March 6, 2012
XAU to Gold Ratio Beckons….
March 26, 2012

Miami Property Bottoms…

I have lived in Miami Beach, Florida for 8 years. To say that the real estate market here has been a roller-coaster is to understate the obvious. Whatever has happened in the rest of the US, it has happened here first and with a much greater magnitude. My own travails renting living spaces in 4 different locations neatly mirror this market. I never set out to be a nomad—my landlords consistently forced my moves. In the end, it pays to follow the market here in Miami.

Our story starts with my first rental home. (I refused to buy, because Miami Beach prices made no sense). My landlord bought it for next to nothing in the early 2000’s. By 2007, it had appreciated nearly 7-fold. How could you blame him for selling it? When it went on the market, a circus began. The agent told me that it was a “middle-class starter home,” “it could easily fetch $1 million.” Trying to hide my disbelief (it was a 1400 foot bungalow), I enquired about her calculus. She explained how the orange tree in back added at least $30,000 to the price. (For those of you keeping score at home, that’s about $5,000 per orange it produced). Even my dog knew her math was wrong. Then again, how can you argue with the market? Day after day, speculators traipsed through our living room, ridiculed the size of the place, and then proceeded to raise the current offer. The insanity wouldn’t end. The price kept going up. I questioned the speculators’ collective sanity. My dog barked her objections, but, no one would listen to either of us. We hadn’t taken the 7 hour course necessary to become real estate agents. What did we know about property?

Finally, that day came. Despite our efforts to forestall the sale, someone bought our place and we had to move out. You cannot believe my shock when I learned that the buyer was the illegal fellow that cut our grass. Apparently, his immigration lawyer thought it would improve his chances if he owned a property worth more than $1 million. In very choppy English, he noted “This is such a great country. I have been here less than six months and I already own a beautiful home. The bank even let me borrow against it to buy this new truck.” What can I say; maybe WaMu really did make our country great? I don’t want to degrade our gardener; unlike most people that WaMu leant to, he at least had a job. Besides, he was selling our rotting mangos by the roadside for some extra income. When his 30 year balloon hits, we’ll learn how good the underwriting was…. In any case, I was off looking for new digs.

By that time, the top was already in. If anything, my gardener had made the top. I landed on my feet, renting at one of the nicest condo buildings on the beach. It was a prefect vantage point to witness the collapse. One day, at the gym it all finally hit—I overheard a lady who was equal parts spandex and silicone crying on the phone.

“I don’t understand…. Why can’t I just borrow money from one of my other units to pay my mortgage this month? ….But you let me do that every month for the past two years? But if I can’t borrow the money, I can’t pay the mortgage. Why don’t you understand this?? …How can I possibly pay this off?? I make twenty dollars a dance. I owe you guys $30 million…. Do you have any idea how many lap dances that would be!!! ….. Ok, give me a few more weeks. I’m going to call Countrywide. They’ll lend anyone money for anything. They’ll pay you off.”

And with that, the housing bubble imploded. Countrywide wasn’t there to bail her out—Countrywide itself needed a bailout. Of course, from my vantage point, this was all great news—I was waiting to buy all the distressed properties that the banks were about to spew all over the market.

Along the way, there were economic benefits from the bubble. My good friend Bill Fleckenstein may have coined the phrase “housing ATM,” but he didn’t witness it in the same way that I did. Do you realize that at one point, there were 32 locations where I could refinance my mortgage within 5 blocks of my condo building? At least a third of these were open 24 hours. I used to joke with friends that you could stop into one of these places, swipe your deed and use it to pay off your drinking bill. Sadly, I think there was plenty of truth to the joke. Fast forward to today and there are less than half a dozen of these places left. The minions of mortgage brokers are onto other Ponzi schemes; selling vitamins and cosmetics. Unfortunately, those don’t pay quite like the “points” you earned on refinancing someone’s mortgage. 3 points on an interest only, 5 year ARM buys a lot of nice baubles. In fact, the Florida economy was reinvented because of it. No longer did we survive on orange juice, cocaine and money laundering. Our whole economy was “points” based. Who bought these toxic products? Dunno, but they mostly seem to have lived in Germany….

In any case, with the collapse of our bubble, I licked my lips and waited for something nice to buy. Then Bernanke stepped in. He cut interest rates to zero. He flooded the market with liquidity. He refused to let the market clear. He wanted the strippers to hold onto their condos. I waited a year, then two years. Prices dropped. The market tried to reassert rationality. Whole cities of McMansions were reclaimed by the Everglades. However, free money eventually won out.

I was forced from my second and third rental condos. The owners didn’t seem to understand that if the prices of assets had just dropped in half, so should my rent payments. Instead, they tried to raise my rent because otherwise, they couldn’t afford their mortgages. It wasn’t my fault that their 5 year ARM had suddenly re-set, but it was still my problem. I’m now in my fourth unit in 5 years. I’m sick of moving around like I’m in college. I refuse to overpay when I can rent—investing is all about being disciplined. All I want is to see prices drop to something reasonable. I no longer think that this will happen. Miami is now awash in Brazilians, Venezuelans and Peruvians looking to get money out of their countries. These are cash buyers. They don’t need financing. While trying to prop up failed speculators here in the US, Bernanke succeeded in creating property bubbles all around the rest of the world. Quite honestly, Miami suddenly looks cheap to them. Property prices in their home countries are twice as expensive as Miami.

Let’s face it; the market in Miami has now bottomed. Not only that, but it’s racing ahead—especially on the high end. If your apartment costs more than $3 million, it’s back to 2007 levels. If it costs $5 million or more, it’s probably at double the 2007 levels. The insanity has returned. Florida leads the nation in all real estate trends. Has Bernanke succeeded in creating a bubble that’s big enough to bail out the last bubble? I don’t know, but they’re once again talking about breaking ground on new super-luxury condos on the beach. No income, no job, you’re always approved here in Miami. I guess I’ll be renting for a long time to come…. The property market in Miami has bottomed.

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