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A Surprising Number Flipping For A Loss

A report from the South Florida Business Journal in Florida. “The majority of new condos in Miami and the beaches that sold so far this year traded at a loss to their original developer sales, according to a study by CondoBlackbook, part of HB Roswell Realty. After identifying 102 units that sold in the first three quarters of 2018, it found that 64 of them, or 63 percent, sold for less than their original purchase price. When considering the cost of broker commissions and other fees associated with selling a condo, it’s likely that 80 sales, or 78 percent, lost money.”

“The HB Roswell Realty study shows that this troubling trend has continued. A Business Journal feature story from August 2017 found that a surprising number of condos in new buildings were flipping for a loss. The Porsche Design Tower saw a couple of condos resale for steep losses. Unit 4405 in Porsche Design Tower was originally bought for $11.8 million in 2017, and then sold for $7.4 million in August 2018.”

“One reason that it’s been hard for new condo resellers to make a profit is that there’s an oversupply of inventory, said Sepehr Niakan, owner of HB Roswell Realty. Based on the pace of sales over the past six months and the 1,840 new condos listed for sale, there’s a 81-month supply of inventory.”

“That number doesn’t even count new condos that developers have completed and are still trying to sell. Niakan said any condo developer looking to launch now should expect an especially long pre-sales period.”

“‘If you want to make money on a pre-construction property, you should keep waiting until this cycle corrects itself,’ Niakan said. ‘For the buyer who didn’t want to touch pre-construction a few years ago because it was too expensive, now they can get it for a few percent less and see it [the completed condo] for themselves.'”

The Naples Daily News. “Housing permits are on the rise in Southwest Florida. Collier, Lee and Charlotte counties are on track to see a more than 23 percent increase in residential permits in 2018.”

“In 2017 there were 13,603 single-family and multifamily residential permits issued in the three counties. This year that number is projected to hit 16,500, said Randy Thibaut, CEO of Fort Myers-based Land Solutions Inc. The latest permit numbers include new apartments and assisted-living units. Thousands of permits have been issued at about a dozen projects across the region this year.”

“‘Obviously anyone who is in these markets, or driving in the community, on every corner has seen new apartments and assisted living continue to start,’ Thibaut said. ‘That skews the numbers. The permits are not two or three at a time. They are 300 at a time.'”

“What he shared at the sold-out event wasn’t all positive. The rosy permit numbers came with some warnings, including ‘the big elephant in the room.’ ‘It’s time to talk about the big elephant in the room,’ Thibaut said. ‘It’s clear that the development, building and housing industry is aware that there is a correction to the market at hand now — and likely could be some corrections in the market leading up into 2019 and 2020.'”

“Thibaut isn’t the only one who sees signs of a market correction. Asked his thoughts, Gary Tasman, founder, CEO of Cushman & Wakefield Commercial Property Southwest Florida, said, ‘It’s starting to happen.'”

“‘I think it’s being baked in the market right now,’ he said. ‘I think because of that you are going to see a lower velocity of home sales. But I don’t think you can say it’s already happened.'”

“He blames it on three factors: labor, material and land costs, which are all rising. ‘Wages and purchasing power aren’t keeping up with the cost to produce a new home,’ Tasman said. While home prices have been rising an average of 7.5 percent a year in Southwest Florida, wages have increased only 3.4 percent on average, he said. ‘That’s the disconnect. That’s probably the best way to explain it,’ Tasman said.”

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  1. ‘After identifying 102 units that sold in the first three quarters of 2018, it found that 64 of them, or 63 percent, sold for less than their original purchase price…it’s likely that 80 sales, or 78 percent, lost money’

    102. And there are thousands for sale and thousands on the way and thousands in shadow inventory.

    ‘Based on the pace of sales over the past six months and the 1,840 new condos listed for sale, there’s a 81-month supply of inventory…That number doesn’t even count new condos that developers have completed and are still trying to sell’

    When you get over $3 million they are looking at decades to unload them. Which won’t happen cuz they’ll all be dead or broke before then.

    1. “…it found that 64 of them, or 63 percent, sold for less than their original purchase price…”

      But, but, we will make up for it with volume

  3. ‘Thousands of permits have been issued at about a dozen projects across the region this year…’The permits are not two or three at a time. They are 300 at a time.’

    But we aren’t building anything? Shortage?

