How Overpriced is Coral Gables Real Estate?

posted on January 20th, 2010 filed under: Real Estate News

Sales have picked up and prices have generally fallen, so why maintain that real estate in Coral Gables is still overpriced?

Because the bigger the bubble, the greater the correction needed to unwind the overvaluation, and we’re not there yet.  Jeremy Grantham and Robert Shiller, who saw both the tech-stock bubble and the real-estate bubble for what they were, describe the real-estate bubble as a “three-sigma” event.  That’s statistical talk for something that deviated from normal not just a little, but by a terrific, almost unimaginable degree.

To understand where the real-estate market in Miami and Coral Gables could go, you have to understand where it came from.  And that means not just where it was when the bubble was fully blown, but where it was before the bubble.

One objective indicator is the relationship between the cost of buying and the cost of renting.  It makes sense to pay a little more each month if you’re building up equity and hoping for capital appreciation over time.  So it’s normal for the purchase price of a home in Miami or Coral Gables to be about 12 to 14 times the annual rent of the same or a comparable home, making the cost of renting about 7% to 8% of the purchase price, even though the cost of ownership is generally about 9% to 10% of the purchase price.

Want examples?  In May 2001, before the bubble really started to expand, a prospective buyer or renter in the Coral Gables market had the following options (among others):

  • 3601 Durango Street, a 3-bedroom, 3-bathroom home with pool, was available for sale at $565,000 or for rent at $3,800.  That’s a price-to-rent ratio of 12.39.
3601 Durango St.

3601 Durango St.

  • 525 Blue Road, a 2-bedroom, 2-bathroom home, was available for sale at $350,000 or for rent at $2,500.  That’s a price-to-rent ratio of 11.67.
525 Blue Rd.

525 Blue Rd.

We are nowhere near being back to normal.  In Miami and Coral Gables, the price-to-rent ratio is still about 20 in many cases, making the cost of renting about 5% of the purchase price compared to 9% to 10% for owning.

This imbalance will resolve itself through some combination of falling prices and rising rents.  Considering that prices went ballistic while rents remained fairly stable in relation to incomes, don’t expect much help from rising rents.  The only thing that would tip the balance would be significant wage inflation.  No sign of that yet.

It is occasionally possible to find properties listed for a fairly defensible price relative to their rental value.  Those are the only properties you should consider buying if you want your purchase to make economic sense.

Participants in the Coral Gables real estate market may be tempted to sing along with the old Doors song Been Down So Long It Looks Like Up to Me.  For sellers of many still-overpriced properties, it may be a while before the music’s over.

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Why You Want a Commission Rebate When Buying Real Estate in Miami or Coral Gables

posted on January 20th, 2010 filed under: Real Estate News

What is a commission rebate, and why do you want one when buying real estate in Miami or Coral Gables?

What It Is. A commission rebate is money that a buyer’s real estate broker gives to a buyer from the commission that the buyer’s broker earns in a transaction.

Why You Want It. To borrow a quotation from my tattered old Things I Learned at Harvard Law School t-shirt: “You always want more money, not less money.”  Seriously.  If one broker offers you a large pile of money and the other does not, what is there to think about?

How much money are we talking about?  Most listings in the Miami and Coral Gables market offer a buyer’s broker about 3% (half of the 6% that most large brokerages charge sellers to list property).

How would you like 1.5% back as a rebate when you buy a home in Miami or Coral Gables?

  • $7,500 if you purchase a $500,000 home
  • $15,000 if you purchase a $1 million home
  • $75,000 if you purchase a $5 million home

Too good to be true?

No, just progress.  Commission rebates are relatively new to the competitive landscape of real estate.  Most buyers don’t know better.

You do.

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New Home-Appraisal Rules Threaten Real-Estate Overpricing

posted on January 18th, 2010 filed under: Real Estate News

Why must real-estate professionals behave as though the right direction for property prices is always up?  Honestly, has nobody learned anything?

