Archive for the 'Financial Responsibility' Category

Recent Sale: 909 North Greenway Dr., Coral Gables

posted on July 2nd, 2010 filed under: Financial Responsibility, Properties in Focus

This recent sale in Coral Gables may be challenging for potential home buyers and their agents to understand.  At 5,405 square feet according to public records, 909 North Greenway might seem to have sold recently for an inordinately low price at $842,500.  That’s just shy of $156/sf.

909 North Greenway Dr.

909 North Greenway Dr.

Indeed, it was cheap, even considering the need for some serious updating.  But the key to understanding the price is that a big portion of the square footage –over 2,000 square feet according to public records — is in a second building out back that houses a couple of apartment units.  That might be great for an extended family that wants a compound, or for someone who wants rental income.  But it’s not for everyone.  The main house is just over 3,000 square feet.

And the master bedroom and bathroom were both tiny.  Typical of many of the older two-story homes in Coral Gables, the second story has a much smaller footprint than the first.  Sometimes there’s nothing but a single bedroom upstairs (here there were three, but with a pint-sized master).

Property taxes and homeowner’s insurance are additional factors when considering a property like this.  All that extra square footage in the thing out back might be nice, but you’d better really want it, because you’re going to pay for it whether you want it or not.  Property taxes are about $20,000.  Insurance would be about $15,000 to $25,000, depending on the carrier and coverage limits.  And remember, insurance is not tax-deductible.  For those uninitiated to home ownership in South Florida, the carrying costs can be quite shocking.

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Low CPI Inflation Keeps Pressure Off Real Estate Buyers

posted on May 31st, 2010 filed under: Financial Responsibility, Real Estate Market Data, Real Estate News

The Wall Street Journal recently reported that inflation in the United States has declined to its lowest level in 44 years, as measured by the core consumer price index (i.e., excluding food and energy).  A prior post here at The REF made a similar observation several months ago.

Why does it matter?  CPI data provide a backdrop for making informed decisions about whether to buy or sell real estate.  In times of inflation, people flee their devaluing cash for hard assets like real estate and commodities.  There are other ways for real estate prices to rise — like when interest rates are slashed and lending standards are abandoned.  (Sound familiar?)  But we will not return to the days of NINJA (no income, job or assets) loans again.  So the next real estate boom is far more likely to be fueled by inflation than easy credit.

The 1970s are a classic example of inflation-based gains in home prices.  Throughout that inflationary decade, real estate values rose in tandem with wages and general CPI inflation.

U.S. CPI -- 1960 to Apr. 2010

But this is not the 1970s, and the current lack of general CPI and wage inflation takes the pressure off your decision whether to buy a home.

Recognize, however, that inflation is not gone.  Rather, inflation in some items is being offset by deflation in other items — principally shelter.  In fact, the shelter component has gone negative for the first time in the history of the data series.

U.S. CPI -- Shelter Component -- 1950 to Apr. 2010

The declining shelter component is keeping the overall CPI much lower than it otherwise would be.

U.S. CPI -- All Items Less Shelter -- 1960 to Apr. 2010

The shelter component is based on the cost of renting, not buying.  But you won’t have sustainable gains in real estate prices as long as rents are falling.  As noted here time and again, one of the pathologies of real estate values in Miami and Coral Gables is that the cost of owning far exceeds the cost of renting — well beyond historical norms.

Articles like the one in the Wall Street Journal indicate that the fear of deflation has not disappeared, and that the risk of inflation is thought to be muted.  As long as that remains true, there will be little pressure to buy real estate.

Recognize, however, that others believe the government deliberately understates inflation, and that easy money and government spending will cause inflation to surge in the not-too-distant future.  (See., e.g.,

See both sides.  When the shelter component flips positive, the evidence of deflation could vanish and lead quickly to general inflation.  So it will be wise to keep an eye on this canary in the coal mine.

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Strategic Nonforeclosure: Banks Leave Condo Associations to Suffer

posted on May 13th, 2010 filed under: Financial Responsibility, Real Estate News

When a borrower defaults on a mortgage in a condo building, the borrower often stops paying not only the mortgage but also the condo association maintenance fees.  The usual remedy would be for the condo association to file a lien against the unit, or exercise a right to take title from the defaulting owner.

