Archive for January, 2010

Muted Pay Gains Can’t Drive Miami & Coral Gables Real Estate Prices Higher

posted on January 29th, 2010 filed under: Real Estate News

Today the federal Bureau of Labor Statistics released its quarterly Employment Cost Index, which showed that wages and salaries increased 0.5% in the 4th quarter of 2009, and have risen 1.5% in the past year.  (These are national data, but there is no reason to believe conditions are significantly different in Miami and Coral Gables.)

Why should you care?  Because over the long haul, real-estate prices rise in tandem with incomes, as the value of the currency is slowly and deliberately destroyed.  (Since the Federal Reserve was created in 1913, the dollar has lost 96% of its value.)  Rising real-estate prices in Miami and Coral Gables thus depend on rising incomes.  With incomes rising slowly, real-estate prices in Miami and Coral Gables are not likely to bounce furiously higher.  Time remains on the side of those who are patient and wait for the right home to come along.

Of course, it is possible for prices to rise faster than incomes for short periods of time.  The whole real-estate bubble in Miami and Coral Gables was a function of factors unrelated to incomes, like stupidly low interest rates, complete abandonment of lending standards, and a general orgy of fraud and speculation.  According to the National Association of Home Builders and Wells Fargo, the ratio of median home prices to median incomes expanded from 2.5:1 to over 6:1 in the Miami metro area, and from 3:1 to over 8:1 in the New York metro area.

But that sort of disconnect between prices and incomes always ends badly.  Miami has snapped back toward 3:1, leaving some room for additional price declines but not the trap door that existed before.  New York remains grossly overvalued at about 6.5:1, and is now the most overvalued, unaffordable U.S. real-estate market.

Interest rates are abnormally low again, but the other factors underlying the bubble cannot be expected to return anytime soon.  We’re back to basics.  Slowing rising incomes mean slowly rising real estate values in Miami and Coral Gables.

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Miami 10th in Foreclosures for 2009

posted on January 28th, 2010 filed under: Real Estate News

RealtyTrac reports that 7.2% of housing units in the Miami metro area received foreclosure notices in 2009.  Miami ranks 10th in the nation.  Las Vegas took the top spot at 12%, with Florida’s foreclosure capital, Cape Coral – Fort Myers, running a close second at 11.9%.

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U.S. New Home Sales Continue Sliding Back Toward Oblivion

posted on January 27th, 2010 filed under: Real Estate News

Sales of new homes (not existing homes) fell to a seasonally adjusted annual rate of 342,000 in December 2009.

Sales hit a low of 329,000 in January 2009, then rebounded to 419,000 in July 2009, and were still at 408,000 as recently as October.  Now they’re reapproaching the old low.

Here’s the big picture, from 1963 to 2009:

U.S. New Home Sales -- 1963 to 2009

The U.S. Census Bureau, keeper of the data, defines a new home sale as a deposit taken or a sales agreement signed.

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Case-Shiller Price Index Unchanged for Miami Real Estate

posted on January 27th, 2010 filed under: Real Estate News

The Case Shiller Home Price Index, which measures repeat sales of the same homes, registered at 149.08 for November 2009, essentially unchanged from its level of 149.09 in October.  It will be interesting to see what next month’s Case-Shiller release (on Feb. 23) says about December 2009 prices.  The Florida Association of Realtors reported a significant jump in the median price for single-family homes in Miami in December (see Miami Real Estate Shows Signs of Panicky Buying (Yes, Buying) in December 2009).  But the change in median price might have reflected a change in the mix of homes sold (more or less expensive).  Avoiding that statistical noise is the main  reason Case-Shiller uses only repeat sales of same homes.

The Case Shiller index does not break down Miami real estate activity by locality, so one cannot draw any specific conclusion about home values in Coral Gables from the report.

Side note: New York was the worst performer in the Case-Shiller index, coming in at 173.24 — a 1.0% decline from October to November.  New York remains, according to some data, the most overpriced and least affordable real estate market in the country.

