For Richer or Poorer

posted on April 12th, 2013 filed under: Properties in Focus, Real Estate Market Data

Broad market data do not always capture the reality of the real estate market.  National data do not necessarily reflect local market conditions.  Even metro data does not necessarily capture deep divisions among micro-markets.

Miami is especially fertile territory for such local divisions to sprout.  According to the U.S. Census, Miami-Dade County is second only to New York County (i.e., Manhattan) in income inequality.  Hot properties and neighborhoods are also a magnet for international wealth.  If location matters in real estate, it really matters in Miami.

So perhaps it should come as no surprise that the past year’s rebound in Miami home prices has been very unevenly distributed.  The most desirable areas have seen prices regain almost all of their losses, while most of Miami remains deep in negative territory.

For the sake of comparison, consider the Cosmopolitan Condo in the trendy SoFi neighborhood of Miami Beach.  SoFi is the part of South Beach that lies south of Fifth Street.  The Cosmopolitan, built in 2004, is not even a high-end property, yet buyers have recently been willing to pay roughly the same amount that buyers paid at the top of the market in 2006.  Only 6 of the 223 units in the building — about 2.7% — are in some stage of foreclosure.

Cosmopolitan -- South Beach -- Sales History -- By Date -- with Moving Average -- 2013-04-12

Compare that with Snapper Village, a community located in the heart of southwest Miami-Dade County.  Prices went parabolic during the boom and collapsed in the bust.  The past year’s bounce has hardly begun to recoup the losses.  At Snapper Village, 64 of 636 units — over 10% — are in some stage of foreclosure.

Snapper Village -- Miami -- Sales History -- By Date -- with Moving Average -- 2013-02-27

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So You Wanna Be a Landlord?

posted on February 28th, 2013 filed under: Financial Responsibility, Properties in Focus, Real Estate Market Data

Investors big and small have suddenly decided that it’s a great idea to buy single-family homes for rental income and future price appreciation, according to a flood of media reports.  A quip about how quickly we forget would be too easy.  And indeed, these investors are far more responsible than the yahoos who bought homes during the bubble.  Those were bad investors, and these are good ones.  Right?

Renting a house is hardly a newfangled way to earn income.  This big new idea is actually an old idea that previously had limited appeal.  What changed?  For one thing, the government rolled out big subsidies for institutional investors.  For another, Federal Reserve policies are starving small investors of a fair yield on their bank deposits, forcing people to hunt for yield in places they never considered before.

Such things tend to end poorly, but in case that observation strikes you as unconvincing and platitudinous, let’s look at a few recent sales to see what they say about how profitable buying and renting single-family homes really is.

The math is not hard.  In the simplest sense, your yield equals rent, minus carrying costs, divided by purchase price.  This is also known as your capitalization rate, or cap rate.

The major carrying costs annually are property taxes, homeowner’s insurance, and maintenance.  In the Miami area, property taxes approach 2% of the purchase price, homeowner’s insurance can be about 1% to 2% of the purchase price depending on the age and structural characteristics of the home, and maintenance should be budgeted at or near 1% as a rule of thumb anywhere.

If you finance, then the interest is a carrying cost but the out-of-pocket purchase price is effectively reduced by the amount you borrow.  We’ll ignore financing, as it’s often a wash.

So what does this simplified analysis say about buying homes for rental income in the Miami and Coral Gables real estate markets these days?  Consider several homes that recently sold and were also recently rented or offered for rent.

The home at 629 Madeira Avenue in Coral Gables recently sold for $370,000, and recently rented for $1,900 a month ($22,800 annually).  Property taxes are about $7,000.  Insurance can’t be known without getting a quote, but the house was built in 1940, so it probably doesn’t qualify for the cheapest rate.  Call it $5,000.  Add another $3,000 for maintenance and you’re at $15,000 in carrying costs.  Subtract that from the $22,800 and you have net income of $7,800 annually.  Divide $7,800 by $370,000 and you get a yield of 2.1%.  Salivating yet?

