On the surface, Miami’s condo market is in trouble. But beneath
the surface, “the whole system is jammed up.”
Signs have been piling up that the Miami condo market, where luxury towers
are still sprouting like mushrooms, is getting into serious trouble. This has
not yet made its way into the overall house price indices for the vast Miami
metro, such as the Case-Shiller
Index for Miami, in part because it only tracks single-family houses and
not condos. But it is showing up in the condo data for the sub-markets.
Back in 2017, I covered Miami’s condo construction boom, how it was
turning into a glut, and how the preconstruction condo flippers
were starting to run into trouble, down to the granular detail of condo tower
by condo tower. These things take a long time to filter to the surface, as
they’re now starting to. But beneath the surface, it has gotten a lot worse.
On the surface, Miami’s condo market is troubled enough:
Here is a sampling from the Q2 report on
Miami’s condo markets by Brown Harris Stevens. These sub-markets are small,
and sales volume in each market is relatively small, so the data can get
volatile. While most of the sub-markets show price declines, and in some
cases vertigo-inducing price plunges, there are some sub-markets were prices
in Q2 have increased. All data is for Q2 2019 compared to Q2 2018:
South of Fifth:
- Closed sales: -40%
- Average sales price: -15.8% to $1,814,060
- Median sales price: -1.6% to $859,900
- Average price per square foot: -7.5%
- Days on the market: 169 days
Miami Beach – 5th St. to W. 63rd St.
- Closed sales: -14.1%
- Average sales price: -15.3% to $472,687
- Median sales price: -8.4% to $299,500
- Average Price per square foot: -5.5%
- Days on the market: 142 days
Bal Harbour
- Closed sales: -16.2%
- Average Sales Price: -15.2% to $1,592,032
- Median Sale Price: -19.6% $925,000
- Average price per square foot: -10.6%
- Days on Market: 155
North Beach 63rd St. to 86th Terrace
- Closed sales: -12.8%
- Average sales price: +31% to $568,231
- Median price: +35.7% to $380,000
- Price per square foot: 25.6%
- Days on the market: 174
Surfside
- Closed sales: no change
- Average price: -45.7% to $1,340,075
- Median price: +2.7% to $572,500
- Price per square foot: -18.7%
- Days on the market: 183
Key Biscayne
- Closed sales: -32.5%
- Average Sales Price: -36.2% to $1,107,305
- Median Sale Price: -18.0% to $845,000
- Average price per square foot: -13.1%
- Days on the market: 155
Downtown Miami – MacArthur Causeway to the Miami River and NW 1st
Ave. to 5th St. to I–95
- Closed sales: -5.1%
- Average Sale Price: -6.1% to $388,698
- Median Sale Price: +5.8% to $317,500
- Price per square foot: -4.2%
- Days on Market 177
Edgewater
- Closed sales: -1.8%
- Average Sale Price: -9.8% to $408,913
- Median Sale Price: -7.7% to $300,000
- Average price per square foot: -2.2%
- Days on Market 118
But beneath the surface, it has gotten a lot worse.
Below is a riveting and funny article by Harris “Kuppy” Kupperman on the
difficulties the market is now facing, as seen by an insider from beneath the
surface, particularly the financing issues that are now ripping into Miami’s
condo business.
By Harris Kupperman, founder of Praetorian Capital, Adventures in
Capitalism:
Miami has a highly cyclical property market where the magnitudes of the
booms and busts dwarf anywhere else in the country. In my experience,
trends in Miami real estate also tend to lead national trends by a few
quarters. Therefore, smart guys always watch Miami.
Roughly a year ago, I noticed that Miami property prices started to
decline after a two or three-year period of leveling off. The pace of decline
has clearly accelerated recently. Most properties on South Beach (where I
live) are off by 20 to 35% from peak prices, but that is nothing compared to
the carnage across the bridge in areas like Brickell and Edgewater.
