I calculated that a little over 16,000 condos would hit the market within the next 19 months in the neighborhoods of Brickell Key, Brickell, Downtown Miami, Park West and the Performing Arts District. Probably about 1,500 or so units have hit the market since I wrote that post. If you add 14,500 units to the Miami figures above then we're looking at close to a 10 year supply. Now that's quite shocking!!!
Let's take a look at the Miami Beach figures:
I was surprised to learn that the supply of Miami Beach condos is higher than that of Miami's. The number of new condos coming onto the market, however, in Miami Beach pales in comparison to the new condos scheduled to hit the market within the next two years. My guess is that about 1,500 units will hit the Miami Beach market in that time which would put it at around an 8 year supply. Still pretty shocking given that it's Miami Beach! I was equally shocked by the low number of closings in the $500,000-$999,999 price range. That appears to be a problematic price range if you're a condo owner looking to sell somewhere in that range.
Despite a number of news stories that have hit the press lately, it looks like the ultra-luxury ($2.5M+) market isn't moving. It has very few available listings compared to the other categories but it had basically no closed sales in October. There were a total of two in all of Dade-County. Both were located in Bal Harbour.
I receive a lot of monthly phone calls from investors who are waiting for the market to bottom-out. They all want to know when is the "right" time to buy into the South Florida condo market. I'm hoping that a report like the one above can help me pinpoint when that time might be.
A recent Fortune magazine article entitled, "Real Estate: Buy, Sell, or Hold?", said the following:
The combination of steep discounts to move inventory and a stream of new communities built at a lower cost will keep prices far below their peak levels in the boom towns. And they'll keep falling until builders work off the massive inventories. The tumbling prices of new homes, in turn, will put enormous pressure on the far bigger existing-home market, already under stress from two desperate groups of sellers, investors and banks. Hence, the adjustment needed to bring the ratio of prices to rents into alignment will happen far faster than in most housing downturns. "In the most vulnerable places in California and Florida, it's highly possible that most of the correction will happen by the end of 2008," says (Mark) Zandi, (chief economist at Moody's Economy.com).
The article was mainly discussing single-family homes but I think the same holds true for the condo market. The Miami condo market is likely to drop lower, on a percentage basis, than other major U.S. cities but I agree with Mark Zandi that the market here will be quicker to correct itself because of the high number of foreclosures and defaults that we are likely to see. 2008 will be a time of readjustment. I'm looking quite forward to it.
Price is a function of supply and demand. It’s basic economics.
In this case, supply (number of condos on the market) is way, way higher than demand (as evidenced by the number of closed sales).
The number of current and upcoming foreclosures tell us that many of the people that were buying condos during the boom couldn’t really afford them. With the death of the subprime market, these types of buyers will be gone for many, many years. The lenders and CDO investors have hopefully learned their lessons. Bottom line is, I don’t expect the level of sales to come back to the levels that they were during the boom for a long, long time.
So, even if sales pick up, it will take many years to work through this inventory, especially given that the inventory is due to increase significantly with all the new buildings coming on the market.
Prices will keep declining until an equilibrium is reached between supply and demand.
I don’t see how that is going to happen as soon as 2008 when as Lucas said, we’ve got many, many years worth of inventory to work through. Sales may pick up as prices fall, but with the whopping supply we’re going to have, prices can’t possibly bottom that quickly.
I see prices bottoming in 3-5 years or so, followed by a much more normal increase in prices after that (no more crazy double-digit increases like we saw during the boom).
My grandmother bought a townhome in northern Palm Beach County in 1981 when the market was hot. Sold it 13 years later for the same price she bought it for. It’s not crazy to think that we won’t see 2005’s prices for another 10 years at least. After Japan’s bubble burst in the early 90’s real estate prices went down for 14 years. 14 years! So to think that prices will bottom out as soon as 2008 following the biggest housing bubble in history is VERY wishful thinking.
Miami Beach is getting stiff competition from South America and the Carribean, and the European market is now realizing this. Its amazing what you can buy in these locations. For about $300,000, you can get a brand new condo directly on the beach in some islands ,with resort ameneties attached. For Miami Beach with its inflated prices and exhorbant taxes, that would put you in some crappy building on west avenue where it smells like a New York City sewer every time it rains.
When I talk about the market bottoming, I’m talking about price. I wasn’t referring to supply. The supply, like you said, will take years to be absorbed. Prices may go down in 2009 but I don’t think that they’ll go lower than the price where the investment groups will buy condos in bulk in 2008.
I worry about what the bulk buyers will do to some of the premium buildings. They are in to make a fast buck, and they will, by dint of the fact that a developer or bank in trouble will give them a discount to get the “assets” off their books in large numbers.