629 Madeira Avenue

629 Madeira Avenue

Here’s another.  The home at 1248 Milan Avenue in Coral Gables recently sold for $430,000, and recently rented for $2,000 a month ($24,000 annually).  The house is so small (1,335 sq. ft.) that property taxes are about $5,200.  It was built in 1924, so insurance is probably high for the home’s size, but that isn’t saying much.  Call it $4,000.  For such a small home, add a mere $2,800 for maintenance and you’re at $12,000 in carrying costs.  Subtract that from the $24,000 and you have net income of $12,000 annually.  Divide $12,000 by $430,000 and you get a yield of 2.8%.

1248 Milan Avenue

1248 Milan Avenue

One more — this time on the higher end.  The home at 5309 Alhambra Circle in Coral Gables recently sold for $1,261,000, and was recently offered for rent at $6,950 ($83,400 annually).  Property taxes are about $19,000.  It was built in 1926, so insurance probably is expensive.  Call it $11,000.  Add $8,000 for maintenance and you have $38,000 in carrying costs.  Subtract that from the $83,400 and you have net income of $45,400 annually.  Divide $45,400 by $1,261,000 and you get a yield of 3.6%.

5309 Alhambra Circle

5309 Alhambra Circle

The higher-end home seemingly fared better than the others, but still yields just 3.6% — and that’s based on the asking rent.  It didn’t actually rent for that much, so the yield might well have been less than 3.6% if a tenant had been found.

Which raises another consideration: An important factor omitted from these case studies is the vacancy rate.  There’s a big difference between listing a home for rent and renting the home.  Until it’s rented, your income is not just zero, but negative, because you still owe all the carrying costs.  Professional landlords accordingly reduce their anticipated income by the share of time they think a property will be vacant in between tenants.  A safe margin would probably be at least 5% to 10% for single-family homes, and as 5309 Alhambra Circle shows, it can drag on for much longer.  How long would you be able to take that heat before either cashing out or renting your home on the cheap to seven fraternity brothers and a four-legged mascot?

The home at 5309 Alhambra is particularly interesting because the seller bought it in December 2011 for $1,215,000, then listed it in March 2012 for sale or for rent.  The list price for sale was $1,397,000.  The list price for rent was $8,200.  It looks like a failed flip that neither yielded a capital gain (remember the brokers probably took 6%) nor successfully rented even after the asking rent was substantially reduced.

Still wanna be a landlord?

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S&P Case-Shiller Says Miami Up, New York Down

posted on January 29th, 2013 filed under: Real Estate Market Data

The S&P Case-Shiller Home Price Index for Miami posted a modest gain for the three-month period ending November 2012.

S&P Case-Shiller Home Price Index -- Miami -- Nov 2012 (from Jan 2008) (Chart, Graph)Source:  Standard & Poor’s

Prices gained 9.9% year-over-year (Nov. 2011 to Nov. 2012).  That’s a fast pace for real estate, and certainly far quicker than incomes have risen.  No doubt the Fed-sponsored drop in mortgage rates helped.  And there could be a bit of an echo bubble in psychology, as media reports have served up a steady drumbeat of housing-recovery stories.

Will it continue?  Shiller himself is skeptical, writing in a recent New York Times piece that “the tea leaves don’t clearly suggest any particular path for prices, either up or down.”

This much is certain:  Even if prices continued to rise 9.9% annually, it would take over 6 years for prices to get back to their bubble high.

S&P Case-Shiller Home Price Index -- Miami -- Nov 2012 (Chart, Graph)Source:  Standard & Poor’s

The fact that it would still take so long at such an unrealistic pace for prices to regain their high is a testament to the mendacity of the bankers, brokers and buyers who inflated the bubble.

Meanwhile, in New York, the real estate market remains moribund.

S&P Case-Shiller Home Price Index -- New York -- Nov 2012 (Chart, Graph)Source:  Standard & Poor’s

Not quite back at its low, and maybe there’s a broad, bowl-shaped bottom taking form, but that’s about the best you can say for it.

Nonetheless, the crash already happened, and prices have reverted close enough to the long-term trend that the risk of loss has diminished.  If you find a good deal, and plan on holding a property for a long time, buying may make sense, particularly if you plan on financing at currently low rates.

