How Overpriced is Coral Gables Real Estate?

posted on January 20th, 2010 filed under: Real Estate News

Sales have picked up and prices have generally fallen, so why maintain that real estate in Coral Gables is still overpriced?

Because the bigger the bubble, the greater the correction needed to unwind the overvaluation, and we’re not there yet.  Jeremy Grantham and Robert Shiller, who saw both the tech-stock bubble and the real-estate bubble for what they were, describe the real-estate bubble as a “three-sigma” event.  That’s statistical talk for something that deviated from normal not just a little, but by a terrific, almost unimaginable degree.

To understand where the real-estate market in Miami and Coral Gables could go, you have to understand where it came from.  And that means not just where it was when the bubble was fully blown, but where it was before the bubble.

One objective indicator is the relationship between the cost of buying and the cost of renting.  It makes sense to pay a little more each month if you’re building up equity and hoping for capital appreciation over time.  So it’s normal for the purchase price of a home in Miami or Coral Gables to be about 12 to 14 times the annual rent of the same or a comparable home, making the cost of renting about 7% to 8% of the purchase price, even though the cost of ownership is generally about 9% to 10% of the purchase price.

Want examples?  In May 2001, before the bubble really started to expand, a prospective buyer or renter in the Coral Gables market had the following options (among others):

  • 3601 Durango Street, a 3-bedroom, 3-bathroom home with pool, was available for sale at $565,000 or for rent at $3,800.  That’s a price-to-rent ratio of 12.39.
3601 Durango St.

3601 Durango St.

  • 525 Blue Road, a 2-bedroom, 2-bathroom home, was available for sale at $350,000 or for rent at $2,500.  That’s a price-to-rent ratio of 11.67.
525 Blue Rd.

525 Blue Rd.

We are nowhere near being back to normal.  In Miami and Coral Gables, the price-to-rent ratio is still about 20 in many cases, making the cost of renting about 5% of the purchase price compared to 9% to 10% for owning.

This imbalance will resolve itself through some combination of falling prices and rising rents.  Considering that prices went ballistic while rents remained fairly stable in relation to incomes, don’t expect much help from rising rents.  The only thing that would tip the balance would be significant wage inflation.  No sign of that yet.

It is occasionally possible to find properties listed for a fairly defensible price relative to their rental value.  Those are the only properties you should consider buying if you want your purchase to make economic sense.

Participants in the Coral Gables real estate market may be tempted to sing along with the old Doors song Been Down So Long It Looks Like Up to Me.  For sellers of many still-overpriced properties, it may be a while before the music’s over.

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posted by // This entry was posted on Wednesday, January 20th, 2010 at 11:27 am and is filed under Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed.

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