Archive for the 'Real Estate News' Category

Beware Half-Baked Cost Analyses When Buying Real Estate

posted on September 29th, 2010 filed under: Financial Responsibility, Real Estate News

It’s a PITI that people don’t know better.  Your payments on a home include Principal, Interest, Taxes and Insurance.  Yet often one or more of these — usually taxes, insurance or both — is conveniently omitted in pitching how attractive home ownership supposedly is.

For example, the Miami Herald runs an article every now and then titled “What Can You Get for $. . . .”, with a different arbitrary price point each time.  The article presents about five properties for sale at about that price point in Miami, Miami Beach, Coral Gables and surrounding real estate markets.  An introductory paragraph says how much your mortgage payment will be, but notes that taxes and insurance are not included.  Estimated taxes are listed separately in the information for each property.  The cost of insurance is stated nowhere.

Miami Real Estate -- Herald -- What Can You Get Series

If you’re not careful, you might think that the cost of ownership is basically the cost of the Principal and Interest portion that’s stated very precisely.  In the latest installment, the Herald asks What Can You Get for $647,000.  Readers are told that “[m]onthly mortgage payments (not including taxes or insurance) would be $2,561.”  Such precision.  So little meaning.

For the first property listed in the $647,000 article, taxes are estimated to be $14,163.  It’s not a big house, but insurance will surely cost thousands more.  (Would it really be so hard for a reporter to get an insurance quotation for each property before running a story?)  The monthly payment is probably more like $4,500, not $2,500.  Think that makes a difference to your budget?

Oh, and don’t forget maintenance.

As a rule of thumb, you would do well to regard the true cost of ownership as about 10% of the purchase price — o.k., maybe 9% in these days of extraordinarily low interest rates.  Why so much?  Currently, you can figure that the Principal and Interest payment is about 5%, Taxes are about 2%, and Insurance is usually about 1% to 1.5% (depending on the storm-resistance characteristics of the house).  Maintenance will add about 1% on average over time, once you take into account the intermittent big jobs (roof, paint, pavement, etc.).  Yes, you get a tax deduction for the interest and property taxes, but that’s only a benefit to the extent it exceeds the standard deduction you can get anyway.

In the example from the Herald, the reporter assumes a hefty 20% downpayment, compressing the Principal and Interest payment to about 4.7% of the purchase price.  The estimated taxes amount to another 2.2%.  So you’re at 6.9% before insurance and maintenance.  You might come in a little under 9% of the purchase price, but only if you put that 20% down.

Don’t be fooled.  Do the math.

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No Money Down Government Loans Spark Debate. (Tiny Bit Down Loans Don’t.)

posted on September 10th, 2010 filed under: Financial Responsibility, Real Estate News

No money down loans from the government for homebuyers. Makes for a sensational story, but keep in mind that standard FHA loans require only a 3.5% downpayment.

At present, the no money down program is available in only four states, not including Florida. So anyone looking to buy real estate in Miami or Coral Gables will have to come up with the usual 3.5% if they want an FHA loan.

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10-Year Treasury Yield Collapses, Mortgage Rates Follow

posted on August 21st, 2010 filed under: Financial Responsibility, Real Estate Market Data, Real Estate News

As noted previously (see Mortgage Rates May Drop Again, May 6, 2010), the rate on a 30-year fixed mortgage is closely related to the yield on the 10-year U.S. Treasury note.  When the yield on the 10-year rises, mortgage rates go up, and vice versa.

Lately, it’s been all about the vice versa.  The 10-year yield has collapsed on renewed fears of economic weakness, deflation, and impotence trumping stimulus.  The yield is now back to where it was in spring 2009 when the stock market bottomed amid widespread despair.

U.S. 10-Year Treasury Yield (Aug. 2005 to Aug. 2010)Source: Yahoo! Finance

That’s good news if you want a mortgage to buy a home in Miami or Coral Gables, because the rate on a 30-year conventional mortgage is hitting its own new lows in the 4.5% range.  Of course, the question is whether home prices in Miami and Coral Gables will fall further if the bond market is right about the severity of renewed economic weakness.  It doesn’t make sense to buy a depreciating asset with borrowed money, no matter how cheap the financing.

Mortgage Rates -- 30-Year Fixed -- Aug. 2005 to July 2010

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Housing and Economy Weaken Together (Again), Threatening Real Estate Values Miami and Coral Gables

posted on July 16th, 2010 filed under: Financial Responsibility, Real Estate Market Data, Real Estate News

Neither a borrower nor a lender be;

For loan oft loses both itself and friend

– Shakespeare, Hamlet, Act I, Scene III

Evidence has mounted in recent months of a second leg down in housing and a possible double-dip recession in the broader economy.

The problem, ultimately, is that there is really no way out for a people who have gorged themselves on debt.  Once you’ve reached the point where you can no longer spend today another dollar that you planned to get tomorrow, it takes a long time to wring out all the excess borrowing.