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Merry Christmas from Miami and Coral Gables

posted on December 25th, 2012 filed under: Miami and Coral Gables Living

Coral Gables Real Estate Photos -- Christmas Pic (Nativity)

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Do Incomes Matter to Home Prices?

posted on November 23rd, 2012 filed under: Financial Responsibility, Real Estate Market Data, Real Estate News

A little dose of reality to put the black in your Black Friday . . .

Price-Income Ratio (NAHB) -- Miami -- Chart, Graph -- 1991-2012

Home prices have stabilized recently, and even gained in some areas.  But this recent price action may face significant headwinds going forward.  The ratio of median home price to median income in the Miami area has once again reached the highest level on record outside of the housing bubble.

The price-income ratio is like the price-earnings ratio of stocks.  When it’s historically high, so is risk.  And when it’s historically low, that’s usually a good opportunity.

The most important factors in the recent bounce in the price-income ratio are probably (1) record-low interest rates that enable buyers to pay more, and (2) continued investment by cash buyers, for whom income is by definition irrelevant.  Perhaps these influences will persist, but rates may not fall much further (having fallen very little since the Federal Reserve announced QEternity), and cash buyers seem like slender support for a major metropolitan area’s housing market.

Of course, it’s a bit late to time the market.  The crash already happened.  And with rock-bottom interest rates, you can’t go too wrong in buying that perfect home if it comes along.  Just be aware of the possibility of detours along the road to recovery.

[Geeks’ note: A few of the data points in the above chart were missing from NAHB statistics, and those gaps were filled by interpolation.]

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Halloween in Coral Gables

posted on November 1st, 2012 filed under: Real Estate News

It was a beautiful evening for trick-or-treating in Coral Gables.

Coral Gables Real Estate Photos -- Halloween 2012 (1)

And plenty of neighbors got into the act.

Coral Gables Real Estate Photos -- Halloween 2012 (2)

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Case-Shiller Index for Miami Rises Again

posted on September 21st, 2012 filed under: Real Estate Market Data

The latest reading of the Case-Shiller Home Price Index for the Miami metro area scored a seventh consecutive monthly gain, sparking optimism that housing prices in Miami may have finally hit bottom.

The trend is indeed impressively longer than in other short periods of improvement since the crash, although prices have not clearly escaped the sideways channel established several years ago when property values began to bounce along a bottom.

S&P Case-Shiller Home Price Index -- Miami -- June 2012 (from Jan 2008) (Chart, Graph)Source: Standard & Poor’s

The latest improvement looks fairly promising, though still inconclusive, on the long-term chart as well.

S&P Case-Shiller Home Price Index -- Miami -- June 2012 (Chart, Graph)Source: Standard & Poor’s

One significant danger is that prices may simply have been goosed by dramatically falling interest rates.  According to Freddie MAC, the rate on a 30-year mortgage plummeted from 4.55% in July 2011 to about 3.9% by January 2012, and then from 3.9% to 3.55% between April and July 2012.

Is the 7-month string of gains in the Case-Shiller index proof that housing has bottomed?  Or is it just an artifact of the latest round of Federal Reserve interest-rate manipulation?  The question is important, because the Federal Reserve’s low-rate policy in the early 2000s played a big part in creating the housing bubble, and those who bought in that low-rate, rising-price environment came to regret it.  When the Fed raised rates, the jig was up.  As Warren Buffett likes to say, when the tide goes out, you find out who’s been swimming naked.

So it’s worth reading optimistic news reports with a jaded eye.  For example, the Miami Herald yesterday reported:

[I]f South Florida home values continue rising at their current pace, it will be 2017 before they return to peaks hit in 2006, according to the latest results from the Case-Shiller real estate index.

This is a dangerous assumption based on a flawed analysis.  As the same article points out, prices are still down 47% from their high.  To recover that loss in 5 years would require greater than 8% compounded annual gains.  That’s a much greater rate of appreciation than prevailed before the bubble, so the Herald article is basically talking about a new bubble — an echo bubble.  That’s hard to imagine.  Will banks abandon lending standards again?  Will incomes rise furiously?  Will interest rates fall much further, considering that the Fed is already “all in” since announcing “QE infinity”?

