International buyers are drawn to Florida by the same forces that drive domestic buyers – abundant sunshine, relatively mild winter weather, and historically affordable prices. In addition, many Latin American buyers have historically sought homes in South Florida as a refuge from potential political strife in the home countries. This last factor has been particularly important in recent years, which have seen a huge influx of Venezuelan buyers.
Exchange rates are also a factor. The recent strength in the British pound and the euro has provided a huge boost to demand from British and German homebuyers. Moreover, home prices in several European resort locations have soared in recent years, while airfares to the United States have fallen. Exchange rate movements have also helped fuel demand from Canadian and Latin American nations. Both the Canadian dollar and Brazilian real are currently 30% higher than they were back in 2002.
Supply Has Been Constrained By Growth Management Initiatives
While all the stars seem to be perfectly aligned on the demand side, the supply of housing in Florida has been much more problematic. Even though residential construction has soared to new highs recently, the supply of housing has lagged woefully behind demand in recent years. This has been particularly true for single-family homes, where population growth, a rising homeownership rate, and strong demand for second homes and vacation properties created a demand for 560,000 new single-family homes between mid 2000 and mid 2004. During this period builders only delivered 540,000 units. When you add in the growing demand for townhouses and condominiums, buyers were looking to purchase 675,000 new homes during this period, while builders were supplied just 570,000 units. No wonder prices have been surging!
The chief impediment to new construction has been a shortage of developable land. The shortage primarily results from a growing resistance to new development. The state is not running out of space. Nearly every community in Florida and the state itself are looking at some type of limitations on new residential development. While well intentioned, these initiatives are making it more time consuming and expensive to build homes in Florida. Others are taking land off the market, designating areas for green space, or preserving space for industrial development. The net result has been dramatically higher land prices across much of the state.
Another factor limiting supply has been the growing role large builders are playing in the state. With the residential development becoming more time consuming and burdensome, many smaller builders are getting out of the business and selling to the large private and publicly-traded builders. Such builders currently account for more than one of every five homes built in the state, which is nearly double the share in past building cycles.
Large builders are much better able to raise the capital needed to acquire land, bank it, and improve it. These firms are also better able to deal with the difficult staffing and procurement issues that currently plague so many builders in the state. In addition, only large firms have the resources to withstand and engage in all the litigation and lobbying that is needed to push residential developments through the approval process.
There is still room for smaller builders in Florida. Most are concentrating on small niches, such as custom homes or infill projects. Others may have land entitlements that will carry them through the next several years. Many, however, are looking for an exit strategy, particularly with the business as strong as it has been recently.
Large builders have a different operating strategy than smaller, independent builders do. Most are publicly traded companies and have to withstand the scrutiny of Wall Street analysts, the rating agencies, the SEC, as well as their investors and lenders. With so much scrutiny, these firms are run much more conservatively than homebuilders have operated in the past. One of the biggest differences is that most builders now build to order, which has kept inventories exceptionally lean.
All this caution by builders is making a difference. The Federal Reserve has been monitoring building activity in Florida and reaches many of the same conclusions. The Fed's latest Beige Book noted the following: "Shortages of homes for sale continued to be a problem in Florida, and some builders noted a shortage of available land for development. Several Florida builders indicated that labor shortages were an additional restraining factor."
While builders are taking less risk than in previous building cycles, buyers appear to be taking more risk. There seems to be a great deal of speculation in parts of Florida's condominium market. Buyers are also taking on more leverage, with a larger proportion of homebuyers utilizing interest-only loans, and/or making much smaller down payments. 9 In addition, we are seeing some evidence of speculative buying of single- family homes in a few markets. So far, however, we feel these excesses are still the exception. Most Florida housing markets remain exceptionally strong, with demand still exceeding the available supply. Demand is being primarily driven from buyers intending to occupy their home as their primary residence. Increasingly, we are seeing signs that the gap between supply and demand is beginning to narrow. If this continues, price appreciation should slow toward the end of this year and into 2006.
A Survey Of Florida's Major Housing Markets
Miami is widely thought to be ground zero for the housing bubble. That distinction largely derives from the dazzling array of building cranes dotting the city's skyline. There are currently 14,134 condominium units under construction in Dade County, an additional 21,284 units approved to be built, 12,252 in the application phase, and another 23,856 units planned or in what the Miami Planning Department calls the preliminary phase. By comparison, only 9,152 condominiums were built in the past decade. The pace of development easily eclipses anything ever seen in Miami, including the 1920s building boom.
Condominium development has taken off across Dade County, but the epicenter is clearly downtown Miami, particularly along Biscayne Boulevard near the area where the Miami Performing Arts Center is being built. Tales of buildings selling out in a day have become legendary, although somewhat more rare in recent months. Demand for condominiums is being driven by a mix of retirees and second home buyers from the Northeast and Midwest, younger buyers seeking an urban lifestyle, and overseas buyers from Latin America and Europe who are attracted to the region by its famed international flavor and nightlife.
There is another element to demand, however, which has received widespread attention. Speculators are widely thought to account for anywhere between 50 percent and 75 percent of all condominiums purchased in Miami during the past two years. Many have reportedly been flipped more than once, as investors have capitalized on the rapid appreciation that has occurred during the two years or more that it takes to bring a project to completion. Efforts have been made to limit speculators. Most projects do not allow multiple purchases of condo units or limit the number of units one buyer can purchase. In addition, most developers require a 20 percent nonrefundable down payment and also reserve the right to a portion of profit earned from re-sales of a unit before the project is completed. In addition, lenders have tended to require that a building be between 70 percent and 100 percent pre-sold before handing over construction money.
Even with these restrictions, speculation remains rampant. There are many ways for speculators to get around virtually all of these restrictions. The $10 billion question is will investors be willing to walk away from deposits that range anywhere from $20,000 to $400,000 or more per unit if the market suddenly turns soft. Moreover, who will be left holding the bag if the market turns down, the buyers/investors, the lenders, the developers, or everyone involved. History would come down on the latter, but the key distinction in this market and earlier condo booms is that the buyer/investor is shouldering a much larger proportion of the risk.
For all the talk about speculators, there is at least one surprising statistic that tends to downplay some concerns. The latest data from LoanPerformance.com show that just 14.3% of the mortgage loans made in Dade County were interest-only loans. By contrast, the national average in 2004 was 22.9%. Moreover, the homeownership rate in Miami is relatively low at just 60 percent, compared to a statewide figure of 73.8 percent. Finally, if this century is truly going to be the age of globalization, one would be hard pressed to find a more internationally-oriented city in this hemisphere than Miami, which should bode well for demand over the long haul.
While the inevitable day of reckoning still appears to be a long way off, we are beginning to see some signs that Miami's housing market is cooling off. Sales of single-family existing homes in Miami slipped 2 percent in July and are running 6.6 percent below their year ago pace. Of course a good part of the problem in the single-family market has been a lack of supply, and that appears to have been the case in July. A shortage of homes on the market is one reason why prices of existing single-family homes have risen so rapidly, jumping 28 percent over the past year alone.
Demand for condominiums is harder to get a handle on. New buildings continue to be announced at a fevered pace. Recent announcements include a pair of mixed-use towers by Cabi Developers, which recently were approved by the city of Miami. The firm plans to build two towers, one 53 stories and the other 57, on Miami Avenue. The $584 million project, dubbed Capital at Brickell, will join 35 other projects currently under development near the Performing Arts Center site. While we fully expect all projects currently underway to be completed as planned, we have no illusions that anywhere near all the projects currently proposed will ever be built.
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