[youtube]http://www.youtube.com/watch?v=NJ6xBaZ92uA[/youtube]

Debt is like hydraulic power.  Banks and other lenders take one dollar and lend it 9 times over, or in the case of some failed Wall Street institutions, 30 times over.  Government agencies (Fannie Mae, Freddie Mac) and yield-hungry investors who take the loans off the institutions’ books absorb the flow of debt and thus free up the lenders to create more.  Eventually, a peak is reached as the most speculative drop of borrowed money is pushed through the system.  As borrowing begins to recede, asset values fall, and borrowers, lenders and investors vanish.

Real estate can make you rich.  There is nothing more beautiful than paying 5 times your income for a house with almost no money down, and seeing its value go up 10% a year.  That’s like getting a 50% raise — with 10% annual compounding on top of it.

But real estate can also make you poor.  There is nothing more destructive of your wealth than buying a depreciating asset with borrowed money.

So where are we in this cycle?  Previous posts have explained that real estate prices usually fall for about 4 years from the time they really begin declining to the time they reach an ultimate low.  In Miami and Coral Gables, real estate prices did not begin declining until about the beginning of 2007, which suggested that the enthusiasm of the past year was premature.

And this is not a typical downturn.  Real estate was far more overvalued and overbuilt than in typical cycles.  In the broader economy, we are arguably in a depression masked by extreme government intervention.

The government and the financial-realty complex turned a firehose of money on the decline in real estate values, and the most we can say is that prices stopped collapsing.  There is less pressure in that firehose now, and not only have prices failed to rise, they have begun to weaken again.

Risk remains.

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Coral Gables Buys Out Developer Using County Funds

posted on June 13th, 2010 filed under: Properties in Focus, Real Estate News

In April, the city commission in Coral Gables approved the city’s purchase of an empty lot at 4650 Alhambra Circle, to be used as a park.  The lot is two blocks north of Blue Road, on the west side of Alhambra.

4650 Alhambra Cir., Coral Gables -- Map

Three cheers for parks.

Here’s the problem.  The city paid $1,000,000 for the lot.  The seller paid $950,000 in 2005, at the top of the real estate market.

4650 Alhambra Cir., Coral Gables -- Sale DataDoes anybody think property values have risen since 2005?

Not the county property appraiser, who puts the value at $635,760.

4650 Alhambra Cir., Coral Gables -- Assessment

The city, however, found its own appraisers to justify the million-dollar price tag.

Appraisal #1 was based on “comparable” sales on Valencia Avenue (prime real estate near the Biltmore Hotel and Venetian Pool), and on Tigertail Avenue, far away in north Coconut Grove:

4650 Alhambra Cir., Coral Gables -- Appraisal #1Appraisal #2 was based on a bunch of sales from 2008 and 2009:

4650 Alhambra Cir., Coral Gables -- Appraisal #2.pt1

4650 Alhambra Cir., Coral Gables -- Appraisal #2.pt2

Appraisal #3 was based on sales including the one on Valencia, one in Coconut Grove and one on School House Road in the estate area known as Ponce/Davis.  Oh, and a fourth one that wasn’t a sale but a listing — a property that sold in 2003 for $650,000 but which the appraiser estimated at about $1.1 million after discounting from the asking price of $1.395 million.  (That property apparently never sold.)

4650 Alhambra Cir., Coral Gables -- Appraisal #3.pt1

4650 Alhambra Cir., Coral Gables -- Appraisal #3.pt2

Seems it was more important to find vacant land, no matter how remote in time and space, than to consider comparables like the property at 4607 Alhambra Circle — a mirror image of 4650 occupying the same size and shape lot right across the street from 4650 Alhambra.  The property at 4607 sold in 2008 for $1.855 million — with a 5351-sf house on it.  And that was in 2008; the county appraiser says it’s now worth $1,325,535.

But of course, none of this really matters, because Coral Gables wasn’t spending its own money anyway.  This bailout was courtesy of county taxpayers.

4650 Alhambra Cir., Coral Gables -- Source of Funds

As everybody knows, Miami-Dade County has plenty of money to throw around for things like parks in Coral Gables.

The biggest shame is that the would-be developer’s dreams were never realized.  After obtaining approval to split the lot in two, the project never materialized.

4650 Alhambra Cir., Coral Gables -- Building Site SeparationThank heavens the good taxpayers of Miami-Dade County were kind enough to make this poor developer more or less whole.  We can’t have people failing at the things they try to do.  Then nobody would ever try to do anything.

Right?

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Watch for Home Flopping in Miami and Coral Gables

posted on June 9th, 2010 filed under: Real Estate News

Yes, flopping, not flipping.  If you follow real estate in Miami and Coral Gables closely, you’ll see the occasional short sale that’s too good to be true.  The price is not just cheaper than the mortgage balance, it’s much cheaper than its current market value based on comparable property sales.

A Bloomberg news report suggests you could be looking at a home flopper, the latest mutation in the endless evolution of mortgage fraudsters.  Instead of convincing banks to lend too much for a property, today’s fraudster convinces banks to release properties for too little, often using a “broker price opinion” rather than a full appraisal.  Then the buyer turns around and sells for more than the below-market price the bank accepted.

