Miami real estate is notorious for its boom and bust cycles. The typical real estate market needs 7 years to recover from a "correction" or bust. Our market has numerous segments which all went into correction at different times beginning with the "high end" or luxury residential market in 2004. The "mid-range market" and the primary markets for residential real estate began correcting in December of 2005. Some of these markets are primed for appreciation, while others are showing signs of life, without immediate price gains on the horizon.
The luxury realty market slowed down noticeably before the broader market slowdown at the end of 2004. This market consists of homes in the $1.5-2MM price range and upwards. Real estate taxes are proportionately larger for luxury homes, but insurance premiums can grow significantly larger for these properties since they are overwhelmingly located inside of flood plains, and outside the Citizens windstorm insurance pool.
After the 4 hurricanes of 2004 made landfall, Citizens stopped covering dwellings with value in excess of $1,000,000, as well as Second Homes. According to this Sun Sentinel story in November 2011, only 7,500 policies in excess of $1,000,000 are held by the state run insurer's rate payers. This means luxury homeowners are often forced to pay premiums to "surplus carriers" often through Lloyd's of London which are typically more expensive.
The luxury market's rising premiums, combined with rising property taxes and an increase in interest rates in 2004 caused an earlier freeze than the mid-range residential market. The earlier freeze, and a higher percentage of equity to debt insulated this market from the worst of the recent real estate bust. By all reports, 2011 was a banner year for high end real estate with record prices for condominiums in projects such as the W Resort and Apogee on Miami Beach. Even Shaquille O'neal's former home on Star Island sold for just north of $16MM.
My recent research in CocoPlum during the last 2 quarters of 2011 showed that while most of the sales at the start of the year were in the $1.5MM range, the last 2 quarters had more sales in the $1.7-$2.3MM range for non-waterfront homes. This is a strong indication that today's buyers are end-users and more willing to meet ask prices for the home they want.
Marketing times have dropped from 9-15 months last year into the 4-12 month range. All signs in the luxury market point to modest price appreciation and a robust market for luxury real estate in 2012
The "mid-range market" consists of most of the homes, townhouses and condominium apartments on the market under $1.5MM but above $500,000. This market took the worst beating with the evaporation of "Jumbo" loan products for those who would borrow more than the Government agencies will guarantee or insure, loans greater than $423,000.
Mid-range buyers tend to use more leverage, and less equity, than luxury buyers to finance their purchases. In the past a buyer with a $100,000 down payment might finance 90% of the purchase price of $1,000,000. Jumbo mortgages were virtually non-existant from August 2007 through mid-last year.
This resulted in many $1MM homes becoming $500,000 homes as a $100,000 down payment would ensure the ability to obtain a bank loan (20% down). The mid-range market was rife with speculation in the boom, but today is thoroughly dominated by end-users as investors still don't feel confident in their ability to buy a $500,000 home for all cash and turn a profit in resale.
The one exception to this would be in the condominium apartment market, as units in this price range, inside stable projects, with good views could be over-due for appreciation. The flood of developer units has slowed to a trickle, there's a dwindling inventory of new product in the mid-range condo market. Many units in the mid-range condo market were bought by investors and are now rentals.
The downtown Miami and Brickell condo rental markets have experienced a sudden revival of rents to pre-crash levels over the course of the last 12 months. Two bedroom units that once rented for $1400 a month in the bust are now demanding (and getting) monthly rents of $1650 and up, in low amenity buildings. In condominium economics, rents always lead prices due to the multi-family nature of all condo complexes.
During the next 12 months, the mid-range market should show significantly more activity, though pricing will likely remain flat for single family homes. With more Jumbo loans available, and many homeowners in the 6-7% interest rate band on their current loans, I expect a surge in refinancing activities from this group of homeowners to take advantage of cost savings. Due to existing owners finding savings, it will likely be another 18-24 months before owners in this market sees pricing power over buyers.
The primary market for single family homes and apartments below $400,000 and in particular below $150,000 has recovered strongly in Miami and is poised to show price appreciation in 2012. Cash investors have moved en masse to pickup properties which working and middle class buyers cannot afford without financing. Meanwhile, the financeable buyer pool has shrunk appreciably over the last 4 years with unemployment and lending standards rising, until now.
Our business provides high interest rate financing to investors who put up 50% of the cash purchase price of single family homes, typically post purchase. We are seeing investors purchase homes from banks at 60 cents on the dollar, which have been foreclosed and have maintenance issues. Banks prefer all cash offers from investors, leaving end-users to pay top dollar for rehabilitated homes.
A $90,000 single family home sale from a bank to an investor might re-sell for $130,000 with a $10,000 rehabilitation within a few months. There are finance fees, closing costs, sometimes permit costs as well as the investor's time in (typically) self-contracting the repairs. The investors are providing a service and adding value to the homes, while they are also willing to wait through the end-user finance process in exchange for a healthy profit margin.
When the homes are less expensive, the rehabilitation is more focused on current income and future appreciation as there are few or no bankers who will issue a loan under $100,000 these days. The new consumer protection rules virtually eliminate bankers' appetites for these smaller loans by creating excessive compliance risk, simultaneously restricting the risk premiums they may charge borrowers for smaller loans.
The Condo Conversion Bust has claimed hundreds of apartment complexes in South Florida. Once condos fill with landlords, where 100 unit projects have 50-60 different landlords and numerous dead beat units in the foreclosure process, they're classified as "investor hotels". The end buyers have no options for financing in these projects, leading to rental concentration levels outside those allowed by the Government finance agencies.
Failed condo projects are beginning the Condo Termination process, which will gain steam in 2012. Liberating these apartment buildings from their condo agreements saves approximately 15% of the expenses, as well as the 10-25% collection losses failed condos expect on an annual basis, even with rules that require renters to pay association dues before rents. Once this market sees an overall attrition of 50% of the converted condos turned back into rentals, the remaining units should see price stability. It may take 3-7 years of condo termination activities before enough inventory is terminated to make condo ownership a viable store of value in the home once again.
The primary market has a huge overhang of inventor still coming to market, now through short sales as often as foreclosures. Recently, I have seen an increase in residential lending products available through private label mortgage issuers. As more dollars are added to the finance pool, and more jobs claimed by those earning middle class incomes, this market will get hotter moving forward. While only a trickle today, it promises to perhaps become at least a stream of liquidity which should stabilize prices within 12-24 months.
We are nearing the end of the bust cycle in most segments of the realty market. The luxury market is repaired and functioning today. The mid-range market is still undervalued as a whole, and primed to start the "move up" cycle once more financing programs are in place. The primary market for single family homes is a bargain under $100,000 and beginning to solidify up to $400,000 while the condo market in those price ranges is primed to be stagnant for years to come. Overall, the return of confidence in values and upward direction of the Miami real estate market today means that the last of the value buying opportunities are here, in the next 12-24 months. Don't be late!