Miami The First U.S. Real Estate Bubble To Burst?

Earlier this week I read a great article by Kuppy at Adventures In Capitalism. It brought back memories of the last condo and real estate bubble in Miami… I was there. I was moving to Tampa and sold before the crash that I was nearly alone in forecasting in late 2005 .

Kuppy noted that prices had plateaued for a few years and had begun to drop 20% to 35% in South Beach – and worse in the downtown Brickell area. He talks to a friend who makes non-traditional loans against these condos, and he says “it’s about to blow… just give it six to nine months.”

Miami is Bubble City

It’s a part-time vacation town for many, a show-off place that’s big on laundering money into real estate from drug dealers in South America and so on. At night most are empty with no lights on, even in season.

Builders get on a roll at $300 per sq. ft. costs, selling for $700,000+. So, they keep building until it blows. I was there a year ago and saw more than twice as many cranes as at the last top in 2005-6.

Most buyers put 20% or less down and don’t even have to come up with the rest until completion. They borrow, and borrow more if needed as the prices rise. But when they stagnate or fall, they quickly get into trouble… It’s the carrying costs that average 4% to 7% before financing. The property taxes are 2% alone – I know because I paid that.

When people start to default, the non-traditional lenders add penalty interest and the banks refuse to lend further after prices start to drop. Builders just keep adding inventory to a glut as it pays them short term to complete.

Finally, the lenders start to panic and force fire sales. Miami was the biggest bubble crash in the last real estate bust, averaging 52%. It will be higher this time. The market is dominated by even higher “faker luxury” condos. Larger with more flamboyant features. Those are the hardest to unload when prices drop, says Kuppy’s lending friend.

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