Simkins says until construction costs, insurance, and supply pressures ease, rate cuts aren't enough
Every slowdown in the housing market tends to get blamed on the same culprit. Rates are too high, and once the Federal Reserve moves, buyers will come off the sidelines.
With the news Thursday that Freddie Mac’s 30-year fixed-rate mortgage averaged 6.66% over the last week, rates are certainly one of the headwinds in the market.
Meanwhile, all eyes were on Jackson Hole, Wyoming, with Fed chair Kevin Warsh expressing concerns about high inflation while remaining mum on forward guidance. Short-term Treasury yields jumped after the speech, while longer-term yields were up by a smaller amount.
Not everything affecting local markets hinges on Fed decisions. South Florida's condo market is one example of a sector that has more hurdles to overcome than what the FOMC decides in mid-September.
One private lender says treating rates as the whole problem misses most of what is driving the slowdown.
Zack Simkins (pictured top), managing director at Vaster, a Miami-based private lender, said financing costs are only one piece of a much larger puzzle.
"The financing components with the rates, lenders coming in, willingness to provide alternative financing in a favorable manner, that's going to promote transactions," Simkins told Mortgage Professional America. "But it's also the cost of these developments, the carrying cost of the projects."
Construction and insurance costs
Simkins said the price of building and insuring a condo project is doing as much to keep buyers away as the cost of a mortgage.
"If you start to control inflation, then the construction costs may go down, which will allow pricing to maybe go down to attract new buyers," he said. "Right now, construction costs are high, so the pricing has to be high. Insurance costs are high, so pricing has to be high. So if these things are too elevated, that also pushes people out."
That cost pressure is layered on top of a supply problem building for years. Simkins said land transactions in South Florida have slowed sharply, even as a wave of new condo projects works its way toward the market.
"You have fewer land transactions, and you're not understanding the values today on commercial development potential sites," he said. "But then you also combine it with a heavy supply of new projects. And if those projects don't succeed, then they won't inspire other developers and other buyers to come in to transact those underlying land parcels."
That imbalance creates a risk for projects that were counting on early sales to unlock construction financing, Simkins said. Vaster finances land acquisition for these projects rather than the vertical construction itself, putting that risk close to home.
"You're going to get caught in the next 6 to 18 months, with either those projects not reaching their thresholds to go vertical and get construction financing, or having construction financing and not being able to satisfy their debt obligations," he said. "That's occurring in some key projects in Miami now."
More than a rate story
Asked directly whether lower rates alone would fix the market, Simkins said the picture is more complicated than that.
"If you're building a 600-unit condo project, that's a lot of units to sell," he said. "So the buyers there are probably foreigners coming in or other domestic buyers looking to Miami as an investment opportunity where they could rent out that unit."
Buyer psychology plays a role too, according to Simkins. With other investments still delivering strong, liquid returns, he said many buyers see little reason to tie up cash in real estate right now.
"Rates are still high, and the stock market's going crazy; it's still extremely elevated," he said. "So you may get people like, ‘If I'm making money in a very liquid market right now, why sell my portfolio to buy real estate?’ There's a lot of other asset classes and derivatives that offer very liquid returns that are attractive right now, which are pushing buyers away."
Condo values themselves can be fragile, he said, once one distressed sale sets a new baseline for an entire building. With reserve requirements increasing, these types of sales could increase.
"It's like a domino," he said. "If your neighbor fire sells their unit because their mortgage is due or they got hit with a reassessment and they can't write that large check, then they're going to sell it under value. And that's suddenly your new value unit."
Simkins pointed to a loan Vaster holds on a Miami penthouse as an example. The owner has it listed well above what he paid for it eight years ago, but Simkins said the unit is probably worth closer to that original price than the current asking figure.
Simkins said even geopolitical events far from Miami have also shaped lending conditions this year, pointing to the conflict in the Middle East as an example.
"That all created a lot of banks pulling back or increasing rates regardless of where the rates were," he said. "Oil pricing affected everyone's carrying costs. There's a lot of macroeconomic factors that go into lending decisions and lending pricing well beyond just what the Fed's going to do."
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