It’s not even clear where the Herald gets the idea that the “current pace” of gains is greater than 8% annually.  Year-over-year, from June 2011 to June 2012, the Case-Shiller index gained 4.4%.  At that rate, it would take another 9 years to get back to the old high.  And that assumes the recent trend is sustained for 9 years.  Perhaps the Herald chose some shorter, sharper period of recent gains (e.g., month to month) and projected that into the future.  That is an unreliable methodology.

On September 4, 2008, even before the fall of Lehman Brothers, the advice here was that “prices in Miami will fall 30% to 50% over a period of three to four years, and not return to their old highs until more than a decade has passed.”  House Price Index Update — New York and Miami (Sept. 4, 2008).  Looks like it will indeed take more than a decade to get back to the old highs.

If you find a good opportunity and you plan on living in a home for a long time, then buying may make sense for you.  Just beware irrational exuberance.

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Luxury Flips Hit Market in Miami and Coral Gables

posted on August 18th, 2012 filed under: Properties in Focus, Real Estate News

The luxury real estate market in Miami and Coral Gables sprang to life about a year ago.  An extreme oversupply of homes for sale quickly shrank to nearly normal inventory levels.

Perhaps another sign of strength is that some recent buyers of luxury properties in Miami and Coral Gables are attempting to flip the houses — i.e., sell them quickly for a large profit.

15 Star Island Drive is on the fabulous Star Island in the middle of Biscayne Bay.  There are just 34 properties on Star Island, and 15 Star Island Drive is adjacent to the home of Philip and Patricia Frost at 21 Star Island Drive, which is arguably the grandest estate in all of South Florida, with nearly 32,000 square feet of living space on over 6 acres of waterfront land.  15 Star Island is a mere 8,621 square feet on a 40,000 square foot waterfront lot.

The previous owner of 15 Star Island was Claudio Osorio, an embattled entrepreneur who declared bankruptcy in 2011.  The property made news when a bankruptcy judge thwarted a would-be buyer’s attempt to enforce a contract to purchase the property for $10 million.  The judge held an auction instead, and the property brought $12.72 million at auction in November 2011.

The buyer has now re-listed the property for $16.9 million.

15 Star Island Drive

15 Star Island Drive

6611 Leonardo Street in Coral Gables is not as ritzy, but still in the luxury-home segment of the real estate market.  It was listed for sale at $2.7 million in January 2009 and eventually sold for $1,215,899 in a short sale in March of this year.  The buyer re-listed the property in June for $1.995 million, and has since reduced the price to $1.799 million.

6611 Leonardo Street

6611 Leonardo Street

As auctioneers like to say, it’s worth what you pay for it.

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Cash Remains King in Miami and Coral Gables Real Estate

posted on July 19th, 2012 filed under: Real Estate Market Data

Since the real estate bubble burst, cash transactions — i.e., without mortgage loans — have accounted for an abnormally large share of home sales in Miami and Coral Gables.  But now that sales numbers have rebounded and prices have stabilized, has the number of cash transactions normalized as well?

Not really.

Miami and Coral Gables Real Estate -- Cash Deals -- Percent of All Transactions (2005 to 2012)

Although the share of cash purchases in Miami and Coral Gables has receded somewhat from the post-crash peak, they still represent a far greater share of home sales than they did before the crash.

In other words, an unusually small portion of single-family homes sold in Miami and Coral Gables are sold to traditional buyers who have a downpayment and borrow the rest.  This is troubling.  The possibility that prices have hit bottom would be more reliable if pricing were being set by the traditional, daisy-chain relationship of incomes to loan amounts to prices.

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Fourth of July Fireworks Return to Biltmore Hotel in Coral Gables

posted on July 4th, 2012 filed under: Miami and Coral Gables Living

Happy Independence Day to all.

Coral Gables Real Estate Photos -- Biltmore Fireworks 5

Fireworks returned to the Biltmore Hotel in Coral Gables for the first time in several years.  The tradition fell to budget cuts but returned for at least this year, thanks in part to institutional sponsorship by Bacardi and the University of Miami.  It was a great show and the Biltmore seemed to have drawn a lot of guests in addition to the local crowd.  Let’s hope it can become an annual event again.

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