Condo Markets Future Its So Much Clearer In Retrospect
Written by Michael Lewis on April 13, 2006
By Michael Lewis
Are we overbuilding high-rise residential properties in Dade County?
Readers assume newspapers have inside information, so they ask lots of questions. That’s among our top three, along with "Will the Performing Arts Center make it?" and "When is the shakeup coming in the City of Miami?"
The short answer to all three is "Time will tell" – an easy way out that can actually help if we look back in time. It may not answer the question, but it can show what to emphasize.
Review the first paragraph. We printed "Dade" instead of "Miami-Dade" County because that paragraph led off this space exactly 10 years ago, when condo overbuilding in Miami also was a national question.
That’s when Forbes looked at condos rising and on the drawing boards here and decided that – just like today – the number far exceeded demand.
There was, however, a difference. Whereas today we’re questioning whether far more than 100,000 new units is too much, the number then was 7,000. Forbes said that far exceeded demand – good news for its readers.
"By almost any standard, residential real estate – except luxury waterfront property – is a screaming bargain in Florida," Forbes said.
And more: "We’ll stick our neck out here a bit: If you think you would like to retire to Florida’s low taxes and sunny climate one day, now is the time to buy."
Since Forbes also reported that "the average single-family home in Miami is $105,000," the magazine hit it right: Virtually any housing bought in Miami-Dade 10 years ago would be the bargain of all bargains at today’s prices.
Forbes predicated its case for overbuilding on a predicted outflow of younger residents due to congestion. Forbes saw the Miami housing market as retirees seeking cheap living and Northeasterners buying second homes but never noted foreign inflows that have fueled our population growth for decades or the influx of US upper-income buyers. And it didn’t think young people would remain here as the county urbanized.
Forbes also missed a key question in the 1996 boom: Would all 7,000-plus high-rise units ever be built? We bet they wouldn’t.
Fast forward a decade: What might we learn from history?
First, pinpoint the potential buyers before deciding whether a market is saturated or overpriced. Omitting the foreign marketplace was a colossal oversight.
Second, assess how the community is evolving. Assuming younger buyers would flee because Miami-Dade was becoming more urban got it backwards – the outflow has been older residents who are downsizing, not younger residents who may be growing families and who often welcome an urbanized South Florida.
Third, don’t assume project announcements – or even sales of unbuilt units – equate to the number of units that will rise. Today, we’re seeing developers abandon plans they cannot afford to build and void sales they cannot afford to close because they’d lose money.
Fourth, allow for the unknown. Hurricanes not only cut demand for housing but increase demand, and hence costs, for labor and materials after they blow through. Building booms abroad also raise costs of materials here. Those factors have been apparent in this boom cycle – note that word "cycle" because these things occur over and over with variations. What could be next?
Fifth, watch apparently unrelated factors. We’re building like mad downtown but we’ve added no infrastructure, no roadways or capability to provide water to new residents. Housing doesn’t exist in a vacuum. Just as South Beach’s magnetism once hyped housing demand, a degraded quality of life would reduce both demand and the value of the housing we now occupy.
Given all of that, our forecast of 10 years ago holds true today:
"Despite dire warnings elsewhere or any hints of fire-sale prices, the upscale condos we’re seeing on the market today appear to have a reasonably strong market and reasonable chances of being quite successful for their developers."
Now, notice what we also missed a decade ago. We forecast success for developers, but perils today await speculators, not developers. This goes back to point five: The apparently unrelated factor of a dull securities market sent investments elsewhere. Too much ended up in condo investments.
So perhaps the basic question is not so much about overbuilding as it is about overbuying. In 10 years, we’ll try to answer in retrospect. It’s so much easier that way.