note15 - South Florida real estate outlook -
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Real estate analysts Michael Cannon, left, and Jack McCabe,
right, with the downtown Miami skyline behind them.


Jack McCabe and Michael Cannon covered a lot of ground in their nearly two-hour conversation about the
South Florida real estate market last week at The Miami Herald. Here is a sampling:


SPECULATORS
HOW BIG A ROLE
DO THEY PLAY?

McCabe says he would poll buyers at new condo sales centers, where buyers would camp out over night to get a unit
or pay people to save their place in line, and ``without a doubt the great majority were all in it to flip the property.''

Speculators getting out will put more downward pressure on prices over the next two years.
''It is survival of the fittest at this point,'' McCabe said.

Cannon contends his own study of new condos has not found nearly the number of speculators.
Whatever the number, though, he says speculation in new condos isn't as important as people make it out to be.
That's because the housing market is more than new condos.

New condos make up about 15 percent of the overall market; 10 percent are new single-family homes.
The rest are existing houses and condos, which were speculated on but are already starting to
roll back back from artificially high levels, he says.

''Speculators are a fractional portion that are being blown way out of proportion,'' he said.


DEMAND
ARE PEOPLE
COMING OR GOING?

McCabe: ``The majority of people who live in South Florida can no longer afford this market, and they're leaving.
They are not coming, they are leaving. We have [fewer] children in our public school systems in all three South Florida counties,
but in particular Dade and Broward, now than we did five years ago.
Private schools that didn't have openings for a year or more, you can now get your kid in easily.

``The vast majority of families are finding it a financial struggle, almost to the point of hardship,
and they are leaving this marketplace and moving elsewhere. The [number of] electrical hookups [for homes has] not gone up.
When you talk to the moving van line companies or look at their latest reports Atlas,
United and the third major one all are saying they are moving more households of furniture
out of the state of Florida than they're moving in.''

Cannon: ``We are having an influx of a different demographic group here.
That is the biggest uncertainty we don't know. No. 1, we are in between the Census.
And even when we do have the Census, we don't know how many people because municipalities
sue the government because they say they are undercounting ...

``[In a similar way,] the school statistics are wrong. They say there is a decline in school enrollment in the public schools.
Do you know why? Because there is increased enrollment in charter and private schools ...
We don't know how many people are here. We don't know what our net migration is here.

``And you take pieces, with all due respect, you take pieces of statistics and make it an absolute guarantee,
and it's not true. Because I don't know, and I don't know if you guys know.''


LENDING
HOW WILL RISKY LOANS
IMPACT THE MARKET?

McCabe fears that risky mortgages particularly adjustable rate mortgages slated to reset to a much
higher interest rate could deliver another blow to an already struggling housing market.
He says $2 trillion dollars in adjustable rate mortgages are slated to reset across the country,
including a big chunk in South Florida.

Cannon's not so sure. He says such fears are overblown, and it's wrong to assume adjustable
rate mortgages will result in catastrophe. Cannon said his research reveals between
70 percent and 75 percent of the entire South Florida housing market is not affected
by risky mortgages currently making headlines. He claims the dicey loans offered by high-risk lenders
were only in a corner of the overall market.

''If you go to legitimate lending institutions and look at foreclosure rates, it is de minimis,'' Cannon said.


DANGER ZONES
WHICH REGIONS
SHOULD WE WATCH?

McCabe says the majority of the downturn is still ahead of us and will be widely felt.
Not even the best buildings will be spared, he believes.

Cannon disagrees, saying there is no basis for such a sweeping conclusion.
Yet, he says, a sub-market by sub-market analysis does reveal there are some areas to worry about.

''Miami Beach overall is not doing bad; Coral Gables overall is not doing bad,'' said Cannon.
``Downtown Miami and Brickell Avenue, that is an area to watch. Aventura, certain buildings.
Coral Way, I would watch very carefully. Dadeland I would watch very carefully.''

``But I have not seen any panic selling yet.''


CONCERNS
DO THESE GUYS
AGREE ON ANYTHING?

Yes, Cannon and McCabe do agree on some points.
Here are concerns they share for South Florida's housing market:

• Fraud: Bogus sales may have artificially boosted prices and made discerning
what's really going on in some neighborhoods difficult.

• Property taxes: Taxes are high and getting higher, particularly for second-home owners
who make up a significant chunk of the market. Concerns over taxes are delaying home purchases,
and lawmakers still have not agreed on a plan.

• Insurance: Premiums remain too high for many property owners and could quickly rise again with
another busy hurricane season, further increasing the cost of owning a home here.

• Foreign visas: Rules that make it more difficult for foreigners to travel
here will impede their purchases of second homes.