Beginning February 15, mortgage brokers will not be allowed to order appraisals in connection with FHA loans.  This follows the adoption of similar rules by Fannie Mae and Freddie Mac last May.  The rules are designed to mend one of the worst tears in the tattered fabric of the real-estate lending industry.  Mortgage brokers would hire appraisers they knew would come through with sufficiently high appraisals to support idiotically booming prices.  Appraisers knew if they didn’t come through, they wouldn’t get the work.

The National Association of Realtors, however, complains that the new rules have resulted in excessively low home values, supposedly because lenders have been relying on appraisal management companies that use appraisers who are less experienced and often unfamiliar with local areas.

It’s as if NAR was unaware that FHA is damn near broke from all the fraud, phony appraisals and general overpricing that it swallowed over the last few years.

The NAR’s explanation, moreover, is confused and troubling.  It’s confused because an inexperienced or otherwise unknowledgeable appraiser could just as easily make a mistake on the upside in valuing real estate in Miami, Coral Gables, or wherever.  It’s troubling because it diminishes the whole point of the appraisal profession, which is to follow standards that are objectively applicable in any locale and that minimize reliance on subjective considerations.

In the wake of the failure of Fannie Mae and Freddie Mac, the teetering condition of FHA, and the overall disastrous scam that real estate proved to be in the last few years — especially in Miami, Coral Gables and other hotspots of mortgage fraud — it is rather unseemly for salespeople to attack efforts to improve the reliability of the information on which loans are based.

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What Will Your Property Taxes Be if You Buy a Home in Miami or Coral Gables?

posted on January 18th, 2010 filed under: Real Estate News

Ever look at a listing sheet for a property for sale in Miami or Coral Gables and see an attractively low figure for property taxes?  Don’t be misled.  The figure on the listing sheet is almost certainly not the amount you will pay.  Do not rely on it.

To get a realistic estimate of the property taxes on that home you’re thinking of buying in Miami or Coral Gables, there is no substitute for the Tax Estimator on the Miami-Dade Property Appraiser web page.  Go to

http://www.miamidade.gov/pa/tax_estimator/TaxEstimator.asp

check the box for approving the terms of use, and click the button to Proceed to the Tax Estimator Worksheet.

The worksheet will first require you to enter the sale price or market value.  If you’re buying a foreclosure or short-sale property, be careful.  The Miami-Dade Property Appraiser will value your house according to non-distressed sales of comparable properties in the area, unless all the sales have been distressed sales.  So if you’re buying a foreclosure or short sale in Miami or Coral Gables, enter a realistic value in a normal transaction.

Nest, you’ll need to enter either the municipality or the property’s folio number (a unique identification number assigned to every property in Miami-Dade County).  The folio number is more exacting, and is easy to find by searching the property information at the Property Search page of the Miami-Dade Property Appraiser web site.  If you haven’t used that resource, you should.  Lots of important info like the official square footage of the structure and lot, number of beds & baths, and the last recorded sale date and price.

The tax estimator gives only that — an estimate.  But it’s the best approach to figuring out what your property taxes will be if you buy real estate in Miami or Coral Gables.

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Buy Versus Rent: Moments of Lucidity in Coral Gables Real Estate

posted on January 17th, 2010 filed under: Real Estate News

The cost of owning a home in Coral Gables (or anywhere) is generally about 10% of the purchase price annually.  The cost of renting the same or similar property in Coral Gables historically has been about 7%-8% of a property’s market value.  In recent years, the cost of renting has typically been running at about 5% of a property’s market value — making it economically irrational to buy.

The combination of falling prices, unusually low interest rates and generally stable rents has narrowed the spread for some Coral Gables properties.  In the low-to-mid-priced market segments where values have fallen, and with 5% interest rates making the cost of ownership more like 9% than 10%, some properties are now listed for sale at prices that are not far from normal compared to rental prices.  For example, one property is listed for sale at about $900,000 or for rent at about $60,000 annually.  The rental price is about 6.67% of the sale price, or put differently, the sale price is 15 times the rental price.  That’s not extreme.  And the rental price is not arbitrarily high — it actually rented for about that much in the recent past.

This is not to give the Coral Gables real estate market a clean bill of mental health.  For many properties, the purchase price remains about 20 times the annual rental price — way above the historical 12-to-14 times.  One property was recently listed for sale at about $1 million or for rent at about $50,000 annually, and another for sale at over $600,000 or for rent at about $35,000 annually.

