Beware of Alligators

The Sarasota Herald-Tribune is reporting, “Rental Market Caught in Real Estate Downturn”:
“The Southwest Florida market for rental properties is all whacked out.

“Where demand is highest — in the affordable segment — the supply of apartments and rental houses is tight. But at the higher end of the market, there is a glut of properties aching for tenants…

“Investors initially bought single-family homes in the hope of benefiting from the rapid appreciation in values.

“When prices of properties rose too high, they turned to condominiums and converted apartments.

“Most of the neophyte landlords figured it would be easy to rent their properties at prices that would cover their costs until it was time to sell.

“But it is now dawning on them that the rental market is not a no-brainer, and selling out during the current sales slump is not an option unless owners are prepared to dump their properties at significant discounts…
“Evidence of the disequilibrium in the real estate market can be most clearly seen in Sarasota County. According to RealFacts, a Novato, Calif.-based research company, the average rent of apartments in complexes with more than 100 units in Sarasota County reached $989 during the second quarter of 2006. That is a 19.9% increase from the average rent of $825 in the second quarter of 2005.

“At the same time, average occupancy in Sarasota County apartment complexes fell to 90.7% in the second quarter of 2006 from 98.2% during the same period a year earlier…

“The problem, [senior vice president for Coldwell Banker’s Sarasota Bay region Sue] Louis and others say, is that the new owners of the units want to cover their mortgages, taxes, insurance, and maintenance costs. So they are offering units for as much as $200 more than the market will bear.

“As renters refuse to pay such high prices, the units remain empty.

“‘There’s a six-month supply of condos on the market right now,’ said [president Scott] Corbridge of Sarasota Management and Leasing. ‘That means that if no new rental units come to market, it will take six months to rent all the units we already have.’

“One way to resolve the glut would be for owners to sell their properties and get out of the rental business.

“‘But there’s no one buying,’ said [president Al] Holmes of the Sarasota Landlords Association…

“‘Owners will either have to drop their prices to a point where it makes sense for the next landlord to invest, or hang on until rents rise or real estate sales pick up.’

“Another way to solve the oversupply problem would be for landlords to drop rents.

“‘Instead of making money, landlords will see money going out.’ Holmes said. ‘It’s called an alligator, and it will eat you every month.'”

Alligator Carry Costs

It seems like it is getting very expensive to feed that alligator. I gave Mike Morgan a call and asked him what the average carrying cost would be on a $400,000 condo and a high-priced $1 million condo. Here is the monthly breakdown for a $400,000 condo at 7% interest:

$2,300 interest
$300 maintenance
$500 property taxes
$3,100 monthly nut
$37,200 annual carry cost if not rented

IF rented (a tough proposition), I asked Mike what one could get. Morgan thought $1,500-2,000 rents were possible. Possible does not mean likely, given the current oversupply.

IF rented (most are not), the carry cost is (at $1,750 a month in rent) $3,100-$1750=$1,350 a month. Annualized, that is $16,200.

Bear in mind that does NOT include special assessments. Anyone who knows anything about condos knows those will be coming. Special assessments will happen to cover tuckpointing, hurricane damage, mold, improvements, and low-ball initial maintenance fees. Special and regular assessments do not include rental damage, repainting, recarpeting, etc., etc., to keep a unit rented.

The best-case scenario on a $400,000 unit rented out is a loss of $16,200 annually. Unrented, the annual upkeep is $37,200.

On a $1 million condo, multiply the numbers by 2.5, minimally (it is more, actually, because rents do not rise proportionately).

Let’s face it. That is a serious snapper.

Another problem is the demand to purchase condos has been dropping like a rock, but supply is constantly being added by flippers wanting to bail out, and builders still foolishly building the damn things.

In my discussions with Morgan today, he mentioned that he is starting a consulting service. Morgan Florida Research will be offering weekly analysis of the latest housing trends in Miami, Orlando, Naples, Palm Beach, the Panhandle, and the Treasure Coast. Morgan will also continue to offer statewide tours to hedge fund managers, reporters, analysts, and large private investors. Morgan is available for any custom research projects you have in mind.

Anyone (hedge funds, banks, private investors, etc.) who wants a tour of the area or real-time advice as to what is happening in Florida and why should send him an e-mail or give him a call: Mike Morgan

A Look at Miami

Following are some pictures Mike Morgan sent me. They are all from the Miami area. Those with multiple cranes are from the downtown area:






As I look at those images, I easily say to myself that it is nearly impossible for anyone who bought near the peak to ever break even. There is 10 years worth of supply coming on the market at current sales rates. Prices will drop, and in 10 years, there will be new condos still coming on at reduced prices.

By the time rents catch up with carrying costs — if they ever do — those condos may be worth 50% less than they are today. Right now, it seems that no one wants to rent (at the high end), and no one wants to buy. In that scenario, prices have nowhere to go but down, yet insurance rates and low-ball maintenance fees will be rising sharply.

Snap, Snap, Snap

Condos are like alligators. If you are thinking of buying an alligator, I suggest you think twice, and then don’t do it. If you already have an alligator you do not want or cannot afford to feed, the best thing to do is to sell it for any price you can get before it eats you alive.

Mike Shedlock ~ “Mish”
August 10, 2006