• Bailouts: The government should not bail out speculators, developers or lenders,
many of whom made bad decisions.


OTHER HIGHLIGHTS

• On investing: ''If buying for investment, go buy commercial real estate,
'' Cannon said. Buy residential property only if you plan to remain in it for the long-term.

• When will the bear turn bullish? ''In 2010 and 2011 is when we will see real demand
from real end-users in South Florida,'' said McCabe.
``That is when the baby boomers start to retire.
That is when baby boomers will want to live in these buildings.''

• On the weak dollar: ''It's good news for Europeans and Canadians.
That's really where the lion's share of the buyers are coming from,'' McCabe said.

Cannon says Latin Americans continue coming as well.

• On foreclosures: ''We will see foreclosures double next year and double the year after that,''
said McCabe, citing a shakeout from excessive speculation,
overbuilding and risky mortgages resetting to higher rates.

Said Cannon: ``There are foreclosures, but I still can't reconcile the numbers I read in the media.
Did you know in 2006 there were [fewer] foreclosures than in 2002, 2003 or 2004? ...
Locally, the real lenders are overloaded today processing refinance mortgages.
The majority of people are being taken out of these high-risk loans.

For more than two years, analyst JACK McCABE has loudly and consistently said
the booming housing market is going to deliver a hard fall.


HIS CASE

• Cheap money artificially fueled the boom. Exotic mortgages with low introductory interest
rates were gobbled up by speculators as well as borrowers stretching their wallets to afford pricier homes.
Those loans are now resetting to higher rates, pressuring many borrowers into foreclosure.

• Speculation is rampant. Visits his staff made to sales centers for new condos showed that
70 percent to 80 percent of all buyers were in it to flip. Single-family housing developments
and used homes saw plenty of speculation, too. This fake demand spurred record development,
and now between 30 percent and 50 percent of purported buyers many of them speculators who can't
flip their contracts will simply walk away.

• The oversupply is worsening. Thousands more condo units under construction 37 buildings are scheduled to be completed
in the next two years alone will further drag down a market where already it would take
nearly three years to sell the condo units listed right now, at current rates.
Plus, many who bought in other buildings will continue to put units up for sale to escape higher mortgages,
taxes and insurance; others will end up in foreclosure. The result: Prices will drop significantly.

• The buyers just aren't there. Baby boomers will flock to South Florida to retire, but that is years away.
For now, declines in public school enrollment in Miami-Dade and Broward counties are bad signs for demand.
More people are leaving the state to escape higher costs of living.


PREDICTION

Prices will drop 10 percent to 15 percent each year into 2010.
Few buildings and areas will be insulated from the downdraft.
Foreclosures will spike. Not until the decade is over will prices start to stabilize.
These problems will send the area into a recession in the third quarter of 2008.


BUY OR RENT?

Rent. Given the price drops foreseen over the next three years, it doesn't make financial sense to buy.
All the speculators who can't sell their properties will rent at below costs, so rental deals will be plentiful.


MICHAEL CANNON says he called the last housing bust in the 1980s.
But the real estate analyst who has studied the South Florida market for four decades says
he's not ready to say that about this downturn.


HIS CASE

• Sales are stopping their slide. Since, the market peaked in the second quarter 2004,
the number of sales has declined dramatically. But in recent months, sales have flattened rather
than continue to dip. That suggests the market may be stabilizing, although it's still
too early to tell if it's a trend.

• Project failures are isolated. Condo projects built by inexperienced developers in
over-saturated markets will fail, to be sure. But overbuilding in the new condominium market
that draws so much attention is actually relatively contained compared to the overall body
of new and used homes across South Florida. For the vast majority of homeowners who bought
before or in the early part of the boom, their homes are still worth far more than they paid for them.

• Walkaways are fewer than predicted. The number of speculators who bought new condos isn't as
high as other analysts claim; it's roughly in the 30 percent range.
And buyers aren't walking away from their sales contracts as often as alleged.
For all condo buildings constructed and completed in the past five years,
96 percent of the units have closed, his research shows.

• The economy is strong. Unlike in the 1980s, South Florida is now part of a world economy that is flush with cash.
There is more wealth in South Florida than many realize.
Studies reporting more moving trucks carrying people out of Florida
than into the state miss the tremendous international in-migration.


PREDICTION

Prices are rolling back to around 2004 levels where they would have been anyway if the
boom hadn't produced unusual, and unsustainable, price gains. Few will lose real money.
A readjustment to normal market conditions a better balance between buyers and sellers
will continue for the next 18 months. But, so far,
this relatively orderly transition has not produced panic sales.


BUY OR RENT?

Buy, if you plan to stay for at least seven to 10 years. There are good values out there,
but negotiate hard and you must be thinking long-term.