Biscayne Boulevard Part II

“Miami real estate will eventually be priced the same as New York.”

That’s what a Miami real estate broker told me last week. “What an incredible prediction,” I thought. This woman has faith.

In case you missed Wednesday’s column, I went to Miami last week and investigated the condo market. I heard it was in a bubble, and I wanted to know the real story.

First, I posed as a buyer. I spoke to condo brokers and salespeople. I wanted the real scoop... but they all towed the company line while handing me glossy brochures.

My next contact did not... and here’s where things get interesting...

Jack McCabe runs a research and consulting business based in Deerfield Beach, Florida. He sells his research and analysis of local real estate markets to some of the most important developers, brokers, managers, lenders and appraisers in Florida and the Caribbean.

Here’s what he told me:

“Between 1995 and 2004,9,079 condos were built and absorbed by the market in Miami-Dade County...”

“Right now, in Miami-Dade, there are 25,000new condos under construction. There are25,000 condos permitted for construction and a further 50,000announced for construction in the next 3 years.”

McCabe says the speculators have left the market and buyer demand has dropped by about 50%. So far, prices have only plateaued, he says, but all the signals that normally precede price declines by about three months are present.

In Boynton Beach, it used to be common to see people camped out in front of new developments the night before a grand opening. The Gateway Club at Orchid Bay had their grand opening two weeks ago...

“Large advertisements, walk-around billboards directing traffic, lots of balloons... they put on the whole shebang,” McCabe told me. “Well, attendance was dismal and after the weekend, they decided to cancel everything and turn the whole development into rental apartments.”

He continues...

“Ft. Myers was one of the hottest markets in the country... 47% appreciation last year. Now, each month on the listings service, 100 places are removed for every 450 that are placed on it. In 12 months, inventories of unsold homes have gone from 2,000 to 5,800. Orlando saw a 31% inventory increase in one month.”

McCabe predicts we’ll see a huge number of projects cancelled and postponed. Deposits will be refunded. Many of the condos planned in Miami will never get funding, and we’ll read about tons of class action lawsuits and real estate litigation.

He anticipates a 20-30% price decline in the new condo projects, specifically those developments away from the water. “Could be more severe,” he says. “I try to err on the side of caution.”

New York real estate is in a bull market too. But unlike Miami, I don’t think New York’s real estate prices will crash. Here’s why:

New York has an affordability problem. Real estate has become very expensive and most people simply can’t afford it. It’s the same story in Boston. Or London. And I’d guess, Hong Kong too. Sure, prices may stop rising. They may even decline a little. But I don’t think prices will crash because supply is so tight. There just isn’t a lot of extra room.

South Florida is a totally different story. There’s the affordability issue, but there’s also a supply glut. All the new condos coming on the market are a massive additional source of price pressure.

If you want to make a bet on a housing bubble, I suggest you zero-in on the South Florida market. I have two excellent ideas for you.

WCI Communities (WCI) is a large residential luxury real estate developer with massive exposure to South Florida. Right now, WCI has a projected development of 22,000 properties, 90% of which are in South Florida. I counted 31 projects in South Florida on their website, including over 20 condo towers.

Corus Bank (CORS) is based in Chicago. They specialize in commercial real estate lending. In other words, they lend money to the developers and construction companies. They have $8.3 billion in total commercial loans outstanding, of which 90% are real estate development loans. Of those real estate loans, 91% are for the construction of condominiums. 33% of these condos are in Florida, 22% are in California. The rest are in New York, Las Vegas and Washington D.C.

Consider these two ideas a jumping off point for further research on the Miami condo glut. When you combine that glut with the blind faith of hopeful investors, you have the makings for a sharp drop in all things related.

Good investing,

Tom Dyson