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Are we headed for another Miami condo bubble?

  |   Real Estate   |   No comment

AM-headshot-blogThis time around, we’re not on our way to another Miami condo bubble…at least not yet.

What we’re experiencing right now in South Florida is more akin to an awkward teenager with a growth spurt. The future is bright, however, on the condo development growth chart. The condo market is maturing along with Miami in becoming a World Class city with more luxury living options than ever before imagined.

The current condo development expansion is legitimate because it is being funded by cash -not debt- from bonafide buyers and investors – many condo units being sold before construction even begins. The investment equity coming into Miami for new condo development is in the form of non-refundable deposits up to 50% of the purchase price.

That’s outstanding! And, it’s good news for:

1. The buyers
2. The developers
3. The constructions lenders
4. The marketplace

It’s good for the buyers because they know they are getting good value by investing in a stable condo development market that is not going to be overbuilt. Overbuilt markets, such as what we experienced with the last Miami condo bubble, results in price and value reductions. Here’s how: If speculators are allowed to come into the market with only 10% down and can borrow 90% in mortgage loans, then the market is at risk of a bubble that can burst, resulting in a dreaded price drop!

It’s good for the Miami developers because it reduces their risk, because they know they have all or most of their condo units sold before construction begins. It also reduces the construction debt and cost because most of the construction cost is paid from the buyer’s deposits.

It’s good for the construction lenders because it reduces their risk when they make a smaller loan against a project with so much equity invested. Lenders get sound prudent loans that get paid back.

It’s good for the marketplace because novice Miami condo developers who cannot pre-sell their units will likely never get the equity or debt financing to proceed with construction of a building, which is then likely to remain empty and unsold. This stops foolish development.

What could turn this development expansion into a Miami condo bubble of overbuilding? A bubble could be created that can burst if banks start lending on buildings that do not have substantial pre-sales. Even worse, a bubble could inflate if banks lend money to developers who have no presales, or to speculators who don’t have the cash to make the payments on their mortgage loans. This will encourage overbuilding and a glut of condos on the market – which is exactly what happened in the last cycle.

We are in a good place right now of prudent balance in the condo development market. A Miami condo bubble is not on the horizon.

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