However, a hedge fund is not going to have an interest in maintaining or fitting out these units. They will flip for a % more. The buildings will deteriorate in the meantime, and every other unit owner will suffer from this.
“If prices aren’t going to fall lower than what bulk buyers pay then I’m saying that will mark the bottom of the current cycle. My statement had nothing to do with supply but rather when prices will bottom.”
If price is a function of supply (and demand), then how can a bottom be called without taking into account the market supply?
As far as bulk buyers go, yes–maybe they’ll get a price much lower than what an individual could get. But how does that benefit an individual who wants to buy a condo but doesn’t want to buy before the market hits bottom?
The bulk buyers aren’t going to just pass all of their savings onto the next buyer. They’ll sell them for whatever the rest of the market is dictating at that time (although they’ll have room to undercut the market by a certain amount).
Let’s say, hypothetically, that someone were to sell me their condo for $100k. But I go to resell it immediately and see that they’ve been selling for $350k. I might put it on the market for $300k, but I’m not going to give it away just because I was lucky enough to buy the condo below market. Neither are these bulk buyers. Their prices will still be dictated by the overall market.
Thus, my point is that the market as a whole will still dictate where prices are and where they are going. The price a bulk buyer gets does not necessarily benefit an individual investor or end user wanting to buy a condo.
Foreclosures will be what drive prices down, not mythical bulk buyers.
After the banks pay carrying cost on these overpriced condo’s for 1 or 2 years and they start dumping them on the market thats when we will see what these units are really worth.
Get ready for a 50% price cut FROM CURRENT LEVELS.
Flippers paid 375K for a 1 bedroom.
Flippers paid 600K for a 2 bedroom
REAL PEOPLE pay 125K for a 1 bedroom.
REAL PEOPLE PAY 190K for a 2 bedroom
Flippers are gone, the psycology has changed.
Only real people will be buying these condo’s now and prices will fall like a rock for years until the banks who hold all these foreclosures cut their loses and realize their paper means nothing and that the true value of the unit is only worth what people are willing to pay.
Chris, why stop at an arbitrary 50%? why not 30%? 20%?
Lucas,
Thanks for all the info!
When you say 2008 will be a time for adjustment, do you mean that you’re expecting pricing to bottom out in 2008? It looks to me as if things will take quite a bit longer given the significant inventory and huge pipeline of condos to be delivered in the near term. Are you expecting the market to work through this crazy supply situation in the next 12 months?
One other question: Assuming this is a slow sales year during season, what are your expectations for late spring early summer? Sellers who are unable to unload units during the peak season will be in a position where they’re likely to be carrying the units through November/December of 2008. I would assume that’s the point at which we may see meaningful price cuts for listed units? Maybe a bit less denial among sellers?
Great post.
It’s most definitely a very turbulent, yet exciting time.
I think that there are a bunch of buyers out there for the condos except I think alot are just on the sidelines waiting for thier right price or just wanting to see the finished product instead of looking at renderings. Alot of towers that went up looked good in drawings and then were dissapointing. I mean I saw stuff that looked marvelous and then when I went inside I was so disapointed in some towers. So combine price and just finished product and we’ll prob have a spike in buyers. Dowtown and the rest of areas are becoming a nice area to live in and people do like that urban lifestyle so it will happen sooner or later. As the saying goes build and they will come. So will business as they start popping up with all the new residents moving in.
Waiting to Buy,
Yes, I do think that it’ll bottom-out in 2008. I think in 2008 we’ll see some condos sell for very low prices because of the ever-growing number of foreclosures and the defaulted inventory that will be sold at a discount to bulk buyers. When bulk buyers step in to buy in 100-500 unit lots that will mark the bottom. It may take a long time for them to resell that inventory to end users but you can bet it won’t be for the same price that they purchased it. There will still be inventory problems in 2009 but I think the lowest prices will be seen in 2008.
BB,
Exactly! Price is a function of supply and demand. At current prices the level of supply far outpaces the level of demand. There is a price, however, where the number of new condos will be purchased. The new price will produce a new equilibrium. If a bank gets back 200 condos in a development they are not going to let it sit on their books. They will shop it around until they find a bulk buyer who will purchase them all. This may be at 30, 40, or 50 cents on the dollar. Who knows what that price will be but my point is that there is a price where a new equilibrium will be achieved. This will happen with every development where a large percentage of units go back to the bank.
