Miami: Ground Zero for America's Condo Crash

Miami's Condo Crash Worst in the USA?

A few days ago, the Sun Sentinel ran a great piece on the Condo Crash in Miami. As I recently visited the condo glut in Miami on this blog, I wanted to add this Sun Sentinel piece for an update on that overheated and crashing market just North of the Florida Keys.

The Sentinel piece Boom of condo crash loudest in Miami gave us vignettes of investor dreams dying in flames.

We read about one couple who made so much money off their first condo flip, they threw themselves a $100,000 wedding. However, today, Mr. and Mrs. Living Large are now faced with an either/or proposition which must give them nightmares:

A) Either they walk away from a $117,000 deposit on an expensive "investment" condo in the tony downtown Miami Bal Harbour project

OR

B) Do they go ahead and close on the condo and pay the $585,000 price when they ordered the condo . . . eventhough the market has tanked for expensive condos in a market where 23,000 are now on the market and fewer qualified buyers are materializing as the crash worsens?

As the Sun Sentinel ponders,

Just how many other speculators face the same dilemma in the nation's most glutted condo market will become clear during the next two years. That is when 25,000 new condo units, most of them rising in or near Miami's downtown, will flood an area already saturated with 23,000 condos listed for sale. An additional 40,000 units have been approved, but analysts doubt the majority will break ground.

Well, if you add 25,000 new condos to 23,000 units for sale now, we get a total of 48,000 units for sale by 2009 in a market where lenders are tightening up on lending criteria.

Fewer qualified buyers and more foreclosed owners means prices are going to fall like an aircraft carrier anchor in deep blue water. So, I would say several tens of thousands of "speculators" in Miami's former "can't lose" condo market will soon be chum for the few smart speculators sitting on the sidelines with cash in pocket.

Furthermore, the coming bloodbath will be so bad in Miami, Orlando, and other urban areas of Florida that many honest Economists, Realtors, Homebuilders, Politicians and the like are banking on the Condo and Housing Crashes igniting a statewide Recession.

You are not going to hear this kind of thinking from upside down CEOs, investors or homeowners who are still in denial . . .

The Sun Sentinel throws this at us:

Orlando and other Florida cities -- Naples, Fort Myers, Tampa and Sarasota among them -- also have huge condo gluts. With 4,440 condos listed for sale, Orlando has an unprecedented 29-month supply, and last month sales plummeted 64 percent lower than a year ago.

But Miami, with its unmatched volume and untold number of speculative buyers, is ripe for the hardest fall in the U.S.

"Miami is the poster child for the condo bust," said Jack McCabe, CEO of McCabe Research & Consulting, a real-estate market-analysis firm located in Deerfield Beach. "There are probably only two cities in the world with more construction: Shanghai and Dubai. Unfortunately, there is (sic) going to be a lot of foreclosures . . ., and developers, lenders, title companies and real-estate companies will go under."

Many analysts, McCabe among them, predict the area's condo collapse will drag the rest of the state into recession. Other experts scoff at that notion. But nearly all agree grim times lie ahead.

As McCabe points out, many jobs will evaporate as the Crash spreads.

This can be seen every day with mortgage lenders going out of business. As the founder of the Implode-O-Meter website says in this interview,

"I honestly don't know how many at-risk outfits are left….dozens, perhaps. We're trying to gather together ALIVE and stable lenders for our industry readers to bring their business to.

But as far as continued fallout, I'm more worried about banks at this point. Banks are between 50 and 60% exposed to real estate by their net assets. Banks have held up thus far because they have much deeper pockets than the non-bank lending specialists, though a few have taken sizeable write-downs on mortgage portfolios. But it is well known the write-downs have been largely put off by delaying the mark-to-market process; even the bulk of the ratings downgrades have still not happened, so the real balance sheet hit is yet to come. And banks will see their real estate holdings of all sorts deflate in value.

Those that weren't sufficiently diversified or aren't considered "important" enough for a bail-out could see failure. After an interlude since the last recession, we've already had a few small credit union and bank failures. I expect this to turn into a tidal wave, short of a massive intervention by the government (i.e. a blanket bailout which the public will shoulder-this would not be a "good" thing)."

Think about all the folks dependent on a healthy housing market for work:

Realtors

Lenders

Bankers

Carpenters

Contractors

Plumbers

Appriasers

Home Depot Workers

Sheetrock factory workers

Truckers

Cement workers

Heavy Equipment Operators

Laborers

Accountants

Tax Preparers

. . . and the list could go on and on.

Housing is a major gear in our Economic machinery. When Housing strips teeth off its gear, the whole machine suffers.

My list above doesn't even include the biggest loser of all in the Housing crash: the speculator.

As the Sun Sentinel said,

Usually joyous milestones, closings in Miami are about to become somber days of reckoning for electricians, waiters, retirees and other amateur speculators who counted on making a quick killing in a market they thought would rise forever.

No one knows how many units speculators bought. But as early as 2004, McCabe and Lew Goodkin of Miami-based Goodkin Consulting warned that up to 70 percent of the condos rising in Miami were being snapped up by people who didn't plan to hold on to them, much less live in them.

That was evident from the hordes who camped overnight, fought over lottery numbers, even paid homeless men $20 and a pack of cigarettes to hold their places in long lines, all for the chance to put 20 percent deposits on condos that existed only in brochures. The frenzy for some projects was so fevered that some developers raised their prices hourly.

