“The market could get scary.”
The 374-unit 46-story Brickell House opened in 2014, during the steamiest days of Miami’s condo bubble. Now the dynamics have changed: 77 condos have been listed for resale over the past 6 months. And three have sold at a loss from their preconstruction prices.
A unit sold in February for $525,000, or $4,000 below preconstruction price. After the 6% sales commission, the net sales price was $493,500 or a loss of 7%, according to StatFunding’s new Miami Preconstruction Condo Market Update. A unit sold in March for $350,000 lost 16% after sales commission. And one sold in May for $233,400 lost 38%.
These sales impact the prices of future sales; comparable-sales data rule the industry, on the way up and on the way down.
Brickell House is somewhat unique. It’s equipped with a fully automatic robotic garage that never worked properly and has been shut down. Residents get to park on the street. Boomerang Systems, which supplied the contraption, filed for Chapter 11 bankruptcy a year ago. In January, it applied for Chapter 7 liquidation. The condominium association is suing its developer….
Miami’s condo bubble didn’t need this sort of debacle. Condos are already getting crushed. And the preconstruction condo resale market has “rolled over,” according to StatFunding.
Supply, supply, supply – the perfect glut.
Due to the condo construction boom, the oncoming supply is huge: since 2012, 17 large projects (defined as over 85 units each) with 3,749 units in total were completed. But over the next 24 months, another 40 large projects will be completed, throwing an additional 11,000 units on the market.
Buyers of preconstruction units who want to sell are getting desperate. Seven of them have taking a loss, including the three at Brickell House. And the number of preconstruction condo buyers willing to take a loss, as indicated by underwater listing prices, has soared from 14 at the beginning of May, to 45 as of August 8. And this, according to StatFunding, shows “we may be past the inflection point in the cycle,” according to StatFunding.
But these sellers are up against a monster.
Of the 3,749 units completed in large projects since 2012, 18% or 679 units have been listed for resale. But only 34 have sold over the past six months, and 11 resales are pending. At this sales rate, supply amounts to 119 months.
But 40 large buildings, totaling over 11,000 condos, will be completed over the next 24 months. If a projected 35%, or 3,850 units, are listed for resale – a “conservative estimate,” given current trends – it would mark a 567% jump from 679 units already listed for resale. Combined, given current sales activity, there would be 674 months of supply – or 56 years!
If the current market trends continue and as additional resale inventory is added to the market, the market could get scary.
Something will probably have to give.
Sellers might throw in the towel on dumping their condos and might instead “flood the rental market” that is already facing its own glut due to a historic apartment construction boom. “Or something unexpected may occur due to the imbalances in the market.”
And Shadow Inventory is ballooning.
Owners, unable to unload their units, have withdrawn, canceled, or terminated large numbers of for-sale listings, and have not listed them for rent either. This overhang can reappear overnight on the condo or rental market.
And in a first in this condo cycle, developers are now “sitting on unsold units.” For example, the developer of 190-unit Echo Aventura lists 31 units for sale (16% of the project) and is also sitting on 21 unsold units (11% of the project) that it has ceased marketing and is not trying to rent either. They have just disappeared from the scene. But they can reappear overnight. Hence the “shadow inventory.” Potential resellers have to compete with them.
To stay afloat, the developer took out a $24.3 million mortgage on 20 of the 21 units, which made StatFunding wonder: “If this is a trend, how long will developers hold unsold units? Will developers dump unsold units on a discounted individual or discounted bulk basis?”
Or will banks force them to sell?
Banks are already getting leery. Underwater mortgages, a concept that sends chills down a banker’s spine, have reappeared.
For example, at the Bay House – where 22% of the units are listed for sale but zero sold since September 18, 2015 – sellers are getting desperate. Three of them have lowered asking prices below the purchase price. If these units sell at or below the asking price, two mortgages on other units would be under water on a comparable-sales basis.
Banks, with fond memories of 2008, get nervous when the value of their collateral heads south. But any newly found prudence on their part can trigger a credit crunch at the worst possible time, setting off a chain reaction.
Many of the preconstruction buyers put 50% down. To avoid losing that deposit, they will try to close the purchase, figuring they can sell the unit at a loss that is smaller than the loss of the deposit would be. And they will put additional pressure on the market. But banks, having caught on to the now “obvious systemic market risk,” can throw a monkey wrench into the calculus. StatFunding:
- As a result, a subset of 50% deposit-holder-buyers will not be able to close their preconstruction purchases due to unavailability of financing for their remaining 50% balance to close.