In the stock market, if a large fund needs to unload 2 million shares of particular stock they will shop it around until a price is agreed upon by a large buyer and the print will hit the tape. Some of the shares may be sold to resting bids in the book but the majority of the shares are sold at the agreed upon price which is usually well below the market price that was available prior to the transaction taking place. What happens afterwards is that people will bid up the stock to a point that is somewhere between the previous prevailing market price and the price where the large print occurred. The fundamentals of the company underlying the stock didn’t change. Stock ownership just changed hands but the news of the sale is reflected in the new price.
In the analogy above, the bank represents the fund looking to sell 2 million shares. The bids in the book represent individual buyers who will buy a small percentage of the defaulted condos at a discount from 2004 prices from the developer before he goes bankrupt and the bank gets back the remaining units. The buyer who purchases what remains of the million shares represents an investment fund that buys the bank-owned condos at an agreed upon price. The investment group is going to take into consideration holding costs until they sell the new condos. If they buy at 40 cents on the dollar they will sell to end-users for something like 65 cents on the dollar. The end-users are still getting a 35 percentage discount from 2004 price. These end-users represent the people who bid up the stock to a point somewhere between the previous market price and the price where the large print took place.
I agree with RA that there are a lot of buyers on the sidelines right now. They are just waiting for that large print to take place.
When I said that the market would bottom out in 2008 I was primarily referring to the new condos that will be coming onto the market within the next six months because these will represent the best deals. You may read news stories in the future saying that the market didn’t bottom out until 2009 or 2010 but this is because the bulk purchases won’t be reflected in the MLS.
You are correct that the rest of the market will take much longer to readjust. The existing condo market doesn’t have the ability to sell in bulk because they are individually owned for the most part. It’s going to be a long road for that segment of the market to bottom out because existing condo owners aren’t going to sell for 50 cents on the dollar. That’s why I keep telling existing condo owners that if you NEED to sell then do it now. If they wait until 2008 then they will have lost their chance.
Waiting to Buy,
I don’t think that this will be a particularly slow peak season. I think that there’s going to be a lot of buying during the Winter months for newly constructed condos. These buyers, however, will likely only make a small dent in the supply in the grand scheme of things.
I have four out-of-state buyers flying in this upcoming week and another four the following week. Actually, three of the eight buyers are located outside the United States. They likely won’t all buy something but I think a few of them will.
I think the Summer months will belong to the investment groups. By then, developers will have gone bankrupt and defaulted condos will have become bank-owned. The slow off-season months will entice banks to find a bulk buyer fast. I’m telling investment groups who contact me to check back with me in April for an update. I think a few opportunities will present themselves by then.
I think the existing condo market will see some pretty significant price reductions in the Summer months as well.
The property tax reform vote on January 29, 2008 should also bring out some of the buyers that have been waiting on the sidelines.
You can view the details of the proposed property tax reform by clicking here.
My call… 2002-2003 prices before this stuff moves. It’s all about going BELOW mean reversion now. Cycles tend to exceed one extreme only after going way past the other extreme, and the upside was just exceeded by several standard deviations. How fast we get there… ??? (My bet surprisingly fast!)
What would be interesting is a look at what those sqft numbers you post now, for Brickell and SoBe, would have been back then.
Great info though.
I block, In 2001 condo’s sold for about 120 a sq foot.
So prices have to fall A LOT more lol.
If there are 4 years of inventory than the bottom won’t be until 2011.
Not hard to figure out.
Great index Lucas & well laid out. Miami Beach
(especially South Beach) has long positioned above the downtown collapse fray but I think,
given the fact that listings in many cases reflect
05/06 levels still, that the next 12 months will
witness a further compression of prices in SOBE/MB as well. Many realtors champion the
weakening dollar & the overseas investor as a
likely buffer to our domestic mortgage woes
in Miami but I feel that may not be not so much faulty as on shaky ground. True, the dollar &
lower prices continue to make Miami attractive
to foreign investors except that I fear many of
these potential buyers also see, for the first time,
the dollar stumbling as a global reserve currency
haven. If the dollar is down say 10% this year whats to stop it being down another 10% in 08′
or in the future. Suddenly as well as being long
U.S. real estate risk foreign investors are long
U.S. currency risk & one day, they know they
will probably be selling those dollars so Miami
may need to be more compelling to them than
current prices & supply still suggest.
Lucas, you mention that you expect many bulk purchases from hedge funds and other investors. What do these investors plan to do with these condos? Re-sell them? If that’s the case, then the “supply” that was taken off the market by the developer will soon be right back on the market. That doesn’t solve anything.
Someone who buys a condo to simply “flip” it to someone else (which, I assume, these bulk buyers would be planning to do) does not represent real demand. Real demand would be people who plan to buy a condo as a place to live. Or at least someone who plans on holding it long-term. So, I don’t see how bulk buyers are going to solve the over-supply problem if they’re simply going to dump their purchases back on the market.
