In Miami, Wondering About a Bubble

The New York Times

By Alexei Barrionuevo

A DOZEN years ago, I lived through the hype machine of the energy trading industry in Houston.

 Enron and other firms were transforming themselves into investment banks for traders of natural gas and electricity. They sometimes booked profits today on revenues not expected for another decade. Companies showed off their state-of-the-art trading floors. One hired Ray Charles to sing at a dinner for analysts. We all know how that story ended.

There have been other bubbles, of course — particularly in the technology sector — but these days, I’m having flashbacks to my Houston days when I visit Miami and learn more about its high-end real estate market.

Demand for expensive waterfront properties, much of it coming from South Americans and other foreigners looking to park their cash, has the industry punch-drunk with enthusiasm. Miami agents are putting off vacations (lest they miss a big sale), and some are regularly flying to South America on sales missions.

It’s a roller coaster that has a lot of people shaking their heads in disbelief. After all, as recently as two years ago, Miami was the poster child for distressed real estate. “Now it is redefining itself through luxury real estate,” said Jonathan J. Miller, president of Miller Samuel, an appraiser that produces a quarterly report on Miami for Douglas Elliman Florida.

“It is like it got rebranded,” he added.

But is it a bubble? Or, to frame the question more specifically, just how sustainable — and healthy — is this recent boomlet?

The truth is that Miami, more than any big city in the country, has two very different real estate realities somehow coexisting, at least for now.

On the one hand, there are the nondistressed properties along the water, where sales activity is climbing, prices are on the rise, and some record sales this year have captured the industry’s imagination.

A penthouse on South Beach sold to an Italian for $25 million. A single-family home in Indian Creek sold to a Russian for $47 million. And the telecom mogul Peter Loftin listed the former Gianni Versace mansion on Ocean Drive (where Mr. Versace was murdered) for $125 million.

Foreign purchases — which analysts estimate make up a third of all sales in Miami and very likely more than half of sales over $1 million — are driving much of the sales activity. New Yorkers have also played a big role, brokers say. And cash is king: nearly 73 percent of nondistressed condo sales, and 76 percent of distressed condo sales, were all-cash in the third quarter of this year, Miller Samuel said in its most recent Miami report, released in the last week.

As in New York, real estate agents gripe about the scarcity of luxury properties to sink their clients’ millions into. “There are not a lot of amazing $10 million or $20 million homes out there that don’t need a whole lot of renovations or have land on the waterfront,” said Vanessa Grout, the chief executive of Douglas Elliman Florida. “Brokers are going nuts because their clients are seeking something really special.”

The picture is starkly different in the distressed market, where sales dipped by 21.5 percent in the third quarter, compared with an increase of 27.3 percent for nondistressed real estate. Properties going through foreclosure and short sales still make up 41 percent of the overall market in the 18 Miami coastal communities that Miller Samuel tracks. The average third-quarter sales price of nondistressed properties ($528,705) was more than three times that of distressed properties ($161,777).

The prices of distressed real estate in Miami have been rising, perhaps in part because of the enthusiasm generated by the big sales near the beach. But analysts caution against putting too much faith in the higher prices. The market is still suffering the effects of the robo-signing scandal of late 2010 — in which lenders were processing foreclosure documents without verifying their accuracy — and the courts are clogged with cases that could further depress prices.

There were 56,911 foreclosure cases pending in the Miami-Dade County Court at the end of August, the court said.

That number was down 11 percent from the previous August, but filings are on the rise again. They nearly doubled from January to August compared to the same eight months of 2011.

“We are waiting for the other shoe to drop as these new foreclosures come online and potentially create another drag on the market going forward,” said Daren Blomquist, vice president of RealtyTrac, which monitors foreclosures nationwide.

For a while the foreclosure picture was improving. Then about 10 months ago the outlook darkened. Miami-Dade ranked 10th in the country in foreclosure activity in August among the 212 metropolitan areas studied by RealtyTrac, up from 26th in August 2011.

Mr. Blomquist estimates that distressed properties will weigh down the Miami market for at least the next year and a half. It takes an average of 858 days to complete a foreclosure in Florida, more than twice the national average. Only New Jersey and New York — at 1,072 days — take longer, according to RealtyTrac.

The high concentration of distressed cases, coupled with so many all-cash transactions, has dissuaded most lenders from getting back into the Miami market, analysts say.

In Homestead, a working-class Miami suburb hit hard by the housing downturn, Larry Roth, a real estate agent, says all-cash buyers are scooping up properties almost the same day they hit the market. Most are out-of-town investors, many from out of the country, he said.

“It has been challenging for end users to purchase properties as they have to compete with investors,” said Mr. Roth, who works for Keyes Realtors.

He has no doubt that a flood of new foreclosures, after they exit the courts, will eventually push prices down again.

“I am sure it will,” he said. “And some people out there hope it does, the investors that are just waiting to pick these properties up.”

Credit remains tough — but not impossible — to come by for first-time buyers, Mr. Roth said.

Yet across Miami, Mr. Miller doesn’t see credit easing much, something that needs to happen for the market to return to a more normal, sustainable state.

“What I get concerned about — not now but a few years down the road — is, does Miami have all its eggs in one basket?” Mr. Miller said. “Is it at the mercy of the foreign buyer, the all-cash buyer?”

If the dollar changes direction and foreign buyers slow their participation, “what carries the torch are more traditional transactions, with people getting a mortgage,” he said. “Right now that isn’t happening.”

Yet the hype goes on.