Summary
South Florida's commercial and residential real estate markets suffered in 2008, and the New Year doesn't figure to offer much relief. Continued foreclosures and the weak economy will continue having an impact on prices and number of properties available with only aggressive sellers disposing of properties. Although home sales started picking up this past summer, the beleaguered housing market has been hammered by foreclosures and falling prices. Meanwhile, the sputtering economy has local businesses retrenching and cutting jobs, dealing a blow to the retail, office and industrial sectors. All this carnage creates an opportunity for those positioned to take advantage of the adjustment in prices, and higher expected returns.
Analysis
The three-year housing slump may ease by this time next year, but the real estate market in Florida, particularly the Miami real estate market almost certainly will still be in decline. After a five-year boom, South Florida's housing market began to tumble in 2006. People who stretched to buy properties they couldn't afford have been forced into foreclosure over the last two years. Homes have lingered on the market for months as prices are driven down and as tightening credit makes it difficult for buyers to get financing.But, although it might seem that we must be almost finished, there's still a lot of pain to come in terms of write-downs and losses that have yet to be recognized.The trouble now is that the insanity didn't end with sub-prime mortgages. There were two other kinds of exotic mortgages that became popular, called "Alt-A" and "option ARM." The option ARMs, in particular, lured borrowers in with low initial interest rates - so-called teaser rates - sometimes as low as one percent. But after two, three or five years those rates "reset." They went up. And so did the monthly payment. Now the Alt-A and option ARM loans made back in the heyday are starting to reset, causing the mortgage payments to go up and homeowners to default. With defaults at unprecedented levels and no evidence that the default rate is tapering off, it will lead to further foreclosures, homes being auctioned, and home prices continuing to fall.
Literally, billions of dollars in sub-prime mortgages reset last year and this year, but what hasn't hit yet are Alt-A and option ARM resets, when homeowners will pay higher interest rates in the next three years. The damage and opportunity is substantial if one considers that the sub-prime is approaching $1 trillion, the Alt-A is about $1 trillion and then option ARMs are probably another $500 billion to $600 billion on top of that.
For acquisition funds with large amounts of capital resources at the ready,South Florida's real estate Armageddon may be a welcome occurrence.
