Archive for April, 2010

Threats to Luxury Real Estate Values in Miami and Coral Gables: Part II

posted on April 15th, 2010 filed under: Financial Responsibility, Real Estate Market Data, Real Estate News

Ah, tax day.  A fine time to point out another threat to the value of luxury homes in Miami and Coral Gables.

Seems that we got ourselves into quite a pickle by jacking up real estate prices with ever-looser borrowed money until the whole thing collapsed on itself like the Ponzi scheme it was.  So what did we do when our personal willingness and ability to borrow cratered?  We ramped up our public borrowing.  We the People are collectively borrowing to replace our private borrowing.

Federal Reserve Flow of Funds Data -- Home Mortgage Borrowing -- Table

There is a precedent for this.  Massive federal borrowing and spending replaced a collapse in private borrowing and spending during the 1930s — the Great Depression.  Similarly, the nation went deep in debt to fight two world wars.

How did we pay back all that debt?

Same way every time.  By raising tax rates.  Especially at the top.

Here’s a chart of the top tax rate since the federal income tax was adopted in 1913:

Income Tax and Real Estate in Miami and Coral Gables -- Top Rates -- U.S. -- FederalLow at first, rates rocketed higher to pay for WW I.  They plummeted in the 1920s (arguably producing the speculative bubble in real estate and stocks that led to the ’29 crash and Great Depression), and shot higher again to pay for the borrowing and spending that was used to fight the depression, and then higher still to pay for WW II.  Back down they went over the next several decades, arguably contributing to the greatest stock and real estate bubbles in human history.  Now the nation is living off public debt again.  As night follows day, taxes will rise.

How much?  Just to get the federal deficit to 3% of GDP — a mere few hundred billion a year , where it was under President Bush, rather than the $1.5 trillion it is now — will absolutely require significant tax increases.  According to a recent article by Diane Lim Rogers, Chief Economist with the Concord Coalition, an across-the-board, proportional hike in everyone’s marginal rates to reach the 3% deficit target would produce a top rate of 48%.  If only the top two brackets were hiked, they would go to 77% and 72%.

Ever feel like somebody has their eyes on you?

Income Tax Rates and Real Estate in Miami and Coral Gables -- Uncle Sam Wants YouHow does all this affect the value of luxury real estate in Miami and Coral Gables?  A cock-eyed optimist might say that people will pile into real estate for the sake of the deductions.  But you can’t deduct the interest on loan principal over $1 million, so the benefit is limited.  (Check IRS Pub. 936 for the rule applicable to your personal situation; for example, the limit is $500,000 if married filing separately.)

Think about it. If you went from making $600,000 a year after taxes on a $900,000 income, to making $450,000 a year after taxes on a $900,000 income, would that affect how much you would be willing to pay for a $2 million house in Coral Gables or condo in Miami Beach?

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Threats to Luxury Real Estate Values in Miami and Coral Gables: Part I

posted on April 13th, 2010 filed under: Real Estate Market Data, Real Estate News

The value of luxury real estate in Miami and Coral Gables faces severe headwinds in the near future.

Start with the lay of the land: the fundamental metric of months’ supply.  As noted previously, the number of homes for sale versus sold has been well above historically healthy levels.  That problem persists.  For example, there is currently a 28-month supply of homes on the market in Miami-Dade County, according to MLS data (922 homes for sale, 33 sold last month).  The picture is brighter in Coral Gables (16-month supply, 194 homes for sale, 12 sold last month), but still high.  A normal level for the luxury segment is probably about a 10- to 12-month supply (higher than the 6 months’ supply that is normal for the market as a whole, because luxury property sales move more slowly).

These numbers are improved from a year ago, but the market remains in a weakened state.

Now comes a new wave of potential mortgage troubles, and this one aims at the higher end of the real estate market, not the subprime sector.  Charts like the following have made the rounds for the last couple of years.  It shows that the subprime mortgage crisis coincided with the crescendo of rate resets that borrowers faced in 2007-08.  It also shows that a second wave of resets was scheduled to begin in late 2009 and carry into 2012, this time for supposedly higher-quality loans: prime, alt-A (i.e., between prime and subprime) and option ARM (offering flexibility in making payments).

Mortgage Reset Chart -- IMF & Credit Suisse

Chart from IMF, Assessing Risks to Global Financial Stability.

Investment managers like John Hussman have predicted a new round of economic troubles when this next wave of resets hits the real estate market and financial system.  Hussman thinks “we could quickly accumulate hundreds of billions of dollars of loan resets in the coming months, and in that case, would expect to see about 40% of those go delinquent.”

And sure enough, CNBC’s Diana Olick reported yesterday that Moody’s downgraded the credit quality of 201 tranches of residential mortgage-backed securities, composed of prime jumbo loans made by Wells Fargo in 2007-08, and another 134 tranches of the same stuff from 2006.  Moody’s based the downgrade on “rapidly deteriorating performance of these loans.”

