I moved to Florida from NY exactly three years ago, at the time of the Sukkot holiday, and was pleased and surprised to see how observant everyone was. All along the coast, condominiums and single-family homes were sprouting like sukkot in Bnei Brak or Brooklyn after Yom Kippur. But these weren’t simple desert shacks with palm leaf roofs. These were super-modern skyscrapers and sprawling suburban mega-housing projects, most of which were already sold well before developers broke ground. Who bought them? Everyone. Doctors, lawyers, business executives, wealthy out-of-state “snowbirds” but also teachers, firemen, postal workers, clerks, cleaning ladies, taxi drivers and the perpetually unemployed. How did they buy them? With someone else’s money. Banks were throwing mortgages at anyone with a pulse. Moreover, these loans weren’t granted to help a prospective home-owner make up a small amount that would be paid over time. These were often loans worth 100% (and in some cases, even more) of what in retrospect were highly inflated property valuations.
Refinancing was the national sport. People used their homes as ATM machines, and every location, however remote, was touted as the new “hot-spot.” Banks across the country were letting so many people approach the gambling tables, that lending institutions were being compared to casinos. Frankly, I think that’s an insult to casinos! Casinos need to have enough capital on hand to pay gambler winnings and they spend considerable resources managing risk. In the early part of this decade, most lenders felt that their major risk was not being able to lend money quickly enough.
They didn’t care about borrower credit-worthiness because they didn’t keep the debt. The lending banks were able to sell the mortgages immediately and these, in turn, were aggregated into into massive pools of debt. Wall Street securitized these loans into so many slices and dices, that it would be easier to determine which exact tomatoes or cucumbers were used to make an Israeli salad than to identify the provenance of the “securities on steroids” that were coursing their way through the arteries of the capital markets.
50% of mortgages from three banks
Earlier this decade, when most real estate developers were still acting like James Bond, Ryan Weisfisch, CEO of Maxwelle Real Estate Group, was known in South Florida as Doctor No. He left the party long before most guests arrived, especially the multitudes that started pouring in from out of town. With a lot of cash and exceptional relationships with local banks, Maxwelle was flooded with deal flow. Ryan still keeps some of those proposals that, in retrospect, read like a tragi-comedy. Essentially, his team of analysts didn’t believe any of the numbers made sense from an operational standpoint and they weren’t prepared to rely on perpetual price appreciation. “Like someone who stopped buying internet stocks in 1998 you’re a “fryer” for two years and a genius thereafter. However, I don’t think we were geniuses rather when something seems too good to be true, it’s not going to be true for very long.”
Many of the entities most active during the credit binge have either disappeared, were acquired, or stopped lending. In fact, today over 50% of all home financing in the United States is supplied by just three banks: Bank of America, JP Morgan and Wells Fargo. Moreover, while these mortgages are no longer being structured beyond recognition, the banks are still able to move almost all of them off their balance sheets by selling to Freddie and Fannie, which are essentially owned by the US government. This taxpayer-financed safety net did encourage lending and had a very felicitous effect on financial sector stock valuation. However there are still increasing homeowner defaults across the state and there is no end in sight.
In my neighborhood of Sunny Isles, beachfront property was selling for over $10,000 a square meter in 2005. Now those same units can be bought for less than $4,000 per square meter. Across the street from the beach, condos are now selling for under $1,000 a square meter, about a 75% decline from the peak. In fact, the steepest mountain in Florida might be the graph representing real estate prices from 2000-2009. There were over 100,000 rental units converted to condominiums, though many of these were bought by existing tenants. Aggregate state-wide building permits went from over 200,000 units in 2005 to under 50,000 in 2009. For the first time in 63 years, there was a decline in Florida’s population (of about 60,000 people) in 2008.
Nevertheless, according to Weisfisch, we’re starting to see some liquidity. “Investors are still cautious but are beginning to feel that valuations are attractive enough to encourage resuscitating a few select dying patients. I can’t say that we’ve hit bottom but it no longer feels like trying to catch a falling knife.” Several distressed property funds, especially from other parts of the world, are scouring the state for real estate carcasses. If five years ago, the state bird was the crane, today it might be the vulture. However, the major difference is financing.
Return of the smart money?
Real estate veterans have very little experience buying property with their own money. Now they will have to learn. Personally, I believe that’s refreshing and welcome. Even before the crash, as an asset class, real estate performance was historically unremarkable on an unleveraged basis. However, over time, the price of nearly all asset classes tends to rise. Therefore, when you borrow 60%, 80% or sometimes 100%, your returns will seem astronomical.
Now, real estate prices have come “back to earth,” double entendre. Nearly everything seems to be listed at below the cost of construction and this is likely to continue until the excess capacity is absorbed. Most experts predict this will take 3-5 years. Some pessimists believe it will take longer. However, esthetically and topographically, Florida is a blessed state. It enjoys a tropical climate year-round and its unique shape has an extraordinary coastline of over 3,000 km about 12 times the distance from Ashkelon to Rosh Hanikra!
As happens following all crashes, fortunes will be made as prices recover. While buying “smart” will be extremely important, the biggest winners in this game will be those with the most luck. And, while no one can predict when we will have an “official” recovery, Ryan is voting with his feet: “After a few wonderful years spending almost all of my time with my wife and kids, I recently started seeing enough opportunities to entice me back to work.”
Lyon (Lenny) Roth is a senior executive at an international wealth management firm and a member of Ben Gurion University's Board of Governors
Published by Globes [online], Israel business news - www.globes-online.com - on October 15, 2009
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