I think most people underestimate how long it takes for markets to work themselves out. A real estate property is not like a stock in that it can’t be sold instantly and has a carrying cost. So, the real estate market, due to it’s illiquid nature, will move much slower than the stock market. The late-90’s dot-com stock bubble took 3 years to bottom out, price-wise. Real estate will not bottom nearly as quickly. That’s why I feel that we’re at least another 3-5 years away (or more) from prices reaching bottom.
And you can’t separate new condos from older ones. If older condo prices are falling, new ones will keep falling, too. They may be worth more because they are more desirable. But they will only be worth proportionately more than the older condos. Their prices will move in the same direction. And like you said, bulk buyers can’t solve the suppy problem of non-developer owned units. And there are a lot of them.
To get back to the main issue, if we’re trying to determine when prices will bottom, we should start by determining what a historically normal supply would be (months of supply). If the number of monthly sales all of a sudden returned to normal levels (pre-boom), how many months would it take to reduce the current (and soon to be on the market) inventory back to the historical levels? I doubt you’ll come up with a number anywhere close to 12 months. It’s probably many years. And that’s using a very optimistic scenario (sales coming back strong all of a sudden). I expect the monthly sales volume to bottom out soon, but that doesn’t mean much. As long as the inventory is higher than what is historically normal, prices will fall until the sales chip that inventory down.
I think a much simpler indicator is this: can you rent a particular condo to cover ALL holding costs (taxes, interest, HOA, insurance, etc)? If not, the price will continue to fall. The rent a unit will fetch is the best indicator of a unit’s fundamental value. We’re still at almost 2x renting cost right now (to own). Prices would have to fall a lot really fast to get to that point. I just don’t see it happening so quickly.
As a side note, all the talk of “foreign buyers” saving the market is a bunch of nonsense. If anything, with the dollar getting hammered (and poised to go lower as the Fed keeps devaluing the currency), investing in dollar-denominated assests (U.S. condos) would be an even less attractive option at this time. There may be a lot of rich foreign investors–but they’re not dumb. Any foreigners that bought condos during the boom are doing even worse than their domestic counterparts–their “investment” is down another 20% or so on top of any depreciation (because of the dollar tanking against the Euro and other currencies).
If there were a lot of foreign investors buying during the boom it was for the same reason as all the domestic investors buying: they were trying to make a quick buck. Now that real estate is one of the least attractive investments, these foreign investors will look for better places for their money–just like the domestic ones did.
Seeing units at South of Fifth lux buildings like Murano Grande & The Cosmopolitan on the auction block December 15th seems like a new & negative market indicator.
The unit at The Cosmopolitan was a short-sale that a client of mine made an offer on about three months ago. The bank refused it. They’ll probably end up getting less than what he offered.
Lucas: An excellent study! Congratulations. As you note, the condo market prices will probably stabilize at the end of 2008, but it may take another 7-8 years before the slack in supply is taken up. Therefore, price appreciation will not occur for many years after the bottoming of 2008. This by the way is perfectly normal. Most real estate cycles take 7-8 years. People forget that for most of the 90’s Miami homes did not appreciate more than 5-10%. The 2000-2005 boom was an aberration. The one element that may contribute to a somewhat faster recovery is the cheapness of the US Dollar, but there is no way to factor that variable in the equation.
Great post, really interesting data you’ve presented!
“When I talk about the market bottoming, I’m talking about price. I wasn’t referring to supply.”
I know you were referring to price. My point is: how is price supposed to stabilize with such a huge supply? Like I said, price is decided by supply and demand. Prices will continue to fall as long as there is excess supply.
Once we’ve got a normal level of supply, prices will stabilize. I just don’t see that happening in 2008 or 2009. Especially if the supply is due to increase even more in that time frame.
So you think prices will drop below what the bulk buyers pay?
“So you think prices will drop below what the bulk buyers pay?”
No–assuming they buy at a price that would allow them to profitable rent the units out.
But what does it matter what the bulk buyers pay? They’re going to try to re-sell them for whatever they can get on the open market. They’re motivated by profit like any other investor.
Let’s say one of these bulk buyers puts their inventory back on the market. If comparable condos are selling for $400k in other buildings, they may undercut them, but they’re still going to want to get the most money they can for them. So, the overall market will still dictate where prices are at any given time.
If you can get a condo for a price that makes it cheaper to own than to rent it, I’d say go for it. Otherwise, I would wait.