Miami Real Estate Photos -- Biscayne Bay & Downtown 4

I can think of a few transactions that might have been flops.  When a short sale is listed way below market value, the listing agent doesn’t return calls for showings, and the property goes under contract in a couple of days, you have to wonder.

It turns out that flopping gets a boost from the federal government’s TARP bailout program, which promotes short sales by giving thousands of dollars to buyers, sellers and mortgage servicers who close short sales.  The TARP program requires only broker price opinions, not full appraisals.  Of course, appraisals are no panacea, but TARP inspector general Neil Barofsky says BPOs make it particularly easy to pick taxpayers’ pockets:

“It appears that the program may lack necessary antifraud protections.”

A government handout program that lacks necessary antifraud programs.  What a surprise.

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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., www.shadowstats.com).

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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Default and Foreclosure Suits Litter Old Spanish Village in Coral Gables

posted on May 31st, 2010 filed under: Properties in Focus, Real Estate News

Coral Gables Real Estate Photos -- Old Spanish Village -- Sales Office

According to the promotional materials, Old Spanish Village was supposed to be a refined, old-world oasis in the heart of downtown Coral Gables:

Live the Glamorous Lifestyle Found Only in This Village

Spanning seven beatifully-planned acres, Old Spanish Village brings the spirit of ancient towns in Andalusia into the vibrant heart of Coral Gables.  Its cobblestone lanes and plazas, vine-clad pergolas, and splashing fountains create an authentic sense of place.  Within this urban village, residents will greet their neighbors across flower-rimmed pocket parks, then stroll beneath shady porticos to the sidewalk cafe or neighborhood bakery whose delicious aromas scent the air.

– Sales Brochure

Maybe someday.  But for now, the Old Spanish Village development next to Fred B. Hartnett Ponce Circle Park, a few blocks south of Miracle Mile, is bogged down in foreclosure lawsuits.

Coral Gables Real Estate Photos -- Old Spanish Village Map

The South Florida Business Journal reported in December that TotalBank brought a $2.4 million claim against two of the developers personally, after they allegedly began missing monthly payments last August.

Now, the Journal reports that although the TotalBank suit was settled for partial repayment, a much bigger problem has emerged.  FirstBank Puerto Rico has filed a foreclosure suit on the development’s main $42 million mortgage.  The bank wants the property.

Coral Gables Real Estate Photos -- Old Spanish Village -- Completed Phase One Town Homes

It always seemed a little hard to believe that a luxury real estate development would succeed on the fringe of downtown Coral Gables, with rather underwhelming neighborhoods to the south and east.  And breaking ground in 2007 was a bit bold, to put it charitably.

At least the promo parties they threw in Ponce Circle Park were fun.

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Homebuilder Sentiment and Housing Starts Continue Recovery

posted on May 18th, 2010 filed under: Real Estate Market Data, Real Estate News

Homebuilders in the U.S. continue to become more optimistic.  The Housing Market Index maintained by the National Association of Homebuilders rose to a level of 22 in May from a reading of 19 in April, quite a good improvement in one month.  The index is a gauge of homebuilder sentiment.  The current level is low by historical standards but has been steadily improving.

And those homebuilders continue to increase the pace at which they are breaking ground on new homes.  Housing starts nationwide rose to a seasonally adjusted annual rate (SAAR) of 672,000 in April, up smartly from a revised 635,000 in March.

U.S. Housing Starts -- 1990 to Apr. 2010

Evidence of a bottom in housing nationwide continues to mount.  But be careful about forcing the nationwide picture into your local frame of reference.  Here in Miami and Coral Gables, real estate sales have recovered but prices continue to face headwinds from fundamentals (incomes, rents, employment and historical trendline values).

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Country Club of Coral Gables Begins Next Incarnation

posted on May 16th, 2010 filed under: Miami and Coral Gables Living, Real Estate News

The latest operation at the city-owned Country Club of Coral Gables property officially opened this weekend with a ribbon cutting at the new Liberty Caffe on North Greenway Drive at Granada Boulevard.

Coral Gables Real Estate Photos -- Country Club of Coral Gables -- Liberty Caffe -- Ribbon Cutting 1

The cafe will serve pizza, gelato and light, Italian-oriented fare from 8 a.m. to 8 p.m., which one passerby considered an unwelcome threat to neighborhood fixture Burger Bob’s, the greasy spoon in the Granada Golf Course clubhouse right across the street.  It’s a fair point.  Unless the new cafe draws an all-new clientele, Burger Bob’s could be a big loser.  (The other big losers are members of the old country club operation, but that’s a story for another day.)

Additional club operations will open in several phases.  The pool and gym, which will require purchase of a membership, should be open in the next few weeks.  The restaurant, which will be open to the public, is supposed to open in the next couple of months.  And the event facilities are expected to begin operation in about six months.

Area residents have expressed concern about the effect that the cafe will have on the character of the neighborhood.  The cafe itself is not terribly conspicuous and hardly seems a threat to property values.  But nearby real estate could be adversely affected if the cafe becomes a popular place to grab a quick cup of cappucino to go.  Nobody wants a constant stream of cars zipping up the street, parking and pulling away two minutes later.

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