Well, it looks like I waited until the very last day to post my September article, but better late than never. After all, unlike in Information Technology, there is no such thing as a Real Estate Emergency.
This month we experienced a bit of a slowdown, mainly attributed to the many Jewish Holidays that are in September. Now that the holidays have come and gone, I expect an exciting end-of-the-year run towards closings to begin and run up until Thanksgiving/Hanukkah, which coincide this year. Despite the slowdown, a number of events this month are demonstrating, in my opinion, that we are at the top of a market and significant change is forthcoming in the next 6-8 months.
For example, we (Metro International Realty, PLLC) saw a major deal we were working fall apart for an unexpected reason. Back in June, a major name in the South Florida real estate market was exploring the possibility of selling a 400+ unit multi family property in Miami-Dade County with us. The original ask was 45 Million USD. Within 48 hours we brought in an offer at 43 Million, direct from a senior VP at a major real estate corporation. Our seller (and this is one of the pain points of “Off Market”), not being under any obligation, immediately raised his price to 50 million USD. Our Buyer, flew down from the midwest, met with the Owner/Seller to negotiate, not once; but twice. 47 Million (which placed that asset at a 5.25 CAP on a Class B/B+ property requiring 15K per unit in upgrades/renovation) was tentatively agreed upon and the original thought was the Owner/Seller would take the deal back to his accounting team and see just how much money they wanted/needed right now, and how much they would want to carry as a note. Our Buyer was willing to construct the deal in ANY fashion they wanted. [The apparent “Greed” of the Seller (and others we have been working with who are countering offers at higher than their original ask price and NOT getting it), is one thing that is telling me that we are due for a turn in the RE Market.] Last week, we received an email from the Owner/Seller that the tax implications of selling the property were far too great for them to move ahead with the deal. Considering that we happen to know that this Owner/Seller could really use the extra cash right now, this was a very surprising outcome to what appeared to be, in virtually every way to even the most skeptical of businessmen, a “slam dunk”. The fact that “Taxation” is creating an obstacle for deal flow just goes to show how screwed up the thinking is in Washington.
Which brings us to the next development of the month, the so called “Government Shutdown”. Every year it seems we have a budget battle between the President and Congress. I find this kind of funny given that the President has not actually proposed a real budget since he took office 6 years ago. However, he has issued more “Executive Orders” during his tenure as President than all other Presidents before him combined (Dictatorship?) Further, I was watching his address to the nation, today, and he specifically states “One House, of one branch of government, should not be permitted to…” essentially get in the way of his Left Wing Agenda. My answer to that is a question: Is this not a Democracy? And, is it not the very “House” that, arguably, most closely resembles the voice of The People, ie: The House of Representatives, that is getting in the way? The President even suggesting that the Legislative Branch’s powers/checks/balances be (or should be) more limited should be of grave concern and raise the question of just how “American” is this President? But I digress…..
Another supporting factor to my thesis is that interest rates are up, and will be going higher. California Beach Pundit wrote an article, early in the month, suggesting that interest rates were rising because the economy was stronger. What I found most compelling about his article, was not the article, because most of his stats are based on Government Massaged Numbers, but the responses to his article by Stanley J G Crouch; who writes:
“Absolute nonsense completely unsupported by the facts.
Interest rates are up because the Chinese and Japanese are huge net sellers of Treasuries and have completely swamped “QE Now”. The Fed would do well to double “QE Now” just to stay even.
“Loan demand” is poor for mortgages, corporates, muni bonds and U.S. treasury ‘supply’ is much lower due to sequestration and higher collections through the tax increases. So, higher rates are not “demand driven” at all.
The real reason is the BRICs trading away from the $ as sole reserve currency in increasing ways. Hardly bullish, and in fact, the pre-cursor to quite a ‘risk asset’ collapse.”
and by William McKibbin who responded:
“I agree that the macroeconomic data indicates the US economy is edging upwards, albeit at a glacial pace — however, when I consider fundamentals in the US, a am not so sure — for example, Sears, JC Penney, and Barnes & Noble stores are essentially insolvent — moreover, the city of Detroit is lost in a municipal bankruptcy of unprecedented scale — the US is still engaged in lost military expeditions overseas that are costing hundreds of billions of dollars — finally, we simply cannot ignore long-term declines in real working wages, real home values, and the employment to population ratio — thus, while I agree that the macroeconomic indicators are showing an “uptick” of sorts, the fundamental indicators are dire — said more specifically, the technical indicators do not reconcile with the fundamental indicators in the US — folks, that’s troubling — in fact, very troubling…”
I do appreciate the charts and commentary of Scott Grannis (AKA California Beach Pundit); however, we can agree to disagree on the hows & whys Scott!
With interest rates going up, regardless of the reasons, asset values must come down. I have a residential customer, newly engaged as of yesterday (congrats Vanessa & Kevin!), who are in the market for a home. They want to put 10% down, and finance the rest. My customer has an 840 credit score (I swear…they DO exist it seems!). I gave them the following advice given the budget requirements they gave to me. I recommended we look at distressed assets through the Fannie Mae program via HomePath.com. Given their credit, and the incentives Fannie Mae has for Buyers/First Time Buyers and the special Renovation Mortgage option/possibility with some properties, I could put them into a near ideal home (in terms of price), but it will be a Fixer Upper (something they actually would like to do). I also explained to them that if they were ALL CASH, I would recommend they hold off on a purchase unless it was their intention to secure a low, loan-to-value loan against the home. This is because asset values WILL drop as interest rates go higher, and CAP rates on both residential rentals and commercial assets will have to go higher as a result.
Lastly, if you are a Seller, do a quick, objective check of your mindset and finances. Now is absolutely the time to start considering selling some assets and taking profits. If your “mental state check” comes back as even being remotely Greedy, then you should probably call a Broker and have them QUIETLY assess/value your assets for possible sale and give you a professional opinion rooted in logic, reason, facts & fundamentals. If you are unable to check your greed and/or ego now, you might be kicking yourself this time next year.
This coming month I expect to see quite a bit more activity, both on the big commercial scale, such as the forthcoming Hilton IPO, as well as at the small, residential level. During October I will make several posts with some useful information pertaining to the Miami Market and hope you find it interesting.
On to Q4!
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