- A subset of preconstruction buyers, unknown in scope, will close on their units and will be forced sellers for economic reasons and will likely be forced to sell at significant losses.
And as prices under this pressure continue to head south….
- Financing for actual end users and resale buyers will also likely become unavailable, which will further shrink the pool of potential buyers and further depress prices.
- Condo lenders who failed to exit the market early will likely see defaults, and lenders will likely realize losses where loans are at the higher end of the LTV spectrum (following short sales and foreclosures).
And that’s how a formerly pooh-poohed doom-and-gloom scenario of an imploding condo bubble – a bubble that has been obvious for years but whose existence has been strenuously denied by the industry and its promoters – is turning artfully into reality. And once again, into a big headache for the banks.
And rents in Miami and other prime markets, under similar pressures, are already hitting the wall of reality. Read… Big Unwind Begins in San Francisco, Miami, New York, Houston: Rents in “Primary Markets” Sunk by Apartment & Condo Glut
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Question: Is it just Miami, with its dependence of foreign money, or are other cities seeing the same thing.. I know from reading your posts that San Francisco is seeing some slowing and the NYC area is slowing but it seems Miami has moved past a slowing market to one on the brink of collapse. Seattle shows no sign of a slowdown in construction with more older buildings slated for demolition.. Huge areas of our city are literally gone and replaced with soulless, ugly, buildings with a life span of a few decades. Everything seems disposable..
Grew up in Seattle, can’t wait to leave. I know quite a few natives that can’t stand the place now that Amazon employees have taken over. Planning on buying a Miami condo once the prices fall.
David, good question.
Real estate is local. Every city has its own dynamics. They all move on their time clock. If enough move in the same direction, they trigger a national trend – on the way up and on the way down.
But it’s not happening simultaneously.
For example, the last housing bubble peaked on a nationwide basis in June 2006, in terms of median home price. In some cities it had already started to skitter downhill in late 2005. But in San Francisco, the median home price hit a new record in November 2007, and people thought the national housing bust, which by then had begun to wreak havoc, would bypass SF.
Then came December 2007. It was the beginning of a brutal housing bust. Even SF hadn’t been spared. It just hung in there longer than other big housing markets.
The SF housing bust bottomed out in late 2011, after global liquidity from QE and ZIRP had washed tsunami-like ashore.
Wolf, with all due respect, the idea that real estate is local has limits now, that was not the case a mere 15 or so years ago.
I was in the business in S.Florida and as a mortgage broker and agent. No one could have for seen this, unless they were in on a long range plan. I never could have gotten any approval for the sham docs that were flooding the market in 2005 and on.
This diarrhea of near worthless money to the ones who did not need it and toss to the wolfs ( no offense) the ones who did, is why we face the edge with complete indifference that is in front of us. This flood of money has distorted the RE market just as it has the stock and bond market. Viruses are not so easily contained. The dead virus poisons of contempt is left behind now for the ones who were forgotten. Look around, it is a daily MSM attraction.
If you think Miami was a ‘money laundry’ as has been decried for this explosion in RE, then one is ignoring New York, DC, LA, SF, and so many more laundry factories that span the globe, and have as mom and dad, the biggest names in banking…but you know that.
This ‘phenomenon’ as is seen ‘localized’ to the coasts is actually not new….not at all (but actually it is everywhere now). The 20’s..30’s….the 50’s..80’s …the 90’s…the 2015+. It has all been done before with loose money and no thinking about the …tomorrows. So, it crashes, a decade goes by and the same old buy-at-low-tide sales pitch begins a new. I saw it in San Francisco, New York, DC, and Miami, Key West. …. it just looks like it is different, but it is not. And, they leave when the party ends and leave behind trash for the locals to clean up.
Take a good look at San Francisco in 1988 and 1989 and there about…to scary. Freaky scary. Nothing changes but the balls and they too, can get cut from the bull. Who loves you now, baby?