Wells Fargo has been very active in lending to buyers of luxury homes in Miami and Coral Gables, so it would come as no shock if the recent downgrade partly reflected loan performance here in South Florida.  We’re not privy to the specific loans populating the downgraded securities, but it would be rather dangerous to assume that luxury real estate in Miami and Coral Gables is immune from broader trends.

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Sold: 715 Sevilla Ave. in Coral Gables, $1.6 Million

posted on April 12th, 2010 filed under: Properties in Focus

At first blush, $1.6 million might seem like a substantial enough sum for a 4,000-sf home in Coral Gables.  But 715 Sevilla Avenue, which recently sold for that price, is not just so much square footage.  It is new, high-end luxury construction.  And based on preconstruction promotional presentations, the properties in the development were supposed to bring closer to $3 million than $2 million, let alone $1.6 million.  It’s a good subject for a cloudy background:

715 Sevilla Ave.

715 Sevilla Ave.

The back story on this property is one of those fabulous, intriguing windows onto the shadowy yet colorful history of Coral Gables.  715 Sevilla is among of a number of homes planned for a developer’s fantasy: the last two entire blocks of virgin, privately owned land in north Coral Gables.  The developer, Riviera Sevilla LLC, is a successor to McBride Family Properties LLC, which traces its ownership to wealthy businessman Arthur B. McBride.

In the 20th centruy, McBride made a fortune in various businesses including newspapers, taxicab service, pro football (he was the first owner of the Cleveland Browns), and yes, Coral Gables real estate.  McBride apparently had a few unsavory connections, but the ritzy Biltmore Hotel has no trouble mentioning its lavish Al Capone Suite (a.k.a. Everglades Suite), so all is surely viewed with nostalgia now.

For many years, the McBride family held onto these two blocks of prime residential real estate in Coral Gables, before finally committing them to development.  Nonetheless, according to the developer, the family aimed to do justice to these choice properties by building to only the finest standards.

The first development, dubbed Casas Sevillanas, includes the recently sold 715 Sevilla, and occupies the land bordered by Almeria Avenue, Biltmore Court, Sevilla Avenue and Cardena Street.  You can see 715 Sevilla outlined in red on the map below.  The new luxury homes replace a stand of old pine trees that towered over a field of grass.  You wondered how it had lasted.

715 Sevilla Ave., Coral Gables -- Casas Sevillanas Development, Riviera Sevilla

The other development, dubbed Casas Andaluzas, rests on the land bordered by Malaga Avenue, Columbus Boulevard, and the sweeping curve of Anastasia Avenue in front of the Biltmore Hotel.  Again, even a casual observer had to wonder how such a choice parcel of Coral Gables real estate remained undeveloped for so long.

Coral Gables -- Casas Andaluzas Development -- Riviera Sevilla

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Friday Fountain Photo

posted on April 9th, 2010 filed under: Fountains

Friday afternoon, downtown Miami.  North side of fountain pool at Espirito Santo building, 1395 Brickell Avenue.

Miami Real Estate Photos -- Fountain at Espirito Santo Building -- 1395 Brickell Ave. (2)

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Buy Versus Rent in Miami and Coral Gables Real Estate

posted on April 8th, 2010 filed under: Financial Responsibility, Real Estate Market Data

Consider the following real estate theorem:

  • The cost of owning real estate is about 10% of the purchase price annually (principal + interest + taxes + insurance + maintenance)
  • Historically, people have been willing to pay a bit more to own real estate than to rent it — say, 1.2x
  • If 0.1 x purchase price = 1.2 x annual rent, then the ratio of purchase price to annual rent is normally about 12 to 1.

And indeed, before the real estate bubble, homes in Miami and Coral Gables normally listed for sale at about 12 times annual rent, maybe 14 times rent in some cases.  But during the bubble, the cost of owning property in Miami and Coral Gables routinely was double the cost of renting — prices were 20 times annual rent.

How about now?  The table below shows properties advertised both for sale and for rent in recent newspaper listings.  Not very scientific, but enough to get the lay of the land.  (During the bubble, simply consulting back issues of the Miami Herald from the ’80s and ’90s would have warned you that real estate prices in Miami and Coral Gables had become an absurdity.)

Miami and Coral Gables -- Real Estate Sale and Rental Prices

The table suggests that real estate prices in Miami and Coral Gables are back to normal only at the low end (but even there, beware the possibility of a downside overshoot).  For the wealthy, either money is no object or real estate prices in the luxury segment of the Miami and Coral Gables real estate markets have a long way to fall.  (The truth is probably somewhere in between.)

The greatest risk arguably lies in the mid-range — from about $500,000 to $2.5 million — where buyers are more likely to be working professionals than wealthy plutocrats.  The difference between 15 times rent and 12 times rent is a potential 20% decline.  The difference between 18 times rent and 12 times rent is a potential 33% decline.  Of course, incomes and rents could rise, working off the overvaluation without price declines.  But lately, incomes and rents have been as likely to fall as to rise.  Prices in this segment are still running from history.