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Miami Real Estate Shows Signs of Panicky Buying (Yes, Buying) in December 2009

posted on January 26th, 2010 filed under: Real Estate News

Miami homebuyers jumped at anything with a “For Sale” sign in front of it in December 2009, contradicting a slackened pace of sales nationally.

According to the Florida Association of Realtors, sales of single-family homes in the Miami metropolitan statistical area (MSA) rocketed from 455 in November to 623 in December — an increase of 37% in one month.  (Coral Gables may not have shared in the feeding frenzy — see Coral Gables Single-Family Home Sales Running Flat Year-Over-Year?)

The median price in the Miami MSA likewise jumped higher, from $184,800 in November to $204,300 in December — a 10.5% gain in one month.

To keep the price data in perspective, the bubble-high median price was $401,100 in May 2007.  And the median price has bounced around a lot since hitting a low of $177,000 in April 2009.  Nevertheless, it’s the first month over $200,000 since that low point.

The story nationwide was different, with sales down sharply and prices up significantly.  According to the National Association of Realtors, single-family home sales fell from a 6,540,000 seasonally adjusted annual rate in November to 5,450,000 in December — a 16.7% decline.  The median price, however, rose from $170,000 in November to $178,000 in December — a 4.7% increase.

The slackened sales pace nationally is generally believed to have resulted from the originally scheduled expiration of the $8,000 homebuyer tax credit at the end of November 2009 (since extended to the end of April 2010).  The credit has the most impact at the lower end, so its anticipated expiration spurred a lot of low-end deals to close by the end of November, resulting in a reversion to a higher-priced mix of homes in December.

But Miami saw big gains in both sales and the median price.  Is the bottom in?  Or is the elixir of artificially low interest rates and other government inducements leading a new herd of buyers into the same slaughterhouse that just decimated so many others lured by cheap money and rising prices?

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The Unbearable Wrongness of Property Taxes in Miami and Coral Gables

posted on January 25th, 2010 filed under: Real Estate News

If you ever see property-tax information on a listing sheet for a home for sale in Miami or Coral Gables (or anywhere in Florida), do not rely on that information.

You can buy a house in Miami or Coral Gables and pay three times the property taxes of the previous owner, or of a next-door neighbor in a similar home.  This can be a major turn-off for prospective buyers.  Who wants to pay someone else’s taxes?  How did we arrive at this place?  It’s a problem nearly two decades in the making . . . .

Most states have an “ad valorem” property tax system.  Ad valorem means according to value.  Roughly speaking, a local government like Miami or Coral Gables comes up with a budget (how much money they need) and subtracts the amount it’s likely to get from sales taxes and other assorted fees, arriving at the amount that needs to be raised from property taxes.  Each parcel of property is assigned an appraised value, and property owners shoulder a pro rate share of the needed tax revenue according to the relative values of their Miami or Coral Gables properties.

Florida had a genuine ad valorem system until 1992, when voters approved Amendment 10 to the state constitution.  Also known as the Save Our Homes Amendment, it limited annual increases in assessed value to the lower of 3% or the annual change in the consumer price index.

The Save Our Homes benefit protects only so-called Homestead property — i.e., one’s principal residence.  Buyers get no protection, so even if a seller enjoyed a below-market assessment, the buyer will be assessed at market value.  Foreigners are also ineligible for the 3% cap, as are owners of the various kinds of non-Homestead property, such as vacation homes, rental properties, and other commercial properties.

Historically, property values in Miami and Coral Gables have increased more than 3% per year.  Vast inequities were inevitable under the Save Our Homes system, but the real-estate bubble in Miami and Coral Gables accelerated the deepening property-tax disparities.  With prices rising at 10%, 15%, 20%, 25% per year, buyers and other ineligible owners saw their taxes skyrocket while Homestead owners were capped at 3%.  As a result, the government’s books in Miami and Coral Gables have become increasingly disproportionately balanced on the backs of new buyers and other unprotected groups (foreigners, vacation-home owners, rental and other commercial owners).

The severity of the problem has moderated a bit in the last couple of years, as falling prices have led to reduced assessments for buyers.  But that just means the gap has narrowed, not that the gap has been closed.  You can still buy a house in Miami or Coral Gables and pay several times more in property taxes than the seller was paying.  Do not rely on listing sheets for tax information.