The looser will loose, the winners will buy the losers….that is until the CBs come in to rescue the gamblers, the new phenomenon . That, my friend, is the wide card….can they do it again when the whole shebang comes to THE dead end street of unimaginable, un solvable, unpayable debt ? ( lets thank Shakespeare for un since he invented it…no, not un-cola, please).
You can’t write this stuff, the world is one great stage set of digital horror and the lunatics are in charge by the millions. ( I pay homage to Pink Floyd and suggest all of you take those $10,000 stereo’s and really listen to the words and try not to cry or shiver in the darkness).
I agree with both of you … the current bubble is almost universal in the Western world, and even many areas around the big cities in second/third world countries (where the central bank money flowa arrive first).
I haven’t heard much lately from Germany, which until recently was about the only EU country that didn’t have a serious housing bubble. My impression is that even there speculators have been hoarding properties and driving up prices, although in this case it is mostly institutional investors and not private speculators or new homeowners with dollar signs in their eyes.
Also, while some EU countries e.g. in the South and East were very cheap compared to e.g. UK and Netherlands 15 years ago, nowadays the more popular areas e.g. around capital cities or vacation spots all over Europe often have similar very high price level. It all has become international and only very remote or otherwise unattractive areas escape this trend.
But there still are many local factors that can mean big changes to bubble dynamics and pricing.
I also agree that the central banks are the wildcard.
The article mentions a potential 56-year supply in Miami. We had a theoretical 32-year supply (if I remember correctly) for the whole Netherlands around 2008 based on sales numbers and inventory for sale, but very little happened thanks to unprecedented government intervention. Sales had slowed down to a trickle (I guess the realtor organization had to trow a party in my area for every home that got sold), prices declined by 15-20% (which is nothing given the often more than 1000% runup before it). Thanks to extreme measures from central banks and politics, prices now are even higher in some areas than at the previous top and sales numbers are the highest ever. You can be sure that politicians and much of the sheeple like what they see, so this will continue until the system crashes so extremely that there might be no recovery possible for a generation (history in my country shows that extreme price crashes often took over 50 years to recover).
It’s funny to read about developers in the US being scared of underwater properties. Nobody worries about that over here, almost ALL recently bought properties are under water for years because most buyers start with a 103% mortgage and often do not pay down anything for a long time. People have learned that time heals all wounds in the housing market …
Another factor that the story above is not including is the outbreak of the Zika virus spreading through Miami-Dade county. Even the tourists are getting infected now.
Agreed. This could be a big factor in the coming months. We should see it in transaction volume. But these things don’t tend to last long. People get used to risks of this type. They got used to West Nile and other scourges too. Even the risk of the BIG ONE hasn’t scared people from buying property in San Francisco.
@Meme your prose, well the jokes I suppose, are somewhat confusing, your points are on the money and your Pink Floyd reference SCARES THE BEJEEZUS OUTTA ME. I really hope they’re not right on since they didn’t have Syd by then.
I’m a retired finance guy and I’ve seen this same episode of “Miami Vice” a mind-numbing number of times.
I presume most of the sheep buying Miami condos are about my age…
…it astounds me that people simply do not watch & learn – we’re talking recent (and ever repeating) history here.
You are not wrong.
I bought into the UK housing market at almost the peak of our late 1980s boom.
The bust lasted years but there was no sensible phase before the next boom started.
University educated friends who had been caught in the same bubble as me had forgotten all about it in just over 10 years and were convinced that this boom would never end.
A University education (and a good UK university at that) still does not guarantee one iota of common sense.
in 2005, my brother-in-law gave me a lecure about how i was missing out bc i didn’t own So Cal real estate. Everybody he know was in real estate. it only goes up, blah, blah, blah. I said to him, “What about LA in the early 90s when the arms manufacturers were hit with the “peace dividend” and prices collapsed. Anyone buying just before that crash is only breaking even now.” He told me that i was crazy, there was no crash in the 90s–EVEN THOUGH HE OWNED A RENTAL THAT CRASHED IN PRICE WITH EVERYONE ELSE. You’re right, memories are pathetically short.
It’s combination of suckers born every minute, it’s different this time, surely it won’t happen to me and real estate only goes up, etc. Summed up – The Greater Fool Theory at work, again.
Vespa: I do believe that you summed it up nicely. People’s ability to rationalize it truly amazing. I have seen friends use moves to rationalize carrying through on an ill-advised action that would have made Harry Houdini envious. But, bad idea or not, it was something they wanted to do, or buy. So it might be hard to get from apples to oranges, but the motivated can navigate the trip.