History has a way of catching up.

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Waterfront Home on Hammock Lake in Coral Gables Sells for $1.8 Million

posted on April 7th, 2010 filed under: Properties in Focus

According to public records, 5425 Hammock Drive, a waterfront home on Hammock Lake in Coral Gables, has sold for $1.8 million.  The existing 7625-sf Mediterranean house was built in 1967 and might have been seen as a teardown.  But the waterfront lot, at 64,033 sf, would alone have sold for much more a few years ago.

5425 Hammock Dr.

5425 Hammock Dr.

Indeed, the property did sell for much more a few years ago.  The seller in the recent transaction was a pharmaceutical entrepreneur turned real estate investor.  She bought the property for $3.175 million in February 2006.

Coral Gables Real Estate Photos -- 5425 Hammock Dr. (3)Coral Gables Real Estate Photos -- 5425 Hammock Dr. (2)

Sometimes you’re on the water, sometimes you’re under it.

At least she was playing with her own money.  The mortgage was only about half a mil.  No bank bailouts necessary.

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Mortgage Rates Spike — More Clouds on Horizon for Real Estate in Miami and Coral Gables?

posted on April 7th, 2010 filed under: Real Estate Market Data, Real Estate News

Well, that was fast.  Mortgage rates wasted no time going higher, as foreshadowed in recent posts on the rising 10-year Treasury yield and the end of the Federal Reserve’s mortgage backed securities purchasing program.

The Mortgage Bankers Association reported that mortgage rates jumped an eye-catching 27 basis points (0.27%) in a single week, to an average of 5.31% for the 30-year fixed.  That’s the biggest jump since rates spiked last June.

So what’s your strategy if rates keep rising?  Will you buy in order to lock in a lower payment?  In the 1970s, rates went through the roof, and property values rose the whole time.  Real estate can be a good hedge against inflation.

On the other hand, in the 2000s, rising rates sent property values into the dive that brought the financial system to its knees.  Higher rates could mean another leg down for real estate prices, especially in markets like Miami and Coral Gables where the fundamentals — oversupply combined with unfavorable pricing relative to incomes, rents and historical valuations — remain out of whack.

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Pending Homes Sales Index Rises

posted on April 7th, 2010 filed under: Real Estate Market Data

January’s dreary pending homes sales index of 90.4 gave way to a brighter index of 97.6 for February.  An index level of 100 represents the level of contract-signing activity in January 2001.  Data are seasonally adjusted.

Real estate sales activity may surge in anticipation of the April 30 final expiration of the $8,000 homebuyer tax credit.  Here in Miami and Coral Gables, property sales tend to peak a little earlier than up north anyway, so turnover could be brisk.

Of course, that begs the question what happens to property sales and values when the government’s intervention vanishes.

Index maintained by National Association of Realtors.

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Further Extension of Tax Credit Unlikely, Says NAR

posted on April 7th, 2010 filed under: Real Estate News

Looks like the $8,000 homebuyer tax credit will not be extended beyond its currently scheduled expiration (contracts by April 30, closings by June 30).  Originally, the credit was to expire on November 30 (closings).  The National Association of Realtors, which lobbied hard for the extension, is telling members that its efforts to get another extension are not likely to succeed.

Whether the credit was a good or bad idea — whether it truly generated demand or merely pulled demand forward — is debatable.  And whether you ought to buy now because the credit will soon expire is likewise debatable; an asset that draws more interest because of a government handout may be worth a little more while the handout is available — and a little less when the handout disappears.  Despite the risk, buyers in Miami and Coral Gables seemed to like the handout, as low-end real estate activity surged.

One thing appears certain:  It’s almost over.

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Mortgage Rates to Rise?

posted on April 2nd, 2010 filed under: Real Estate Market Data, Real Estate News

Fixed-rate mortgages are most closely tied to the yield on the 10-year Treasury note.  The yield has risen sharply of late, and spiked again today after a jobs report that was not even any big surprise.  Unless the yield on the 10-year backs off, expect higher mortgage rates before long.

[iframe height=”380″ width=”400″]http://plus.cnbc.com/rssvideosearch/action/player/id/1458237689/code/cnbcplayershare[/iframe]

In the wake of Wednesday’s expiration of the Federal Reserve’s mortgage-backed securities purchase program (on top of last October’s expiration of the Fed’s Treasury purchase program), the prospect of a breakout in 10-year Treasury yields looms large for the real estate market.

Real estate in Miami and Coral Gables is already vulnerable to further declines, as home prices remain elevated relative to incomes.  Higher borrowing costs could help push prices lower unless wages rise even more than is already necessary to support prices.

* * * * *

Update 04/05/10:  Charts show near-term breakout, albeit within long-term downtrend.

Six-Month Chart (from www.barchart.com)

Six-Month Chart (from www.barchart.com)

Historical Chart (from www.multpl.com)

Historical Chart (from www.multpl.com)

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