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Real Estate & Economics

 

 

It’s a Great Time to Buy! South Florida Housing Starts Jump 41%

According to the South Florida Business Journal, South Florida’s quarterly single family housing starts rose 41.2 percent in the third quarter from a year ago, and 9.4 percent from the prior quarter, says data from Metrostudy.

Housing starts remained higher than move-ins during the quarter, but move in starts have accelerated.

In addition, Miami-Dade, starts grew by more than 50%, year over year, and were up 7% in the third quarter compared to the second. Move-ins rose 36% in the third quarter, year over year, and climbed 42 % compared to the prior quarter.

In Broward County home starts were 5.2% higher, year over year, and had a 2% increase in the third quarter compared to the second.

In Palm Beach, starts rose 61 percent in the third quarter compared to a year ago and climbed 15.5 percent from the third quarter to the second quarter.

Move-ins climbed 44 percent in the third quarter, year-over-year, and grew 9 percent in the third quarter compared to the second.

South Florida is mirroring the nation’s construction activity.

National construction permits for housing skyrocketed 45.1 percent in September, compared to the previous year, and jumped 11.6 percent from August.

Single-family construction permits rose 6.7 percent to an annual rate of 545,000, the highest since July 2008. Multifamily construction permits jumped more than 20 percent to an annual rate of 349,000, another rate not achieved since July 2008. Meanwhile, South Florida continues to work itself out of its foreclosure-related issues.

Property Median Values Up!

A newly published report from the local association of realtors, is showing that the median price of condominiums in Miami is up almost 32% in November alone. This is an unprecedented change following a 17 month long trend of upwards pricing for condos in the city.

This is contrasted by the mere 15.9% rise in average sale prices for single-family homes in the same city. While both types of properties are on the rise, there is a staggering difference between the 2 markets.

“It appears the Miami real estate market will set another record in 2012, exceeding sales levels at the height of the boom in 2005 and during the all-time record in 2012,” said Martha Pomares, Chairman of the Board.

She continues stating, “Considering the shortage of housing inventory available, it is remarkable that sales remain this strong. This record demand coupled with extremely limited supply is driving strong and consistent price appreciation.” In Miami, total sales rose by about 23% in November alone for all real estate properties.

Real Estate Impacts on Economics

Last year, the Wall Street Journal published an article titled “The Folly of Economic Short-Termism” authored by Allan H. Meltzer, a professor of public policy at Carnegie Mellon University. The gist of the piece is that the author thinks that the Federal Reserve needs to focus more on implementing policies to increase long-term confidence in the U.S. economy, and less on pursuing another round of short-term economic stimulus. He also mentions that the M2 money supply in the U.S. has been over 10 percent for the past six months, a sign of more inflation in the future.

So what does “economic short-termism”, inflation, and the consumer confidence have to do with Miami’s real estate market? In many ways, this way of thinking and these economic conditions are inter-connected and do impact and will continue to affect our real estate market.

According to the author, there are many economists and Wall Street interests suggesting that the Federal Reserve should pursue a third round of quantitative easing. This move will further boost the M2 money supply and further increase the risk of inflation. This idea is very consistent with the government’s response thus far, which has been to apply band aids and hope for some magical fix to the ailing economy and housing market.

The government has provided incentives to homeowners to pursue a short sale or obtain a first-time home buyer tax rebate, but we do not address the long-term implications of homeowners strategically defaulting on their mortgages. Do I have the magic bullet to cure our housing and economic problems? No, but these short-term band aids have done nothing more than kick the can down the road. Until we deal with the fact that the consumer and real estate markets, both residential and commercial, are over-leveraged and underwater, we will remain in the same quagmire.

Homeowners need to recognize that owning real estate is a long-term financial commitment and that a home is not a liquid asset nor ATM. However, bankers also need to take responsibility for flooding the market with easy mortgages.

It’s time for the policy makers and banks to focus on the cancer instead of just treating the patient. More stimulus may save a few jobs and provide some short-term relief, but this will do nothing to stave off inflation and resolve all the bad debt on our books.

Why invest?

Following a horrific third quarter, many investors are now focusing on income producing investments and the Miami housing market is at bargain levels. It is time to consider buying an investment property in Miami?

Miami attracts a wide variety of investors and the majority over the past few years have been an international bunch with cash that have been taking advantage of a weak dollar. Some investors aim for properties that produce rents at 1% or less of the purchase price. For example, $1,500 a month in rent for a $150,000 condo or home, or an annual gross return of 12 percent. Today, some of our investors are actually realizing as much as 2.5% yield of the purchase price per month.

However, this rental yield actually provides an average return of 4 to 6 percent of the purchase price as investors have to account for expenses and real estate taxes. Considering that the Dow Jones Industrial Average just finished the third quarter down 12 percent and that the S&P suffered an even bigger decline, this return is clearly above what equity investments yield.

Purchasing an investment property in Miami requires expert help and a tremendous amount of due diligence. You have to remember that owning an investment condo can be expensive, management intensive and challenging.

Here are some common miscalculations Miami property investors make:

Underestimating repairs and rehab costs – Many investors underestimate the extent and nature of the repairs required to offer an acceptable product to renters. Mold, inefficient air conditioning units, wood rot, insulation, and shoddy window treatments are common issues. Often what appears in good shape on the surface may be a nightmare lurking beneath.

Assuming you will rent out the property immediately – Renters tend to show up at the last minute and they want the property to be turn-key and “move-in” ready. If you place an unfinished or dirty condo on the market, they will simply move to the next best available.

Ignoring key expenses – It is not simply a matter of knowing the potential rent, monthly maintenance fee and estimated annual real estate taxes. Investors have to also factor in closing costs of 1.5 to 3 percent, the expenses to fix up and maintain the property, property management, plus any holding costs while vacant.

Exit strategy – Having a clear and defined exit strategy is key to owning investment property. When and how do you plan to exit the property? When you exit what is the assumed sales price less your selling expenses? How will you market and sell the property? Will financing be available to potential buyers?

Opportunity costs – In real estate, time is one of your biggest challenges. Properties age and can rapidly deteriorate if not adequately maintained in Miami’s tropical climate. You also lose money when your home is vacant, and managing and marketing an investment property is very time consuming. Hiring a competent and reputable local property manager is a key ingredient.

Owning an investment property is the same as owning a home – This is a common misconception that investors make. Tenants will not put up with maintenance issues like you will in your own property. Many communities also have certain ordinances in place that may restrict your ability to freely rent your property.

Condominiums pitfalls – While the investment condo may have an ocean view, did you consider that the monthly condo fees of an oceanfront condo can be extremely high? Although the monthly condo fees may appear manageable, does the condo association have reserves and are there any upcoming or current special assessments? Has the building cleared and satisfied the 40-year re-certification?