SOURCE: Blumberg Capital Partners

September 25, 2007 08:00 ET

A View on the Crisis in the Residential Real Estate Market: Presented by Philip Blumberg, Chairman of Blumberg Capital Partners

CORAL GABLES, FL--(Marketwire - September 25, 2007) - The State of Florida has been ground zero for the explosive growth in housing inventories over the past decade. According to the May 2007 issue of "US Economic Analyst" published by Goldman Sachs, Florida is the "Epicenter of the US Housing Bust." In fact, it is difficult today to read any type of economic forecasting publication that hasn't weighed in on the impending crisis in the South Florida condominium market. Today, however, the crisis has spread to the entire housing market and is national in scope. The US housing market has reached a point that is creating serious disruption in the credit markets. This latest crisis has been driven by the sub-prime lending market and is rapidly exacerbating US housing market troubles. This contagion spread will create greater opportunities in the South Florida condo market.

In July, Moody's's Chief Economist, Mark Zandi, said of the sub prime market, "Alt-A, jumbo interest-only and option adjustable-rate mortgages, or ARMs, account for about 25 percent of all mortgage debt outstanding, or around $2.5 trillion. Of that amount, approximately $1.4 trillion is at serious risk of default," he said. "Of those mortgages, about $460 billion should actually end up defaulting sometime this year or in 2008 and of that, $113 billion will be a loss to investors after recovery efforts are made," said Zandi. Sub-prime loans are those loans made to the lower tier of the housing market and are utilized by those buyers who have little credit, no credit and bad credit.

Even though the crisis is in the sub-prime market, it has direct implications in the mid to high end residential market. The area in which this crisis impacts the severely overbuilt condominium market is in the capital markets and in investor confidence. Disarray in the capital markets creates two problems:

1) The crisis makes it more difficult for developers of troubled projects to finance their way out of trouble and there is increasing likelihood that the banks, who are the end lenders for the speculators holding contracts on so many of the under construction buildings, will not fund the end purchase.

2) A crisis in confidence by investors suggests a much greater percentage of those who are investor-buyers will walk from their deposits and dramatically increase the inventory in the hands of the developers and lenders, increasing the likelihood of default.

There are two separate categories upon which one can focus when discussing the potential housing collapse; the single family housing market and high-rise condominium buildings. The opportunity seems the greatest in California, Nevada (Las Vegas) and Southeast Florida, but is not restricted to those markets.

Data from the City of Miami Planning Department provides a vivid picture of the scope of the development underway in the city of Miami. Between 1995 and September 2006 there were 15,525 units in 100 projects completed in the city. As of October 01, 2006, there were 22,254 units in 99 projects in the construction phase, 51 of those located in the greater downtown area alone. In addition, there are another 60,232 units that are either approved, have an application approval filed or are in preliminary review within the city.

Data from Trendsgraphix Fact and Trends, published by Esslinger Wooten Maxwell realtors, shows the last 14 month trend in condominium sales and availability in Miami-Dade and Broward County and supports the concept that the South Florida condo market is in for a significant correction. In the two county areas there are almost 47,000 units for sale. Based on the number of units sold, there is a two to two and a half year supply of unsold inventory before the 22,000 units, currently under construction in the City of Miami, come on line between the end of 2007 and the end of 2008.

In summary, given the unprecedented unsold inventory currently on the market and the equally unprecedented inventory of new units coming on-line in the next 12 to 18 months, further compounded by turmoil in the debt markets and US housing markets, a substantial correction is anticipated and, by most accounts, has already begun.

About Philip F. Blumberg

Philip F. Blumberg is Founder and Chairman of Blumberg Capital Partners, which operates real estate investment funds for corporate pensions, foundations, banks and other institutional investors. For additional information about Philip Blumberg and other commercial real estate news, visit the Philip Blumberg Blog and the new Philip Blumberg Five.