Let’s talk about what is on everyone’s mind: Are our condo property values headed for another bust?
Miami is infamous for its boom/bust real estate cycles, with many still feeling the residual burns from the latest bust in 2008-2010. So whenever prices go up, we all have to wonder whether Miami is going to let us down once again. When you start digging into today’s numbers, the scary prospect of a fall looks very real.
Before we get into the frightening numbers, let’s first run through all the things that make Miami an amazing and increasingly attractive place in the long term: more quality and quantity of retail (see Design District, Miami Worldcenter, Brickell City Centre), quality and selection of restaurants, the arts (see Wynwood, PAMM, Adrienne Arsht Center), and innovation and business. And of course we arguably have more sunny days and cleaner air than any major city in the United States. Everyone truly does want a piece of Miami, and Miami’s future is very bright.
But that doesn’t change the numbers on the ground. First of all, inventory is way up. According to the Miami Association of Realtors’ resale data of Miami-Dade County compiled from the MLS, from 2010-2012, Miami saw a consistent dip in total available condo inventory, followed by a slow but steady increase in 2013 and 2014.
There is nothing wrong with increased inventory if it is matched by increased sales volume, but 2014 showed the first chink in Miami’s condo armor with a small dip in “closed sales” as compared to the previous year.
From December 2014 through today, Miami-Dade is holding steady at around 8.5 months of condo inventory. The general rule of thumb is that six months — possibly up to nine months — of supply is a balanced market, where supply and demand reaches equilibrium and prices stay more or less steady. Anything higher makes it a buyer’s market with downward pressure on prices, and anything lower makes it a seller’s market. For example, I remember when doing Broker Price Opinions for banks back in 2008-2009, 36 months or more of inventory was the norm in most neighborhoods, so home prices fell steeply. In 2011-2012, calculations in the same neighborhoods would result in three to five months of resale inventory available, which is why there was a strong increase in prices.
So our current 8.5 months of inventory does not give us any reason for alarm, at least not on a countywide level. But what we all sometimes forget is that real estate is (ultra) local. If we get away from general county numbers and focus on the Downtown Miami area where we have the highest concentration of condos and the highest concentration of pre-construction and new construction condos going up, the numbers become very different.
I took a February 2015 snapshot of MLS data from Miami-Dade County and then some downtown ZIP codes to present the differences in inventory levels. And now we are at a whopping 18.2 months supply of inventory in Brickell/Downtown’s 33131 ZIP Code; a less painful but still scary 16.3 months of inventory in Downtown Miami/arts and entertainment district’s 33132 ZIP Code; and a borderline healthy level of 9.9 months supply in Edgewater/Midtown.
As a real estate broker who believes in Miami’s long-term prospects, especially the growth of the Edgewater and the arts and entertainment districts, I also want to see Miami flourish, our condo owners see increases in their equities, and our overall economy grow. But we all have to accept the reality that markets have real estate cycles and that the numbers don’t lie.
So what will be the result of all this excess resale inventory?
First, just because we are double or triple healthy inventory levels does not mean we will have a crash comparable to 2008-2010 or that we will have a certain dip in prices. Condos that are priced similarly to other comparable recent sales are moving at a healthy rate of 70-90 median days on market (the number of days it takes a listed property to go under contract) in the sub-markets I presented above. So those owners who are trying to break records with their properties will have to take their property off the market and wait a few more years, or they will have to reduce their prices and take offers at today’s market prices. That said, there is certainly a chance that the market may dip, and the factors below could attribute to that occurring.
Since this is an equation of supply and demand, let’s talk about a couple of the main factors that have been driving Miami’s demand for the past few years:
Miami has had unprecedented run of gains from a broader set of international buyers than ever before. This phenomenon has been due in part to the weak dollar, excellent public relations by the city of Miami and the Miami Association of Realtors, strong developer marketing, inexpensive real estate from the last bust and low prices compared to most other major cities. Miami continues to make new international connections, but international buyers are becoming increasingly hesitant to buy in Miami due to the rapid increases in prices over the past few years, coupled with the reality of the now very strong dollar and a general international economic slowdown. Most of our biggest international customers will have 18-28 percent less purchasing power from their peak exchange rate in 2014. That means that a $300,000 condo will cost that same international customer $354,000-$384,000 in their respective currency due solely to the current exchange rates.
Lower interest rates can certainly help increase demand for Miami condos to help us move our supply. Real estate values are driven by monthly payments. With interest rates low, those who qualified for loans are getting historically low rates and subsequently lower monthly payments. The problem is that we are already at historically very low rates, and most mortgage brokers I speak with believe that interest rates will either stay the same or go up. On the positive side, there is a potential of more demand created by more flexible lending, which could be a real silver lining for our markets, especially the condo markets where lenders have been hesitant to lend in most condo buildings due to their strict financial and insurance requirements.
Now let’s talk about what has hurt us historically.
Miami is still primarily a second/vacation home market, which means a less committed base of owners. When people are financially distressed, the first thing they do is sell off their nonessentials like second homes and rental properties. While I do believe more and more people are making Miami their primary home, we are, for the time being, still a heavy second-home market and thus have a foundation of less committed homeowners. I do believe the trend is moving toward more people making Miami their home, but for the time being we will have to suffer from this lack of homeowner commitment during down markets.
On a similar note, the rental return on investment is a key factor. In the greater downtown area, getting more than 2-3 percent cash on cash return on rental is pretty standard, and if one takes takes out a mortgage, she will likely have to come out of pocket each month to cover the rental investment. Flash back a few years ago, and 5-10 percent rental return was a much more attractive option and thus drove prices upward.
Pre-construction is also taking the steam out of the condo resale market, and is making many wary as there will be thousands of new condo units available in the Downtown Miami area in 2015 and even more in 2016.
So who or what will save us from a fall and put us upright for another growth cycle?
The bottom line is that inventory is way up. Inventory is a leading indicator of where prices will be going, and with 10-18 months of inventory in downtown and Brickell, the signs are leading to a flat-to-downward price trend in the near future. Until the U.S. dollar weakens, national and local buyers (or foreign nationals with money already in the U.S.), who are typically more informed on our markets than new international buyers, are likely going to be a bigger percentage of our sales, which means they will be looking at the numbers and will understand that they have many choices in a city with excess supply of inventory.
That will keep us in more of a buyer’s market with prices in check with recent sales, with a downward adjustment of prices certainly possible. Sorry to disappoint the doomsayers: I don’t predict a bust this time around.
So let’s all get ready for a soft landing, and look on the horizon for the great city of Miami’s next boom, which I don’t believe is far away.
Niakan is a principal at HB Roswell Realty. He can be reached at firstname.lastname@example.org and 305-725-0566.
Inventory levels of condos
This is a February 2015 snapshot of MLS data from Miami-Dade County, with some downtown ZIP codes, to present the differences in inventory levels.
Miami-Dade County (by ZIP Code)
Months of Inventory
▪ 33131 (mostly Brickell and some Downtown Miami)
▪ 33132 (Downtown Miami and Arts & Entertainment District)
▪ 33137 (Edgewater, Midtown)
Source: Data from the MLS, calculated based on past 6 months’ sales