I find it “difficult” to feel any remorse for the banks or investors. I think the accounting standards are still suspended so they are probably just going to sit on those bad loans like they are everywhere else.
Meanwhile SFH here in Fremont have reached their all time high in terms of selling price. A modest 3 bedroom 2 bath house near me recently sold for around $830,000, was tore it down, and now a new one is being built on the same foundation.
Wolf I know you are more of a chronicler of the economy rather than a seer. Of course I do not think any one is going to hold you to any prediction because there are so many variables involved.
Generally speaking, US banks do not sit on bad residential real estate loans like EU banks. Timeframes for declaring real estate loans “non-performing” or “defaulted” is reasonably cut & dried (however, bank-owned loans classified as defaulted and written off are still owned by the bank).
But you are correct: US banks are given some discretion (much less than EU banks), and the industry (BofA & Citi always come to mind) has a history of abusing it. This usually shows up as a bank’s market cap being significantly below its book value (i.e.: investors don’t believe management’s numbers). This is more likely to show up in loans to commercial ventures (including real estate developers).
Thanks for your response however I know personally too many people who are still living in their homes rent free despite their failure to make payments for years. A close friend of mine actually knows a woman who is renting her home out and getting an income. Its worse than you think.
Until there is no water to take a shower and then the health department will lock the doors. ( they do not care if there is a working toilet, just a shower!)
Since Central banks been inflating stocks and bonds since 2009 maybe they can start buying condos in Miami!
Eventually they would, buy buying all REITs. Everything really. And while no one’s watching the Chinese stock market has rallied meaning pretty soon Chinese investors will be able to buy more houses in the Bay Area.
The question is more: what kind of price increase would it take before someone slams a 15% tax ala Vancouver?
One thing about the Vancouver Tax effect. Our dollar is what, at 77 cents these days? 15% of $.77 added on is still a deal compared to SF. I’m not sure how it will end up shaking out? There was doom and gloom first reports, but this is the slow time for sales, anyway. We’ll know better in October. (Not that I really care).
Well, I’m also not so sure about the Chinese stock markets and yuan recently building wealth. You may still sell your house to a Chinese, but not because he’s recently made a killing in the yuan denominated Chinese markets:
o about 1 year ago SSE Composit index was 5100+; today it’s 3125 (down 39%)
o about 1 year ago CSI 300 Index was 5300+; today it’s 3393 (down 36%)
o about 1 year ago USD-to-yuan was 6.2; today its 6.7+(down 7%).
Looks like a 40%+ haircut to me.
The other scam government entities Freddie/Fannie will be stuck with some of the bad loans and probably rather sit on them rather than force foreclosures.
And who knows maybe Freddie/Fannie will buy up the banks’ mortgage NPLs to beef up their balance sheet.
They better find a lender of last sympathy, because they are train wreck looking for a canyon to fall into. They are BROKE again!
Come on guys do some homework. I am for hire!
Very well explained, well researched, and well documented case presented here.
I have no doubt you will soon be invited to CNBC and the major business shows, WSJ and Bloomberg, television news in Miami and across the nation to share your findings and share in their Mission of creating and maintaining inflated the public’s belief in a robust economic recovery.
Oh, wait… yes, just look at what the BOJ and SNB and our own shill bc are doing.
Wolf…. the BOJ now owns 81 of the 100 index as ‘major stock holders’ and of those 51, the own a majority interest. Now, excuse me, but is this not a backdoor ‘nationalization’ of companies? Now, consider the SNB and their ” discount shoe sale on black Monday” buying of every dirty stock that has a seller? One wonders what our own Janet is doing.
This is like mom bailing out her criminal son, and saying… “he is a good boy, a good boy…leave him alone already”.
HOA fees are about a buck a foot. In other words, it costs an extra grand a month for 1,000sf unit, over and above piti. Such a deal.
