The Real Estate Market Sustainability Debate

JCO: The following is from a residential broker whose farm area is Brickell and works for a prominent brokerage firm in Downtown Miami.

“…prices are not strong. It’s definitely a buyers market. All of my listings have been dropping in price over the past year in order to sell quickly.

No prices are going up… most prices are down, especially if owners want to sell their properties instead of listing them at unrealistic prices.”

That was the response I got when I asked her if she’s been seeing price increases over the past year as the CNBC report finds. I think we’re in the midst of a pricing correction and an inventory shake out as you can see from the WSJ article. Most of the research we’ve seen nationally assumes that the housing market will get back to equilibrium within the next two-three years. However, there’s been a fundamental shift away from the high appreciating market that Miami experienced over the past few years

BOB: There is no doubt that the market is moving towards a price correction. But, look at the MHP for houses in Miami versus other major urban centers (granted, this includes quite a bit of low income housing). Still, the MHP is significantly lower. Your broker contact uses the word “quickly” when describing current sales. This implies a motivated seller–not motivated by financial gain but rather averting financial loss. This will be the selling trend in the short term: desperation sales.

Two to three years for the market correction sounds fair, but I think it’ll be closer to the former…Also, I’ve read reports that the multi-family markets in Edgewater (midrises: City 24, Uptown Lofts, Cite, etc) are doing very well, as is the North Beach market. Recent reports are also showing that high end sales throughout the Beach remain strong. Also, notice that the WSJ article, unlike the CNBC one, doesn’t isolate the Miami market but looks at FL as a whole and references indicators (number of building permits and construction material sales) that are more a reflection of the expected construction slowdown than a housing price bust. Overall, I think both reports have shortcomings.

JCO: From a market fundamentals perspective, MHI is the prime indicator of the health and sustainability of any housing market. The problem with Miami doesn’t stem from just looking at the city only, but as the county as a whole. Yes, international buyers, northerners, and retiring boomers all find Miami’s MHP a bargain relative to other places in the country. But how sustainable is that over the long term? I mean, speaking of higher priced markets (Northeast, Chicago, California) one can’t neglect the fact that on a relative perspective, MHI’s support the MHP’s. Miami is different in the sense that the entire boom was largely perpetuated by outsiders.

Edgar DeFortuna recently revealed that the only sales that are really doing well are those of the higher-end market in his projects. I would bet that most of those buyers are rich South Americans, rich snow birds, and rich empty nesters.

Regardless, a $371,000 MHP vs a County-wide MHI $43,466 compared to a US wide $49,785 MHI and a US MHP of $254,000 (source: http://online.wsj.com/public/resources/documents/bbnew.pdf) shows a drastic spread between incomes and housing prices in terms of Miami relative to the rest of the country (see attached spreadsheet).

Just to give you another perspective, look at the NAR affordability index. They’re using incomes close to the 60’s….

http://www.realtor.org/Research.nsf/files/REL0703A.pdf/$FILE/REL0703A.pdf

BOB: Remember the DDA’s anticipated occupancy numbers, which were astounding, regardless of excluding large swaths of the urban core as we know it; not to mention the Beaches. Remember the DDA’s emphasis on the level of affluence of these occupants. The current MHI data is not factoring this in. This is not fair to Miami as the demographics are unraveling as the neighborhoods are emerging. Forbes and the U.S. Census Bureau are using MHI data from 2003–before the boom took effect. In 2002, if you would have said that there would be a historic boom within the next 4 years, given the MHI data then, you would have been considered a fool, but the boom took place.

The MHP/MHI disparity is factoring in the MHI from 2003 and the MHP from this quarter. Isn’t there a problem with that? In two years the census bureau will have much more realistic MHI data as it relates to Miami’s MHP, as not even a quarter of expected occupants have filed in. The MHI will rise due to the demography of the incoming occupants but also due to the expected increase in office development. Also, the MHI will likely have to play catch up with the expected longterm rise in the MHP. This rise will be attributed to the full occupation of the residential projects, transit and infrastructure improvements (people mover system upgrade, streetscape improvements, River and Baywalk, additional tunnels, etc), Museum Park Development, retail resurgence, burgeoning office market, potential downtown ball park, Watson Island project, PAC, and it will even out Miami’s MHP with that of similar urban counterparts in the country.

http://www.census.gov/acs/www/Products/Ranking/2003/R07T050.htm

http://www.ofheo.gov/Media/Archive/house/4q00HPIprint.pdf

http://www.census.gov/population/cen2000/phc-t29/tab01a.pdf

JCO: I don’t disagree with you on the whole. The purpose of my email was to dispute a rise in property values (because right now they’re pretty stagnant) and to support the fact that the market has gotten rather expensive relative to salaries in Miami.

The MHI data you pulled on your website from the 2003 census is adjusted for inflation. There’s no silver bullet when playing with data. I agree. And yes, there are improving demographic factors. We’ll see how it plays out…

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