Headlines about the overall national real estate market reaching a “housing bottom” are starting to become more common. What does this mean in practical terms if you are potential seller (or buyer)?
The housing market is based on local conditions…and in the Greater Miami and Miami Beach area, it’s no secret that it’s a genuine buyer’s market. Asking prices for class “A” waterfront properties in prime locations are down as much as 50% off the high’s of 2006. Buyers have many choices both for homes and condos, and mortgage rates are near historic lows. Also, due to the large number of construction projects built from 2002-2007, buyers of quality properties today have many options as far as neighborhood, size, amenities, and style.
So…who are the potential buyers for all of those great single family home and condo deals?
As of this writing, July 15, 2009, we are in the midst of one of the most severe economic recessions in a generation. Along with the slow economy, I believe that we have a recipe for long-term price depression (as opposed to continued overall depreciation). During the boom market, real estate prices went up as available inventory decreased and potential buyers increased due to the availability of easy credit. Although the credit markets appear to have stabilized, credit is only available to a select few who qualify based on income, high credit scores, job stability and cash reserves. With the national unemployment rate still rising (soon to reach almost 10%), most families are currently finding their discretionary household budgets shrinking. Consumers who are worried about keeping their jobs, therefore, are not rushing to purchase a property.
Given this national economic situation, most potential real estate purchasers are cautious in taking on any new debt, as they watch the foreclosure crisis continue in the Greater Miami Real Estate market. For example, even the ultra-luxury buildings in South Beach are continuing to see more foreclosure related sales. As condominium and single family homeowners continue to struggle paying debt on properties that are “upside down”, this leads to more properties coming on the market as “short sales”. As “short sales” and bank-owned properties “REO sales” eventually become closed sales at deeply discounted prices, these become the new comparables for “closed sales”.
Any buyer who wants to get financing will also need an appraisal, which are being carefully scrutinized by banks. All major lenders are being careful not to have a repeat of the appraisal abuses that took place during the real estate boom (especially in the Miami market). Therefore, if a property does not appraise for the sales price, the lender will not approve the loan. This creates a significant challenge for future price appreciation, as the new price “standard” usually is strongly influenced by what is being appraised, which are the bargain sales occurring today as Short Sales and REO’s. Approximately 50% of the real estate transactions taking place in Greater Miami and Miami Beach today are “Short Sales” and Bank Owned properties.
In conclusion, we believe that due to the high costs associated with owning real estate in South Florida (mortgage payments, high maintenance fees for condos, property taxes, windstorm insurance rates, etc.) and the relatively limited pool of future buyers, the new “bargain prices” will become the true market values for years to come.
Will housing “turn around”, it depends! Once properties stop depreciating in price, I believe we will see price stabilization for many years to come.
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