The mortgage, however, remains, and has priority over the condo association’s interest.  So the association has to wait for the lender to foreclose and sell the property before the association can get paid anything that might be left from a sale after covering the mortgage (doubtful), or at least get a new owner in place who will start paying the unit’s share of common charges.

But in Miami and other hard-hit real estate markets, lenders are purposely not foreclosing on delinquent loans.  Like borrowers who practice strategic foreclosure and walk away from loans despite being able to pay, lenders are practicing strategic non-foreclosure.  By not foreclosing, lenders avoid realizing losses on their balance sheets and avoid all the costs of condo ownership: taxes, insurance and condo association maintenance fees.  As a result, the unit remains empty and the remaining condo residents are left to share all of the building’s maintenance and insurance costs.

Miami Real Estate Photos -- Biscayne Bay & Miami Beach 1

A case in point, according to the Daily Business Review, is 7149 Bay Drive in Miami Beach.  The condo association waited two years for Citibank to foreclose and take responsibility for a unit.  The association finally brought a quiet-title suit to force Citibank’s hand.  The unit is worth about $45,000.  Citi evidently had no desire to pay past and future taxes and maintenance fees, or the attorney’s fees and other costs of foreclosure.  So Citi simply canceled its $166,000 mortgage, giving the association clean title.

One real estate analyst likened it to a “100% short sale.”

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Case-Shiller Index Posts Another Small Decline for Miami Real Estate

posted on April 27th, 2010 filed under: Financial Responsibility, Real Estate Market Data

The Case-Shiller Home Price Index posted another small decline in Miami real estate for the three-month period ending February 2010.  This marks the fifth straight month of small monthly declines.  A similar pattern is playing out in the New York metro area, which posted its sixth straight small decline.

Standard & Poor's Case-Shiller Home Price Index -- Miami -- Feb. 2010

The real estate bubble in Miami and Coral Gables pushed the Case-Shiller index from a level of about 100 in January 2000 to nearly 280 in January 2007.  Perhaps needless to say, incomes did not rise 180% over that period, and as the bubble inevitably burst, the Case-Shiller index collapsed to about 145.

Since hitting a low of about 146 in May 2009, the Case-Shiller index for Miami has moved essentially sideways.  Despite this stabilization, questions remain about real estate values in Miami and Coral Gables:

  • Incomes have risen about 25% since 2000, not 45%.
  • Insurance costs have rocketed higher, driving up the cost of owning property everywhere in South Florida.
  • Public budgets continue to be balanced on the backs of new buyers who subsidize the capped property assessments and taxes of pre-existing owners.

Responsible buyers, and banks that have returned to old-fashioned lending standards, are again taking these ownership costs into account.  Sideways may be the new Up in Miami and Coral Gables real estate.

The Case-Shiller index is maintained by Standard & Poor’s, and tracks repeat sales of the same homes, thus avoiding the skew that can result from changes in the mix of expensive versus inexpensive homes sold.

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No Ordinary Recession

posted on April 24th, 2010 filed under: Financial Responsibility, Real Estate Market Data

Was the recession that began in 2007 just another typical downturn?  Or is it something more?

Consider the number of people employed.  In every recession since the Great Depression, the number employed has fallen, but in a pattern of higher highs and higher lows.

U.S. Nonfarm Employment -- 1939 to Mar. 2010

This time, for the first time since the Depression, the low is not a higher low, but roughly as low as in the prior recession.

U.S. Nonfarm Employment -- 1990 to Mar. 2010

To put it mildly, this is not normal.  Be careful out there.

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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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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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Bank, Government Augment Relief to Insolvent Mortgage-Debtors

posted on March 27th, 2010 filed under: Financial Responsibility, Real Estate News

Bank of America will forgive up to 30% of the principal owed by debtors who have missed at least two months of mortgage payments and owe at least 20% more than their home is worth.

Separately, the federal government expanded its assistance program for defaulting debtors.  Most significantly, the plan pays lenders, who made bad loans, to reduce the amount owed by debtors, who borrowed more than they can afford to pay.  The Federal Housing Administration will then guarantee new loans at 97.5% of the current market value, or 115% if the debtor took out a second mortgage and spent all that money already.

To be eligible, the debtor’s loan balance must be less than $729,750, and the debtor’s monthly mortgage payments must be more than 31 percent of the debtor’s income.  The bigger the debt and the lower the income, the more likely the debtor is to qualify for government assistance.