But at least the real estate market in Coral Gables is displaying moments of lucidity.

The luxury segment of Coral Gables real estate is still in its own private Idaho on a buy-versus-rent basis.  Luxury properties are still much cheaper to rent than to buy.  Prices have not fallen as much and interest rates are not as favorable.  One Gables manse can be bought for over $8 million or rented for under $250,000 annually.  Another is for sale at about $2.5 million or for rent at about $100,000 annually.

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Foreclosure Data in Miami and Coral Gables Condos

posted on January 16th, 2010 filed under: Real Estate News

Condo buyers in Miami and Coral Gables need to be sure they understand the building’s financial situation.  If there are a lot of owners in default on loan obligations, that can mean nonpayment of condo fees, leaving others in the building to make up the difference.  (Sure, the condo association can put a lien on the unit, but if the owner is deep underwater on a mortgage, the bank(s) will probably take the entire proceeds of any forced sale.)

Why do some condo buildings in Miami and Coral Gables have so many foreclosures while others do not?  The best explanation is usually the year of construction.  Anything built between about 2004 and 2007 was by definition sold at the top of the market.  Everyone bought at once, and everyone lost.

A few examples, showing year built and the number of property records reflecting some stage of foreclosure (based on current foreclosure-tracking data):

10 Aragon, Coral Gables.

  • Condo built in 2004
  • 30 of 186 condo units in some stage of foreclosure
  • 4 bank-owned sales already occurred

Compare that with:

Gables Plaza, 625 Biltmore Way, Coral Gables.

  • Condo built in 1969
  • 2 of 90 condo units in some stage of foreclosure
  • No bank-owned sales

Or how about:

Jade, 1331 Brickell Bay Drive, Miami.

  • Condo built in 2004
  • 58 out of 341 condo units in some stage of foreclosure
  • 48 bank-owned sales already occurred

Compare that with:

Brickell Bay Tower, 1408 Brickell Bay Drive, Miami.

  • Condo built in 1964
  • 5 out of 160 condo units in some stage of foreclosure
  • 2 bank-owned sales already occurred

This doesn’t mean that every condo built in Miami and Coral Gables between 2004 and 2007 is in bad shape.  An example of a building that has remained stable:

100 Andalusia, Coral Gables.

  • Condo built in 2004
  • 3 out of 96 condo units in some stage of foreclosure
  • No bank-owned sales

Bottom line:  If you’re thinking of buying a condo in Miami or Coral Gables, get all the facts necessary to make a well-informed decision.

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Property Tax Appraiser Keeping It Real in Miami

posted on January 12th, 2010 filed under: Real Estate News

The Miami-Dade County Property Appraiser, Pedro Garcia, is keeping a campaign promise to revalue properties’ market values to reflect actual market conditions.  That may seem unremarkable, but the changes are dramatic.

This is especially true for Miami condos.  Market values have been slashed by nearly 50% in the Brickell area.  For example, a 2-bedroom unit in Jade saw its market value revised from $729,000 in 2008 to $401,000 in 2009.  A 2-bedroom at The Mark went from $458,000 to $252,000.

These are not low-ball valuations.  You can actually buy condos in Miami for about the price that the property appraiser is assessing them.  Not that they’re all screaming bargains.  Jade and The Mark are nice buildings, but you might need to pay high maintenance and run the further risk of assessments to cover deadbeats and delinquencies.  Tread carefully.

Some Coral Gables condos have seen significant reductions as well.  The market value of a 2-bedroom unit in Ten Aragon was revised from $382,000 in 2008 to $286,000 in 2009.  A 2-bedroom at 100 Andalusia went from $402,000 to $322,000.

The market values of single-family homes have been reduced as well.  For smaller homes in the north of Coral Gables, values are down about 20% from 2008 to 2009, like a 2-bed, 2-bath, 1600-sf house in the 1400 block of Medina Avenue that was valued at $453,000 in 2008 and $362,000 in 2009.