A minor effort to ameliorate the inequities of Amendment 10 culminated in the 2008 passage of Amendment 1, which limits increases in the assessed value of non-Homestead properties to 10% per year.  Big deal.  You’d have to be suffering from bubble-vision to think that capping increases at 10% is meaningful.  Only in a bubble, or in times of severe wage and price inflation, could prices rise so fast.  The bubble is over.  Protection against 10%-plus increases is like insurance against damage from meteors.

Indeed, Amendment 1 made matters worse by making existing Homesteaders’ undervaluation “portable.”  Homesteaders became so dependent on their under-taxation that they were effectively prisoners in their own homes.  A Miami or Coral Gables resident who bought a 4-bedroom house in 1995 might be paying a mere $6,000 per year in property taxes.  Moving would almost certainly mean higher taxes — possibly two or three times higher — like for any new buyer.  So in the typical self-dealing fashion that led to Amendment 10 in the first place, Floridians assured themselves the right to move and apply their under-taxation benefit to a new home.  (There’s a formula for figuring out how much of the benefit can be transferred, but that’s a whole other discussion.)

If you are thinking of buying a home in Miami or Coral Gables, do not rely on the current property taxes to figure out what you will pay.

But enough about what not to do.  How can you get a reasonably reliable estimate of what your property taxes will be?  It’s easy.  See the post titled “What Will Your Property Taxes Be If You Buy a Home in Miami or Coral Gables?”

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Short Sales Prominent in Miami and Coral Gables Real Estate

posted on January 24th, 2010 filed under: Real Estate News

In a short sale, the holder of a mortgage note agrees to a sale of the property for less than the loan balance.  Of the 8,543 single-family homes in Miami-Dade County currently listed on the MLS, 3,115 (or 36%) are short sales.  Another 470 (5.5%) are listed as REO (i.e., real estate owned), meaning the lender has foreclosed and retaken possession.

The picture in Coral Gables is much less severe, with 41 of 456 listings (9%)  listed as short sales, and 8 others (1.75%) as REO.

Why have short sales become such a prominent feature of the landscape in the real-estate market in Miami and Coral Gables, outpacing traditional foreclosures?

Mainly, it’s because so many homeowners in Miami and Coral Gables are underwater on their mortgages — owe more than the property is worth — and nothing stops them from listing the homes for sale.  Simply listing a home for sale is easy compared to the foreclosure process that leads to REO listings.

Also, Florida is a recourse state.  That means if a foreclosure sale doesn’t cover the balance of the mortgage (plus fees), the bank can get a deficiency judgment.  In other words, the former homeowner is still on the hook, and could be pursued by the bank until the entire debt is paid.  With real estate prices down so much in Miami and Coral Gables, especially at the lower end of the market, a lot of people face that prospect.

The amounts involved can be stunning.  One person posted her story at a credit-counseling website.  She bought luxury condos, pre-construction, borrowing $500,000 on each, using no-income-verification loans.  The condos are now worth less than $250,000 each, leaving her potentially exposed to a deficiency judgment of more than $500,000.  She has no other assets.  Wonder how long it would take her to pay off a $500,000 debt (plus post-judgment interest, presumably).

Yet we’re not going to see debt slavery make a big comeback.  Anyone hit with a massive foreclosure deficiency judgment would go straight into bankruptcy.  The bottom line is that the lenders will simply not be paid (or will obtain recompense from taxpayers through various devices crafted by policymakers in Washington).

The futility of such massive deficiency judgments is probably another reason why short sales have become so much a part of the landscape of real estate in Miami and Coral Gables.  The lender avoids the expense of foreclosure.  The lender might insist that the debtor remain liable for some deficiency judgment, but it’s a negotiated affair, and the debtor obviously will not agree to remain on the hook for so much that bankruptcy would be preferable.  Short sales are a practical compromise.

