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Market Trends
IS THE FLORIDA HIGH-END CONDOMINIUM BOOM OVER?
by Lewis M. Goodkin
For the past four years, residential real estate has been the favored investment for most Americans. Market declines and volatility on Wall Street, low mortgage rates and record numbers of new homes have created a perception among buyers, sellers and developers that the current boom in residential housing will last forever.
A number of recent public opinion surveys indicate that optimistic attitudes are prevalent across the country. For instance, one report noted that 28 percent of buyers in Boston, Los Angeles and San Francisco expect home prices to rise 20 percent a year for the next ten years.
These types of overly upbeat consumer reports do nothing to dampen a wave of speculative buying from "investors" who are gambling that they can purchase new condominium units, lofts and townhome residences at pre-construction prices – then "flip" their units to new buyers at a substantial profit when a new building nears completion.
One of the hottest national markets for speculators is South Florida. Our consulting firm's research indicates that more than half the total condominium demand in the past year has been speculative. In fact, speculators account for as much as 80 percent of sales at some fast-selling projects.
Unfortunately, these speculative buyers – as well as many developers of multifamily housing projects – are coming to the market at a very late point in the current real estate cycle. Just as the technology boom of the late 1990s came to a crashing halt, the potential exists for a relatively sudden "readjustment" in the national housing market.
Today's speculative buyers are betting:
• The residential market will continue to boom
• Prices will continue to escalate
• Interest rates will remain low
There will be no bad news to create an exodus out of the market. Compounding the problem is that price levels have climbed significantly in the past four years, reducing the number of potential buyers who can afford to buy the speculators' units.
For developers and buyers to make plans on the assumption that South Florida – and the nation – will see continued above-average appreciation rates is a dangerous play. As land prices, construction costs and interest rates escalate, the pricing for new housing products may outstrip the mass market's purchasing ability.
Historically, South Florida enjoys one of the nation's most multi-faceted condominium markets with growing primary demand and an expanding international and domestic second home/vacation market.
The market has demonstrated its ability to generate new supply and support impressive price appreciation over the past two decades.
However, the magnitude of new development in South Florida today combined with the extremely high level of speculative purchasing poses a serious risk of a condominium "bubble." The clear danger is that developers may face serious financial difficulties when thousands of new units completed hit the market in 2005-06. It may be like a giant margin call.
In fact, the best-case scenario is that all the speculators will close on their units – then put them back on the market to compete with new construction at that time.
Traditionally, the development industry's biggest challenge is avoiding an oversupply. The huge surge in speculative buying/selling in the past three years has distorted real demand in the market, setting the wheels in motion for a rude awakening. The challenge for developers today is to clearly understand the dynamics of a local marketplace before making a commitment to new product. In other words, we must all learn from the past.
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