Don’t Build a Better Mousetrap – Count the Mice!

Years ago, I came up with the notion that when amateurs fail, it is because they miss the subtleties of the market. When the experts fail, it is because they miss the obvious. Back in 2005, it seemed obvious to me that financial speculation rather than demand from end-users was driving the housing boom. But too many economists, developers and builders kept going, acting as if the party would never end.  They kept trying to build a better mousetrap rather than counting the mice!

In 50 years of studying the real estate market, I know that when owners, developers and lenders ignore the fundamentals, they end up being fundamentally wrong. Now, we have to get the fundamentals right if we expect to return to well-balanced housing market in the future. That process starts with an in-depth analysis of what drives housing demand, including household formations, income trends, wage growth, new jobs and demographics.

It’s also important to factor in impact of today’s global marketplace, which affects us nationally, regionally and locally. As an example, downtown Miami’s once-overbuilt condominium market is recovering much faster than anyone predicted because of strong offshore sales and investment purchases, primarily from Latin Americans. One reason is that Latin America has seen a strong expansion of its middle class, as well as its wealthy households in the past decade. Therefore, there is more money available to purchase vacation and investment properties in the U.S. – and Miami is seen as a natural location.

Going forward, wise developers, investors and bankers need to know how to quantify this offshore demand, along with local and regional domestic demand. It’s also vital to be able to understand the needs, and desired price points, of all three groups of prospective buyers.  In our firm’s recent real estate analysis of the downtown Miami real estate market, we found that many units are being priced for the international buyer and are too high for the domestic buyer.

However, developers today are planning new projects and making their financial projections based on the higher sales figures. They are also designing new units to appeal to the international market, even though this segment is only part of overall demand. Another consideration is that downtown Miami has a large inventory of investor-owned units that could be put up for sale when market conditions improve. That hidden supply could seriously impact the pricing and potential demand for new product.

Again, the lesson is clear: Pay attention to the fundamentals of the market or suffer the consequences.