Why are prices dropping? It’s more than simple supply and demand—though
the glut of new supply is clearly part of it. Rather, your typical condo has
a carrying cost of 4-7% of fair value before financing costs (property
tax/condo fees/insurance/maintenance/special assessments/etc). This adds up
fast when a property is worth hundreds of thousands or even millions. It is
pretty much mathematically impossible to have a positive yield from buying
and renting out a Miami condo (trust me, I’ve done the math many times). The
only way owning is viable, is if prices go up and allow you to extract
capital to fund the carrying costs—though debt service then makes the monthly
cash flow even worse. The basic law of Miami condo pricing is that if prices
stop going up, they collapse due to the carrying cost. Suddenly, it seems as
though a lot of owners are becoming financially distressed—forcing them to
hit bids at a time when demand is somewhat lacking.
With all of that in mind, I got drinks last weekend with a buddy in the
hard-money lending market to discuss the state of the market. For those of
you who are unfamiliar with hard-money lending, these are loans made on the
basis of the asset value, not the ability of the borrower to pay. In fact, in
some cases it is assumed that the borrower will not repay the loan and
through penalty interest, you rapidly chew through their equity and get to
own a high-quality property at a great initial entry price. This works well
in an up market. How does it work when things go no-bid?
Friend: Holy sh*t Kuppy, it’s about to blow!!
Me: You said that 3 months ago…
Friend: It’s different now, the whole system is jammed
up.
Me: What do you mean?
Friend: Before, when a borrower would default, we’d put
him into penalty default interest (which is 25% on loans over $500k in
Florida). My business is to underwrite safe loans and to clip a coupon,
not to own real estate. The lenders that ARE looking for big returns
(and risks and headaches) on real estate watch the public records for notices
of defaults and then barrage the distressed borrower with offers of 12-16%,
interest only private loans… not any borrower’s idea of a good time but still
better than 25% default rate plus legal fees. These offers often come
with periods of prepaid interest that temporarily take some pressure off the borrower…
but also help sharpen the axe for when it finally falls (larger, artificially
inflated final loan amount). We could play these same games with the
defaulted borrowers, but my investors want the defaulted paper off the
books—we don’t want to re-possess the property and have to sell it. Our
specialty is underwriting—not foreclosure. We’re happy when someone takes our
problems away.
Me: So?
Friend: The story usually ends with a “fire sale” of the
property by the defaulted borrower or by the lender (after
foreclosure). End users are seeing that the “fire sale” price may very
well be next quarter’s market price, and the units aren’t moving. Even
the County foreclosure sales, which have been loaded with fix-and flip
reality TV fans bidding 110% of value for the past 5 years, are seeing below
market priced deals with no bids.
Suddenly, no one wants our defaulted borrowers. The shark lenders are all
jammed up with loans they poached last year. They used to be able to recycle
their capital by selling the assets, but now they can’t. This means that no
one is buying the distressed loans off our books without demanding a discount
on principal. The whole conveyer belt is frozen. Even a few months ago, there
were still idiots from out of town, or kids with daddy’s offshore money who’d
come down here with a new hard money-fund and make stupid decisions. Now
those guys are jammed up too or at least they’re not coming down here
anymore. This means that we need to now take possession of our defaults.
Me: How’s that going?
Friend: Lemme explain it this way. We underwrote this one
deal two years ago for a $3.4 million purchase of a new construction condo,
we leant $1.5 million against it. The guy defaulted and we’re up to $2.0
million in principal and default interest and we took possession—figuring we
were plenty protected by over a million in equity left on the asset.
Remember, our basis is $1.5 million. Well, it’s been for sale for 9 months
now. It may not even trade with a 2-handle. Meanwhile, I’m stuck carrying the
thing—which isn’t cheap. I have no idea how to even sell it. We’re on our 3rd
broker now. No one has a clue what to do with it, yet these assholes keep
building more product.
Me: Welcome to the Miami property cycle. If your build
cost is $300 a foot and you think you can sell it for $700, you’ll flood the
market. Once you’ve made a “go decision” you’re gonna finish the thing—even
if you only sell it for $200 in the end.