  5. Whatever happened to $80/bbl oil?

    Crude worldwide plunges after questions about oil demand
    November 7, 2018

    Crude oil prices fell Tuesday, briefly entering bear market territory, after the U.S. said it will allow some of Iran’s biggest customers to continue importing the Opec member’s crude without violating reinstated U.S. sanctions.
    …
    U.S. West Texas Intermediate crude ended Tuesday’s trading session down 89 cents, or 1.4%, to $62.21 a barrel, Kallanish Energy reports. At the session low, WTI touched $61.30/Bbl, falling 20.4% from last month’s nearly four-year high level of $76.90/Bbl.
    …

    1. An 18 year low on mortgage applications is pretty sobering considering it’s worse than the lows of the last depression. It’s rigor mortis for housing.

      1. “We got mortgage broker clients that are dyin'” – Quote yesterday from the Sales Manager of the station at which I work.

  7. Dumb question of the day: How come home builders build themselves into a bust without fail, at every turn of the real estate cycle. Isn’t this rather like shooting one’s self in the foot?

    1. April 19, 2018

      From Bisnow on Florida. “‘Palm Beach is completely on fire,’ said Todd Michael Glaser, a high-end homebuilder who made his name in Miami but has lately been concentrating on Palm Beach County. ‘I’ve never seen the amount of $8M to $70M homes as in the last three and a half, four months. It’s staggering.’ It’s not just single-family homes that are hot, but a new wave of high-end condos and mutifamily apartments, especially in downtown West Palm Beach.”

      “Kolter Urban President Bob Vail, who is developing the Alexander, said that there is something of an arms race for amenities in the new supply of high-end homes. ‘You see that across the U.S. There are [apartment] buildings in Atlanta, Denver and Dallas that are nicer and more fully amenitized than condominium units, because that’s what it’s going to take to get people to choose that building,’ Vail said. ‘It’s just sort of a differential advantage. It’s really become a race in those more in-demand markets.’”

      “Though the market is healthy now, the developers agreed a slowdown is possible as new supply takes time to be absorbed, construction costs rise and actionable sites get harder to find. Low salaries in Palm Beach County mean that not many workers can afford high rents. When an audience member asked whether they were concerned with an economic downturn, Vail responded half-jokingly, ‘Condo developers, we don’t forecast those kind of things, you know what I mean? We’re just go, go go,’ he said. ‘And the faster we go, the faster we get to the closing, and then, I’m not going to say we don’t care, but … ‘ The audience chuckled as he trailed off.”

      http://thehousingbubbleblog.com/?p=10407

    2. Adam Smith wrote about this, called the hog cycle. Goes as follows, hog prices are high so all the farmers raise maximum amount of hogs, 6 months later all the hogs get to market and prices drop. So the next cycle fewer hogs are raised and prices rise. Repeat with with DRAM, LCD panels, solar panels, housing.

      Basically the system is prone to instability if there is a big delay between the price signal that commits investment and the payoff.

      1. Thomas Schelling won the nobel prize in economics in 2005 for his work on game theory. But in 1978 he published “Micromotives and macrobehavior”. In this book he describes the “overshooting phenomenon” referred to above by John and in Ben’s anecdote of condo builders.

        He gives the example of being impatient when you’re in the shower and adjusting the temperature. When the water doesn’t get warm or cold enough fast enough for you, you turn the thermostat even further round. And then all of a sudden, it gets much too hot or much too cold – this overshooting phenomenon. Apply this metaphor to oversupplies of all good and you get the idea of how a surplus occurs. This is of course compounded by easy monetary policy.

        1. In the engineering world, the term is “hysteresis”.

          A good physical example is what happens when a driver of a muscle car floors the accelerator. The rear wheels just spin (“laying rubber”) until breaking free of friction and the car moves.

          1. In the engineering world, the term is “hysteresis”.

            Yeah, in the army they called it the “accordion effect”. Which you can see visually if you watch the back part of a column on a road march as they alternate between half stepping and running as they try to maintain the same pace as the front of the column. Which of course you also see all the time in traffic jams.

    3. Because when there’s a nickel on the ground, somebody is going to pick it up no matter how close the steamroller is? So if that’s the only thing you know how to do, it may as well be you picking it up?

    4. I saw 60 so year ago, that the contractor , developer, would get a 110% construction loan, and then let the homes go to bank if they didn’t sell. LLC companies for each group of homes, so contract not hurt too much.
      But , I think, nowadays, that the construction loans would have to be 125% to make that happen
      I don’t think the lenders know what the costs are now and just want to get the money out as their risk is slight today.

      1. “I don’t think the lenders know what the costs are now”

        Banks are told what the cost is but it’s bad information (although they know it’s bad info). Housing sales is the most corrupt business on the planet.

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