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FHFA House Price Index Update — Miami and New York

posted on January 21st, 2010 filed under: Real Estate News

It’s been a while since the last post charting the progress of the OFHEO House Price Index.  So long, in fact, that the Office of Federal Housing Enterprise Oversight (OFHEO) was subsumed within the Federal Housing Finance Agency (FHFA).  It seems that whole “oversight” thing didn’t work out too well there at OFHEO, what with the the entities overseen (FNMA, FMAC etc.) going belly-up after OFHEO assured they wouldn’t.

Anyway, FHFA keeps the data now.  The data represent repeat transactions of the same homes, but only those purchased with conforming loans (i.e., loans that government-sponsored entities like Fannie Mae were able to buy because the loan amount was below a certain maximum).  This differs from the Case-Shiller price index, which tracks same-home resales but is not limited to conforming loans.

Here’s the chart for single-family home prices in the Miami metro area:

FHFA Miami House Price Index 3Q09

And here’s the chart for single-family home prices in the New York metro area:

FHFA New York House Price Index 3Q09

These charts of homes prices in Miami and New York show that prices would still need to fall a great deal to reach the long-term trend line.  That should not come as a surprise, considering that a real downturn in real-estate prices typically takes about four years from the time prices start declining to the time prices hit bottom.  But it’s still transfixing to see that property values in Miami and New York remain so elevated.  Very few people are aware of, or psychologically prepared for, the possibility of another major leg down.  And that’s just to reach the trendline.  Sometimes prices overshoot to the downside when an asset bubble reverts to the mean.

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Coral Gables Single-Family Homes Sales Running Flat Year-Over-Year?

posted on January 21st, 2010 filed under: Real Estate News

It’s become a reliable assumption that real estate has found some kind of bottom, if not in prices, then at least in sales.  Heck, I told you a long time ago that sales would recover before prices.

But the number of closings has seemed rather thin of late.  Sure enough, a data check on the MLS shows that the number of closed transactions for single-family homes in Coral Gables from December 1, 2009 to January 15, 2010 was exactly the same as the number from December 1, 2008 to January 15, 2009.  For each period, the MLS shows 41 closed sales.

A few more will probably trickle in from lackadaisical brokers for the ’09-’10 period.  But the year-over-year sales gains had been tremendous in the months running up to the initial November 30, 2009 expiration of the $8,000 buyer tax credit.  Now the gains appear to have largely evaporated.

Real estate sales in Miami and Coral Gables may have fallen back down from a government-induced sugar high.

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Expiration of Government Programs Looms for Real Estate Market in Miami and Coral Gables

posted on January 21st, 2010 filed under: Real Estate News

The federal government has implemented lots of measures to support unnaturally high real-estate prices in Miami, Coral Gables and all the other bubble markets.  Two of those measures will soon expire.

At the end of March, the Federal Reserve is supposed to stop buying all the securitized mortgages that nobody else wanted once the real-estate market proved to be a Ponzi scheme.  The Fed’s intervention is believed to have driven mortgage interest rates artificially low.  Ipso facto, when the Fed stops, rates will probably rise.

At the end of April, the already-extended $8,000 tax credit for buying yourself a home is scheduled to expire.  Tax credit means you get the money even if you don’t pay taxes.  The credit is believed to have supported prices, especially at the low end of the market where $8,000 compensates for the meager 3.5% downpayment you need to get an FHA loan.  Ipso facto, when the credit expires, the support for prices expires too.

In the meantime, there could be a rush of buyers trying to lock in low rates and government handouts.  Home sales could surge again in Miami and Coral Gables as the expirations approach.

The problem with joining the crowd is that fundamentals (price-to-income, price-to-rent, etc.) suggest that real estate in Miami and Coral Gables remains generally overvalued.  When the government supports are removed, the fundemantals could reassert themselves, eliminating buyers, frustrating sellers and ultimately driving prices lower.

You can take the bait of low rates and an 8,000 handout now — and if you’ve found the perfect home, I don’t blame you.  Just realize there is a risk that home values in Miami and Coral Gables could resume the inexorable process of mean reversion once some semblance of a free market returns.

Of course, overvaluation could be worked off if incomes and property rents rise in Miami and Coral Gables while property prices remain stable.  But there’s some heavy lifting to be done here, and price declines probably still need to do some of it.

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