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You Can Walk Away, But You Can’t Hide: Lenders Selling Deficiency Judgments to Collection Agencies

posted on March 23rd, 2010 filed under: Financial Responsibility, Real Estate News

A recent post explained that walking away from your mortgage could leave you in hock in states, like Florida, where lenders have recourse against borrowers for the difference between the loan amount and property value.  Several news outlets have since published similar reports.

For example, an article in the Miami Herald reports that investors are buying the rights to collect second mortgages and other liens such as home equity lines of credit.  The practice is especially relevant in non-recourse states like California, where first-mortgage lenders can look only to the property to satisfy the debt, but junior lienholders apparently can pursue the debtor personally.

In places like Miami and Coral Gables, real estate became so ridiculously overvalued that a foreclosure or short sale does not even recover enough to satisfy the first mortgage.  Nothing is left for the second mortgage or HELOC lender, who gets zero cents on the dollar.

To mitigate the loss, the lender sells the loan (at a substantial haircut, no doubt) to a collection agency, which then hounds the debtor until the end of time.

[L]enders have been quietly selling second mortgages and home equity lines left unpaid after foreclosures and short sales.  The buyers: collection agencies, which in some states have years to make a claim.

If they win court judgments, these collectors could have years to pursue borrowers with repayment plans, and even garnish their wages . . . .

“The only relief a consumer will have is entering into a debt negotiating plan or filing for bankruptcy” . . . .

Debtors can attempt to head off these troubles by negotiating a solution at the time of a short sale.  But many don’t know better, and aren’t warned by real estate agents who often are “not really equipped . . . . They’re set up to make the sale.”

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Thinking of Buying Foreclosures in Miami or Coral Gables? WATCH OUT!!!

posted on March 22nd, 2010 filed under: Financial Responsibility, Properties in Focus, Real Estate News

Buyers attracted by seeming bargains among foreclosure auctions can instead lose their shirts.  An easy way to buy Miami or Coral Gables real estate on the cheap turns out to be an easy way to lose a whole lot of money.

As the Miami Herald reported a few weeks ago, the new online auction system for foreclosures in Miami-Dade County streamlines the process of buying foreclosed properties so much that amateurs are getting involved — and getting burned.

The problem is that foreclosures are sometimes brought by junior lienholders, meaning the sale does not discharge senior liens.  If you buy the property at foreclosure, you’re still subject to the senior lien.  This can be disastrous.

Here’s an urgent case study:  601 Sunset Drive in Coral Gables.  This property will be auctioned soon.  The lender has listed its maximum bid at just under $300,000.  If you bid more than that, and more than any other bidders, you will win the auction.  It’s a decent-size house on a big lot, so even in today’s ailing real estate market in Miami and Coral Gables, it seems like a screaming bargain.

601 Sunset Dr.

601 Sunset Dr.

Public records, however, suggest a huge pitfall (do your own homework on this and decide for yourself, of course).  Citibank is the foreclosing lender.  But Citibank is foreclosing on a home equity line of credit.  That’s not the first mortgage.  And there is a whopper of a first mortgage: $825,000 to JP Morgan Chase.

So let’s say you win the auction with your bid of $300,000.  That could turn out to be nothing more than a downpayment, because public records suggest the property is still subject to the $825,000 first mortgage.  If that’s the case, you have effectively paid $1.125 million, not even counting whatever fees Chase can pile on top of the mortgage balance, plus the property taxes that Chase has apparently been paying.

The same thing happens in condo foreclosures.  Let’s say there’s a condo worth $200,000 today that somebody bought for $400,000 at the top of the real estate market in Miami and Coral Gables.  And let’s say there’s a $350,000 mortgage outstanding.  The person defaults on the loan and stops paying maintenance fees to the condo association.  The lender doesn’t foreclose, because that would mean taking responsibility for taxes, maintenance fees, et cetera.  So the association forecloses, not because they think they’ll get any money (the $300k lender is senior and gets the whole $200k in a forced sale), but to force the lender to take title and responsibility in what’s known as a “reverse foreclosure.”  If you buy the association’s lien — say, $20k — you have bought a property worth $200,000 for $20k, but it’s subject to a $300k mortgage.  You’re in for $320,000, not $20,000.

Miami has an excellent online system for searching public records, but unless you understand it all — mortgages, liens, lawsuits, forms of ownership, homestead rights, and more — you might just be America’s Next Foreclosure.  WATCH OUT!!!

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