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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posted by // This entry was posted on Thursday, January 21st, 2010 at 11:33 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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