Him: It’s even worse. Every month they break ground on
hundreds of additional units when the existing ones won’t sell. Some of the
most high-profile buildings have had less than 50% sell-through and the
majority of what’s “sold” is immediately dumped onto the market unfinished
and unfurnished, below the developer sale price for fear that the developer
will drop his price and leave these guys even further underwater. Pretty soon
they’ll all be forced into another round of price cuts. It makes no sense to
build more, but they keep doing it!!
Me: Won’t the 50-bps the fed cut help clear the log-jam?
Him: Are you f*cking kidding me? I’m charging these guys
10% because they cannot get traditional loans. They can cut a few points off
rates and it wouldn’t matter. Besides, the guys who qualify for real loans
are all selling because they cannot hold onto their own properties. That’s
why every third unit is suddenly for sale. Prices stopped going up and the
whole thing blew apart and now there’s no buyers. Remember, the price for a
whole building is set on the last trade. Banks look at the data and won’t
underwrite new loans.
Me: So, what are you doing to clear these bad assets?
Him: I have no idea. I’ll probably smack the bid wherever
it is and take the hit—before someone else does. At least I won’t have to
keep making condo payments and 2% property tax payments. My fund has
basically stopped lending on condos and is well below 50% LTV on everything
else. We’re building cash. I don’t want any more of this crap on my balance
sheet!! A surprising number of my existing loans are starting to go bad. I
know what my competitors underwrote, trust me, they’re in MUCH worse shape.
They underwrote all sorts of nonsense that I wouldn’t ever touch. I’ll be
fine, but they’re toast.
Me: …and Bank
of Ozarks? Haha
Him: They underwrote the stuff the local hard money boys
wouldn’t touch at 15%, but those jokers got paid fed funds plus 3 to take the
risk. We should build a fund to pick at their carcass in 2 years. Good thing
they just popped down a new branch in Sunset Harbor. We can use it as the REO
office. Haha
Me: Why isn’t any of this showing up in the data yet?
Him: Most traditional borrowers have money and are trying
to hold on. Besides, property is a slow burn process. Guys are in extreme
pain, transaction volumes have collapsed, properties on offer have exploded.
Eventually someone blinks, people realize where the real marks are on their
assets, then they ask themselves why they are paying 10% a year to hold onto
something that they’re underwater on and dropping in price. It’s going to be
just like 2009. Wait 6 or 9 more months. They can take rates to zero, it
won’t matter. That’s not the key cost of holding these things anyway.
Me: Will it really be as bad as last cycle?
Him: Last time, a lot of the stuff that defaulted was
upper middle-class product. It just needed lower prices and it eventually
cleared. This time, the glut is fake “super-luxury.” 3,500 ft units with
private exterior jacuzzies don’t ever clear. The property tax is $50,000
alone. Who the hell can afford this stuff? You can give it away for free. A
middle-class guy cannot afford to hold it. Last cycle, it was a few hundred
units of high-end that went bad. Now you have whole city blocks that are
nothing but high end. 200 units per building. There’s thousands and thousands
of these things. The property prices can halve and that means the property
tax halves, but you’re still paying condo fees and remember, when your
neighbors stop paying, you’re on the hook for their payments.
There aren’t enough rich Venezuelans and Russians to buy all these units.
Besides, those guys aren’t buying here anymore. They’re scared of Trump and
they’re broke anyway. This time it really is gonna blow…
Me: Sweet!! Lemme know when I can get a great deal on
something nice. By Harris Kupperman, founder of Praetorian
Capital, Adventures in Capitalism.
The record for house price increases among the 20 metros in the
Case-Shiller House Price Index is held by Miami, where prices skyrocketed
193% in the six years through December 2006, before collapsing. The record
for price increases between January 2000 and July 2019 is now held by the Los
Angeles metro, where prices over the 19-year period increased by 186%. But
Miami has been making up lost ground. Read…The
Most Splendid Housing Bubbles in America, Sep. Update
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