Two real-estate experts explain it all -- or at least give it a good try

The stock market has been drunker than usual lately. Literally every day, for weeks running in September and October, the Dow spiked and plunged several hundred points between opening and closing. At first the nation’s newspapers covered every financial shudder on the front page, as we all waited and wondered who would survive the largest meltdown of the financial sector since the Great Depression.

The drama seemed unreal, even as we watched our own golden investments -- 401Ks, IRAs, home equity -- drain away. The federal government’s much ballyhooed $700 billion financial rescue package, passed by Congress on October 3, is still too new to know when, how, and who it will actually save. So too the Fannie Mae and Freddie Mac bailout the month before.

Generally speaking, economic experts warn that the recession is not going to end soon and that home sales are likely to be discouraged by a weak job market in addition to the credit turmoil and a ripening global panic.

But this is Miami, where the normal rules of real estate don’t necessarily apply. We wondered if there was anyone -- anyone not currently trying to sell us a distressed condo -- who could open for us a window into the near future of the communities along the Biscayne Corridor. This is, after all, where the gold rush became emblematic, as the glittering glass-and-steel towers jutted out of downtown’s scorched earth and began to march up the bay, leaving us with a half-finished and unruly gentrification project now uncertain in its momentum.

We tapped two experts: William Hardin, director of real estate programs at Florida International University’s Department of Finance; and Andrea Heuson, professor of finance at the University of Miami. Both are, to steal a phrase from the now-culpable Alan Greenspan, cautiously optimistic.

“In the big picture, we are in a recessionary period,” Hardin admits, sipping coffee at the Upper Eastside’s Starbucks. (I cashed out what was left of my 401k to join him.) “We have negative job growth. On the upside, Miami is a unique place in that real estate doesn’t correlate with jobs or employment data. The assumption is that people from Europe and South America will come. So there’s a disconnect there that’s unusual for a metro area as large as this one.”

The bad news, Hardin says, is that the federal bailouts are aimed at “owner-occupants, not vacation and part-time owners,” which is a huge percentage of the local market, particularly in condo sales.

“My worry with the top end,” he continues, “is when you have the [stock] market go down 20 percent in two weeks, even if I’ve got 10 million, with losses like that, I’m not really excited about buying a condo. The migratory patterns to South Florida, particularly this [Biscayne Corridor] area and Miami Beach, are a lot of people from New York. If that’s who we’re ultimately selling to, they are going to have less of an ability to pay. In parts of Europe, they were highly leveraged as well, so some of those markets aren’t as strong. I’m not trying to be all gloom and doom, but the government can only do so much.”

Further bad news comes from Heuson, who says that up until late summer, the dollar was weak, making Miami real estate an attractive purchase for Europeans. Less so now. “Are the people buying?” she asks “Sales volumes went up last quarter, but it was mostly foreclosure sales, which isn’t healthy.”

Another factor is the huge amount of uncertainty the world feels as it has watched us select a new president. “Have you been watching the debates?” Heuson says. “Have you ever heard a moderator [in past elections] ask who a presidential candidate would appoint as Secretary of the Treasury?”

As for the various federal interventions, Heuson believes they will help reduce foreclosures, “but for everything else, people are waiting for the election.” She thinks proposals now in Congress that would help certain homeowners renegotiate mortgages is a good idea. Otherwise the banks will renegotiate on a piecemeal basis, and that, she believes, would be a mess.

Everyone wants to learn what will happen to their particular piece of the pie, and the answer is that nobody really knows for sure. There is enormous downward pressure not only because the real-estate market was overblown, but because so many people got loans they couldn’t afford.

According to statistics from the Miami-Dade County clerk’s office, as of the end of September, there were 40,342 foreclosures filed countywide, compared to less than 27,000 the year before, and fewer than 10,000 in 2006. But Hardin says, “If you look closer, you’ll find there are concentrations of them. There are condo conversions that didn’t go well, so that means there’s a condo complex that’s bad, but it’s not relevant to the single-family homeowner in Miami Shores.”

Condo Conundrum
Condos are a problem, no doubt, because that market was driven to a large degree by speculation. “That’s still the $64,000 question,” Hardin quips. “Who will be the end-user in the condo market?” (Of course, the joke, courtesy of the Daily Show, is that “thanks to Lehman Brothers, Morgan Stanley, AIG, Freddie Mac, and Fannie Mae, the $64,000 question is now worth $1,324.86.”)

The predicament is a vast oversupply. Heuson says it took about seven years for the 1980s condo glut to be absorbed. She figures it will take less time to absorb today because economic cycles move faster now. People are looking for the market “to become something other than vulture-condo buys,” says Heuson. “With the condo boom, there were so many nearly identical units that they defied the usual logic in real estate, that location [makes a property] unique. People were trying to sell condos as a commodity.”

On the plus side, falling condo prices will attract buyers at a certain point, just as undervalued stocks attract investors. “That will add some liquidity, which is good, and pricing transparency as well,” Heuson notes.

Hardin says many Miami condos are a good investment long term because the infrastructure for urban infill is there. Eventually people will come. But in the short term, the savvy buyer has to weigh whether it’s better to invest in a fire-sale unit at one of the big new buildings, or pay a little more in an established building.