If prices aren’t going to fall lower than what bulk buyers pay then I’m saying that will mark the bottom of the current cycle. My statement had nothing to do with supply but rather when prices will bottom.
Private equity will get outrageous deals buying in bulk, but it will be 2011 before an individual buyer can get a sub $200/sqft condo, which might end up being less than 100euro a ft by then
thank you for such valuable info. i have been traveling to south florida for the last 7 years and i am finally thinking of buying a condo since i am there so much and plan to retire. maybe it’s my time 2008. thank you and please continue to inform us.
Sorry to post again, but another analogy to illustrate my point about bulk buyers:
Let’s say a major retailer buys an item in bulk (and thus gets a much lower price than if I bought it as an individual) and pays $5 per unit.
What they end up selling it for has nothing to do with what they paid for it. They’ll still sell it for whatever consumers are willing to pay for it. If the product can be sold for $20 per unit, that’s what they’ll sell it for. They’re not going to leave money on the table for no good reason.
They may have more room to undercut their competitors (who may be selling the item for say, $22/unit). But if you’re already the cheapest, there’s no reason to bid against yourself.
In the case of Miami condos, the bulk buyers will only need to undercut their competitors (the rest of the individual condos on the market).
So, since what a wholesaler pays for items I buy in the store doesn’t change the price I pay, the price a bulk condo buyer won’t either. It will contribute to the market decline, but it won’t mark the market bottom as far as individuals are concerned.
We have a condo auction in the Boston area scheduled for mid- December. These units will have minimum bids of 50% of last asking price. The developer will offer 15 units absolute and there will be unsold inventory remaining.
We have not had the extent of mortgage fraud here so our prices have more accurately reflected the supply and demand curve.
Another auction of new construction two weeks ago. The developer pulled 13 from the auction due to lack of demand. The 17 auctioned units went for 30% off Aug./ Sept closed sales. 40 unsold units remain!
I agree with Lucas 100% when Hedge Funds Come in aand buy in bulk from banks that will mark the bottom of priuces on the market, it will take at least another year to absorb them but the hedge funds and venture Capital funds have the capital to carry these condos for 5 years, they are not planning on buying them repainting them and flipping them next month. They need to have them rented and managed so they can at least cover maintenance fees, and property taxes and having tenants helps keep up the condos so everybody wins. The proposed reform in january sould really help out the housing crash, however most of the Florida Govt relies on property taxes as its their main source of income so a lot of FL Govermnet jobs will have to get cut as there willnot be as much funds. property taxes now are ridiculously high and they should go down to the same percentage but assesments similar to what they were in 2001-2002. Ultimately that would give a lot of room for someone to be able to rent a place and actually make an NOI. The fact that the venture Capital Funds Can buy in bulk and make a purchase to take off the books of the banks of 20million means that they can get a deal an end user of a 300k condo can never get. I think it should also be adressed that the speculators that could get aproved for a no doc loan a year ago will not get aproved for a loan now( or at least not at a decent rate)so they will have to loose their deposits. If you think about a Development Budget the developer leaves about 20-25% for profit plus it already has a 20% deposit tht was non refundable so the apt really costed about 40% of what it sold for precontructuion at this point. WHen the bank takes it as a loss they write it off as a capital loss and can declare it so they pay less taxes. THe Banks however are not in the business of holding and managing real estate so it is horrible for them to have the properties in their books as liabilities plus it keeps bleeding them since the apartments are not rented but maintenance fees and property taxes have to be payed every month. The bank will need to liquidate them so I believe we will see the bottom of the market next year when we add another 20,000 condos to Miami’s 1040 acre downtown in addition to the 26,000 Condos currently on the MLS in Miami Dade County.
Regarding the concept of the bulk buyers causing a fairly quick turnaround in the current market place, there are some factors to
consider:
Obviously if a large investment group were able to buy all of the currently available inventory and hold onto it, as well as all of the inventory that will be coming on the market over the coming 24 months, they would basically be
able to dictate selling prices. However, such a venture is not financially feasible.
It would cost many billions of dollars, and might be considered somewhat comparable to the Hunt brothers’ attempt to corner the Silver market in 1980 – Ie. if they had succeeded, they would be richer now than Carlos Slim and Bill Gates combined.
In the meantime, what would will these bulk buyers do with the units that they purchase as they wait for additional ones to be completed and available to be snatched up at discount?
By renting them out, they would depress the rental market, which in turn would depress property values. The problem is that too many condos were built, mostly for imaginary (not real) buyers. I agree that the entrance of bulk buyers (if they do in fact emerge) into the market would be of some limited help, but not a quick solution to the problem. It will take at least 4 years to work off the excess.