The smallest reductions have occurred in wealthy communities, no doubt reflecting the persistence of high asking prices, oversupply, and low sales activity in the market for luxury real estate in Miami and Coral Gables during 2009.  For example, a 6-bed, 6-bath, 7500-sf home in the Cocoplum neighborhood of Coral Gables was valued at $3.6 million in 2008 and $3.4 million in 2009 — barely more than 5%.  Of course, that should change as the ice breaks in the high-end market.

All of this information is easily found using the property search tool at the Miami-Dade Property Appraiser’s web page.  See for yourself at http://www.miamidade.gov/pa/property_search.asp.

Garcia is the first Miami-Dade Property Appraiser to have been elected rather than appointed.  He is well-qualified, having been a licensed appraiser for many years.  Those qualifications helped him win office in a run-off election in 2008 against a better-known opponent who was not a licensed appraiser.

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November Pending Home Sales Plunge in U.S. — and in Miami and Coral Gables

posted on January 5th, 2010 filed under: Real Estate News

The National Association or Realtors reported its Pending Home Sales Index for November, which showed a huge 16% decline from October.  The obvious reason is that the $8,000 tax credit for homebuyers was originally scheduled to expire at the end of November, so deals had to be in works before November began.

Data for the real estate market in Miami and Coral Gables are consistent with the national figures.  A quick check shows that Miami-Dade saw about 1200 properties go under contract in October and 912 in November, a decline of about 25%.  Coral Gables saw 34 go under contract in October and 23 in November, a decline of about 33%.  These figures, however, are not seasonally adjusted, and are comparable to the NAR’s national figures on a similarly unadjusted basis, which showed a 27.7% decline.

The tax credit has since been extended through April, and the income eligibility cap has been raised.  Details are available in an IRS news release.  How many buyers will the extension spur to action?  Hard to say, but probably not as many as the first time around.  The number of people who miss a deadline is usually not that large compared to the number who make it.

Raising the eligibility cap is nice, but the $8,000 has diminishing impact on higher-income buyers who usually buy higher-priced homes.  Getting $8,000 from Uncle Sam for buying a $100,000 condo in the Miami suburbs is a big deal and obviously convinced people to get off the fence and buy something.  Getting $8,000 from Uncle Sam for buying a $1,000,000 house in Coral Gables is probably inadequate to influence the decision whether to purchase.

And then, of course, there’s the whole question of how to value real estate in Miami or Coral Gables in the context of a government benefit that’s going to expire soon.  If the asset is worth $8,000 more to you now because of the government bennie, what will it be worth to the next buyer after the bennie expires?  Ah, the perils of government intervention.

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Crosswinds in Miami and Coral Gables Real Estate

posted on January 1st, 2010 filed under: Real Estate News

Lending standards remain tight, prices remain high relative to incomes, and renting remains abnormally cheaper than owning.  On the other hand, the federal government and Federal Reserve are flooding the economy with borrowed and newly printed money, which could lead to wage and price inflation and at least stability in real estate prices.

It seems doubtful that the nation as a whole would tolerate the inflation that would be required to bail out the most overvalued real estate markets like Miami and Coral Gables.  Incomes and rents would have to rise by 50% in Miami and Coral Gables to return the real estate market to pre-boom relationships between incomes, rents and home prices.  Any quick adjustment here would have to be part of a national hyperinflationary surge, which would be politically infeasible and economically disastrous.

Sellers in Miami are well-advised to accept reasonable offers at current market prices and not expect a return to boom-time pricing.  The best-case scenario is that prices move sideways while incomes and rents catch up.  The worst-case scenario is that prices take a final leg down when interest rates rise and government supports are removed.

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Case-Shiller Index Shows Price Dip in Miami Real Estate

posted on January 1st, 2010 filed under: Real Estate Market Data

Single-family home prices declined in Miami from September to October, according to the Case-Shiller index maintained by Standard and Poors.  The decline amounted to only 0.4% (from an index level of 149.69 to 149.09), but raises doubts about the stabilization in Miami and Coral Gables real estate over the past few months.

October and November were when everybody was supposed to be rushing to close on deals to qualify for the $8,000 tax credit.  It’s not a sign of great strength if Miami real estate prices were softening despite that flurry of government-manufactured activity.

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