“The risk in some of these large buildings is that they aren’t all sold, or you have a number of units in foreclosure and they aren’t paying their assessments,” he says. “So you may get a good deal but you’re buying into a management problem. Some of what we built is too large. I think there’s more of a market for smaller buildings, say 8- to 10-story buildings, rather than 40- or 50-story buildings.”

He sees tough times for a mega project like Midtown Miami because it’s too big, too isolated, and a little too far from the Boulevard and Biscayne Bay to compete in this market. That’s why much of the sales effort there has turned to the rental market. “It’s a great project,” he says. “The question is the scale of it. Can you draw in literally thousands of people to that area? In ten years, it will happen. The question is what it will look like between now and then.”

Commercial Properties
In the commercial sector, Hardin says, the good news is that there’s plenty of space for businesses to consider. “The uncertainty in the Biscayne Boulevard area is three new office buildings coming on line in the next one and a half years, downtown,” he opines. “They were all speculative. The good thing for Miami is we’re building what would be considered world-class space. The only question is the price. You’ll probably see musical chairs with regard to tenants.”

But why do we need huge, new, premium office buildings when Miami in general is dominated by small business?

“I talked with some brokers and had my students ask the question: ‘Well, how many of these businesses need 100,000 square feet of space?’” he answers. “Their estimate was relatively low because the typical user needs 5000 to 10,000 square feet of space. Then you have a big user at 20,000 or 30,000. On one hand, that’s a problem. On the other, it means that a lot of these smaller buildings work. You can disperse a lot of that all over town, so people have the choice to live and work relatively close. That will be interesting downtown to see as they lease these up, from where they pull the tenants.”

Single-family Homes
There’s a bright side to this sector as well -- namely, pent-up demand, the result of so many people having been priced out of the market during the boom. “There are people on the sidelines right now who would like to buy,” Hardin says. “The question is: When should I buy and what should I pay? Everybody wants a deal, and right now there are still a lot of people asking a lot of money.”

So how much is too much? One good way to figure that out is to determine what comparable homes in your neighborhood are actually selling for, not what they’re listing for. Several Websites aggregate sales data. A good one is trulia.com, which reveals, for instance, that the average asking price in downtown Miami is $528,274, but the median sale price is $417,400. You can check any part of town you want.

The Website ushousingmeltdown.org offers a home-price evaluator based on demographics such as income. According to these calculations, which compare housing prices in 1999 to those in 2005, prices in the area bounded by Flagler Street on the south and NE 20th Street on the north, from N. Miami Avenue to the bay, are overvalued by 86 percent. From about 20th Street north to 62nd Street, however, home values are only about six percent out of whack based on income levels in the area. From that point north to 103rd Street, housing is 36 percent overvalued, though Biscayne Park is actually 13 percent undervalued. North Miami south of 145th Street is 42 percent overvalued, according to the Website’s formula.

Heuson believes homes prices along the Biscayne Corridor are still roughly 25 percent too high, based on a more normal appreciation rate of five to six percent per year.

Hardin says he doesn’t think prices will “fall off the cliff anymore,” but there are still plenty of people who haven’t yet accepted the fact that their $700,000 house is only worth $400,000. The problem for some is that their loans are so expensive, they can’t afford to sell at the lower price. That situation is tough because, in most neighborhoods, the competition includes short sales, foreclosures, and sellers who bought low five to ten years ago.

But Hardin and Heuson both say the outlook is good for buyers. If you’re looking to move, hopefully there’s enough equity in your current home to leave you with a down payment. “If you have a single-family home, you may have to take a discount,” Hardin says, “but you can buy cheaper, too. It’s just trading equity.”

“It’s a lifestyle choice,” he continues. “We’re all better off if we block out this idea that buying a house is an investment. Housing is ultimately consumption. The reason people make money on their home is that they got a 30-year loan and paid it off and the home value went up over time, so it’s their biggest asset. It was basically forced savings. But now that we refinance every three years, we think we can consume our way to wealth? It’s a fantasy. In the big picture, if you like that house, figure out if you can afford it, buy it, and move on with your life.”

Hardin recommends that sellers think twice about putting their home on the market right now. “I would say: Why do you want to sell? Because this is a buyer’s market. It’s a good location long term.”

Heuson agrees. “I’d wait until next summer to either buy or sell,” she advises.

Now What?
The first sign of recovery, Hardin and Heuson agree, is when the volume of sales picks up. “We get volume by having prices in line with what people’s expectations are,” Hardin explains. “So we’re not looking at a rebound in prices yet. The first rebound will be that we’re selling more houses.”

If lenders and/or the government refinance residential properties for lower fixed-rate mortgages, that will help reduce foreclosures and stabilize prices. The condos will recover last, the professors say, while single-family homes in neighborhoods close to the water and those with tree canopy, walkable shopping, and good schools will bounce back first.

“If the price gets low enough, the investment demand will come back,” Heuson states.

“The beauty of America is we all have Attention Deficit Disorder,” Hardin jokes. “So in six months, we’re going to say, ‘I want to be doing something.’ That’s why we’ll recover. We don’t really like to sit still for long.”

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