Q & A with Jonathan Miller

The Miller Samuel CEO talks about the impact of the S&P downgrade on South Florida real estate, Miami inventory and how the city differs from the Big Apple

Aug.August 23, 2011 04:07 PM

Jonathan Miller is the president and CEO of Miller Samuel Real Estate Appraisers and Consultants in New York City, and has been studying the Miami market for some time — including providing the analysis for Douglas Elliman Florida’s second-quarter report. The Real Deal talked to Miller about the impact of the Standard & Poor’s downgrade on Miami real estate, the difference between Miami and New York and the relationship between falling inventory and prices.

What does the S&P downgrade for mean for Miami’s market, given its high percentage of foreign buyers?

The net result is, I don’t think it’ll have much to do with foreign investment at the moment. And the evidence of that is the way people flooded to treasuries after the downgrade, and drove rates lower — there was still this sort of flight to safety. I think the perception, generally, is that the market here is safer than other locations. Domestically, I think it could affect real estate in general, because consumers are faced with decisions and want to feel like they’re making the decision in the right point in time, and this global volatility, on a pretty unprecedented scale, is a lot to process.

How would you describe the current state of the Miami market?

What’s happening in Miami is you’ve got roughly two-thirds of the market distressed, and by distressed I define that as either real estate-owned or short sales. I’d characterize the market as relatively stable, both on the condo and single-family market sides, and on the distressed side, housing prices are falling, and sales activity is increasing. So what happens in the overall market is that median prices are dropping year-over-year, and when you lump it all together, the non-distressed activity is actually flat or rising. I look at the market in Miami over the last year as definitely showing more stability, if not prices going higher, and I show distressed prices falling, with more volume. The most important component to this is that the average size of a non-distressed sale is about 35 percent larger than a distressed sale. So it’s apples and oranges.

Miami’s high-end market, especially Miami Beach, has been performing very well — is there any trickle-down effect on the rest of the market from this activity?

No, and the same thing is happening in the New York metro and the D.C. region as well, especially New York City and Manhattan, and the Hamptons. I call the market that we’re entering into, for lack of a better description; it’s the “best than all the rest” market. In other words, the media coverage and scuttlebutt is focused on the $10 to $15 million transactions, and you see that on “Selling New York” and all that stuff. But the vast majority of the market is lumbering along, showing stability but by no means does the high-end reference as a proxy for the balance of the market.

What’s been driving the high-end activity?

Part of it has been the foreign contingency, and that’s why you’re seeing this kind of behavior on the coasts — the left coast and the east coast. Also, you’re having the dot com sector — for example, San Francisco is in the middle of a housing boom at the high end of the market, because of the dot com boom, which feels like a bubble to me. The other component is, you have the high end less tied to financing and credit. Mortgage lending underwriting has actually contracted and gotten tighter over the last six months, where most other forms of credit have actually eased. The big reason for this is, it’s sort of a tie in with the Rent is Too Damn High [party candidate Jimmy McMillan, who ran to be governor of New York State] — mortgage rates are at fifty year lows. If you’re a lender, you have two choices — you can borrow from the fed at just about zero and invest it and make virtually 3 to 4 percent risk free, or you can go to Joe and Mary Homebuyer for 4 percent, and they’re in these markets with falling home prices, potential layoffs, loan modifications and all the baggage associated with the lending policy of five years ago.

How would you compare the Miami and New York markets right now?

I’d say very different. Structurally they’re very different housing markets. The phenomenon that’s happening at the high-end market in Miami is what we’re seeing in Manhattan, so there’s similarity there. Manhattan has shadow inventory of condos, like Miami, but Miami has a lot more. Manhattan clearly has shadow inventory, but it’s not as vulnerable. If you compare Manhattan to downtown Miami or any segment, Miami has a much higher distressed real estate market. It’s a significant part of the market, whereas in New York, there’s pockets of it in two of the boroughs — Queens and Brooklyn. The reason is that during the boom, a lot of the activity in Miami was driven by speculation — carpenters and nurses quitting their jobs and becoming real estate flippers.

Is there a relationship between falling inventory and prices in Miami at this stage?

It’s a double factor. We’re selling more units than we were a couple of years ago, so inventory is not declining, but we’re also seeing inventory fall just because it’s being worked off — not because we have less REOs entering the market. RealtyTrac says something to the order of 70 to 80 percent of fall REOs aren’t even on the [national] market yet. So that’s the shadow inventory, the shadow that will have to go through the system. I think that’s a very important aspect of the overall Miami market, apart from the high-end activity and foreign buyers coming in. It’s almost another world.


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