"It was a nightmare. Lines around the corner. People screaming into phones. I would look at them, and think, 'You don't know what you're doing,' " said Mark Zilbert, president of Zilbert Realty Group.

Many told a similar story: They had a friend who made $100,000 flipping a new condo, and they planned to ride the same wave of escalating prices. All they had to do was put down $60,000 on a $300,000 pre-construction unit and resell it when the value climbed to $400,000 -- before the building opened, and before closing and mortgage payments, maintenance fees, insurance and taxes kicked in.

That meant anyone could risk $60,000 and pocket $100,000 without actually buying anything.

One of my memories of the heady rush to buy . . . any and everything Real Estate in Key West . . . is the story of a guy I know who works as a jet ski tour guide.

Before his current line of work, this guy tried to open three or four businesses on his own. He failed in all attempts because he simply didn't have a head for simple math, nor did he have a mind for marketing.

Anyway, he ends up working as a tour guide for a local jet ski operator, and one night, he comes into the bar, drunk, telling me how he was going to make a mint flipping houses and how I should get into the same game.

To make a long story short, this blue collar worker bought his first and only home in 2005 for $550,000. He put no money down. He used a "Liar's Loan" and a local mortgage mill in Key West got him $575,000 or more than 100% LTV.

He took that extra $25,000 and used it to upgrade his home right before the flood of Wilma.

The loan is an interest only loan for the first three years. He and his wife (a hotel worker) pay more than $4,000 a month in "interest" and not one penny of that goes to paying off any principal.

Not only this, but homes in his area are now asking . . . not fetching when one actually sells . . . about $499,000. So he's upside down by $75,000 already and hasn't paid one penny to lowering his principal.

In June of next year, this interest only loan kicks over to an ARM loan.

His house is on stilts, so he didn't get crushed by Wilma; however, all that money he spent on landscaping his yard was washed away. He still hasn't replaced all the plants destroyed.

This guy is still a 34 year old tour guide operator. He makes $100 a day, rain or shine, with tips. His days are anywhere from 20 minutes long to 12 hours long, depending on whether the business is there.

And business? Business isn't good.

Business isn't good because fewer middle class Americans are coming to Key West.

Fewer middle class Americans are coming to Key West because fewer cheap hotel rooms are available.

Fewer cheap hotel rooms are available because developers went apeshit knocking down perfectly profitable hotels in the chase for bigger short term gains by building condotels.

And fewer middle class Americans are coming to Key West because their Housing ATM on their own homes on the mainland are now empty as housing equity disappears in the Housing Crash.

Thus, when you read about other amateur speculators in Real Estate, you know we can multiply these "losses" by an easy 2 million Americans in the next two years as ARMs adjust.

As the Sun Sentinel finished:

Owners of a gourmet shop, the transplanted New Yorkers poured their life savings into deposits on four condos they had planned to flip for a quick profit.

The plan worked for a one-bedroom condo conversion at The Residence in Hollywood. They agreed to buy it in 2004 for $207,000 and sold it before closing for $330,000.

But they were forced to close on a condo in Boynton Beach, where they now live, and they face the prospect of losing nearly $200,000 they put down on two condo conversions at the Harbour House in north Miami-Dade County. One is a $350,900 studio, which Natalie Luongo said is smaller and in a different location than the one she agreed to buy in December 2005. It is the subject of litigation.

The other is a $585,000 one-bedroom unit similar to others now available for about 25 percent less. As the September closing looms, the Luongos are distraught. If they can't secure another mortgage, the decision will be made for them. They will have to walk away from their $117,000 deposit.

But if they secure financing, they know they will be stuck with a property that could be as difficult to rent as it is to sell. Gregg and Mary Mullins, 70-year-old retirees living near Fort Myers, learned that the hard way.

Last month, they finally rented out the two-story $885,500 penthouse they closed on last year in Blue, a concave tower overlooking Biscayne Bay. But the $2,800-a-month rent they're collecting is less than half their monthly mortgage payment, maintenance fees and property taxes. Yet, as Mary Mullins said, something is better than nothing.

The couple never planned to live in the condo, but jumped at buying it at pre-construction prices in 2004 after friends shared a familiar story."They said they made lots of money, so they told us to try it and maybe we could make lots of money, too," Mary Mullins said. "But that didn't happen. We don't know what happened."

A sheepish Tom Leon says he knows. The retired businessman from Illinois said he knew he had made a mistake about six months after he put down $200,000 on two $500,000 condos at the end of 2004.

"Every 2 inches, I'd see another [construction] crane, and I knew: There is no market that can absorb these many units," said Leon, 72. "It doesn't take a rocket scientist to say, 'Gee, who's going to live in all these buildings?' "

To which I'll answer, "Those of use who were content to rent, who saved cash, who educated ourselves using the Scientific Method of observation and forming hypothesis, who read history books and who waited for the bottom to fall out of the Housing elevator." That's who.

If the math doesn't work, we will not put our cash into play.

It's that simple.

Why pay an outrageous price for a condo which has only lost 25% off its pre-built cost, especially when pre-built cost was set at a market top?

I mean, I buy stocks of great companies which have lost 50% or more from ten year averages and ride them up after they bottom. Why should I be antsy to enter Real Estate now when inventory is about to continue growing like a mushroom cloud over Ground Zero?