Queen Hillary will soon take office and will stop all foreclosures and mandate a 2% mortgage interest to keep the recovery going!!! so these stats don’t mean anything…
the Netherlands has 1% mortage rates, 103% mortgages for everyone who can fog a mirror and a government-guaranteed protection against any financial loss when you have to sell the home. In addition there are countless subsidies, a full deduction of all mortgage and upkeep from income tax (which is by far the biggest tax in Europe) and almost zero property taxes compared to the US.
said otherwise, the US still has plenty of opportunities to make things worse, and I would not be surprised if Hitlary takes a look at the Netherlands, just like Obama used our sick-care insurance system as inspiration for Obamacare (the Dutch system is the most expensive in the world, after the US; basically for the same reason – endless entitlements without obligations for a large chunk of the population).
Doubtless the cash creeps along a gradient of deepening dermal hue.
I’m seeing houses sit for much longer than last year and more are on the market now as well. It feels like a top.
Same thing seems to be happening in Sarasota. New condo towers going up downtown but they had better have the retirees to fill them as the type of jobs that can finance $500,000 plus condos are in short supply in this area.
Can’t have a full-fledged financial panic without a Florida real estate bust, now, can you?
I think I’ve heard this song before, and a few times, in different styles: the Marx Brothers first feature-length film, “Cocoanuts,” in 1929, was a musical satire on the Forida real estate swindles of the early-mid ‘twenties.
At one point Grouch says, “You can even get stucco. Boy, can you get stucco.”
Whoops, sorry, Comedy Gods, that’s Groucho in the next-to-last line.
I work on the legal side of REITs. What I’ve seen lately, in the past three months, is that the entities (I deal with farm land) that we rent our properties to are playing hardball and want lower rents.
10 – 15% of Apartments are sold for less than purchase price.
Greater loss if you have paid mortgage interest between buying and selling.
100,000 – 200,000 new apartments coming online within the next two and half years.
Banks are reluctant to issue mortgages on inner city apartments. Funding is coming from alternative sources.
The federal government has taken some measures to curb foreign buyers from over inflating the top end of the market.
Vested interests in Australia cry foul against any commentator calling Australia’s RE market a bubble.
Thanks. I’ve been hearing about these developments but I have trouble finding data to support this. I’m told that vested interests in real estate and publishing prevent this data to surface. But there should be something. Can you point me in the right direction? You can post the links here or email them to me (contact tab). Thanks!
“Data indicates 82,724, or 4.8 per cent of Melbourne’s total
housing stock appeared to be vacant over this period, having
consumed <50LpD. No water was consumed in 24,872
dwellings – therefore being demonstrably unoccupied."
"If the total number of residential dwellings using 0LpD were added to the present stock of available housing advertised for rent, it would increase Melbourne’s publicised vacancy rate to an estimated 8.3 per cent. This is a significant number that would put considerable downward pressure on rents." (LpD = litres per day, water consumption)
From report at Prosper Australia, Melbourne:
The eighth Speculative Vacancies Report – The Empty Properties Ignored by Statistics – Catherine Cashmore. Vacancies up 28% but still house prices increase?
From Prosper Australia, first report listed there.
I don't know if this is anything like what you're interested in, but they have interesting data anyway.
No one has mentioned the one thing that will blow the real estate market in Florida, Arizona, California and Texas. Climate Change! There will be plenty of climate refugees in the near future. People don’t seem to take the climate into consideration when making financial decisions. Big mistake ignoring reality. It’s like wishful thinking will make this absolute catastrophe disappear. It’s like if we don’t think about climate change it won’t exist. Magical thinking!
I sold out of Hawaii and invested in my new home… Washington State.
Exactly. Miami is toast. South Florida is toast. Rising sea levels will make all those high-priced condo towers uninhabitable, as nuisance flooding gets worse and seawater contaminates the freshwater supplies. Real-estate prices will head to zero, as no bank will be willing to make a loan on such risky property, and no insurer will cover it. The expensive pumping systems and raising of streets in Miami Beach will all be for nothing. Six feet of sea level rise by the end of the century? Glaciologist Jason Box is calling for ten times that. Time to get out of South Florida. There isn’t enough money in the world to save Miami.
Climate Change? Always has and always will and Man has nothing to do with it.
How do you get from the south Fla. condo market to Australia ? Up here in Wyoming everthing is fine. Stuff is selling well and most all the loans are being sold to Washington. Happy days ahead when he crunch hits and your government loan develops a heart . you will never have to make another payment.
LOL. Love it. Hope they all get slaughtered. I am a buyer at a nickel on the dollar…..