Buy. Sell. Sit tight for now. What signals the right move to make in today’s South Florida real estate market?
William Hardin, professor, Finance and Real Estate Department and director, real estate programs in the College of Business Administration, confirms that selling now does not make sense for most property owners.
“In the residential market, we’ve seen a substantial downturn in activity with a large increase in inventory,” he said. “But we’ve not yet seen significant changes in prices. Ultimately, a downward turn in pricing will drive what’s needed to clear the market.”
Study looks at one facet of the market: condo conversions.
In an article soon to be published in Real Estate Economics, a top academic real estate journal, Hardin and Zhonghua Wu, assistant professor, Department of Finance and Real Estate, plus two other colleagues, examine the condominium conversion market.
“We started with a simple question: can clienteles change market dynamics?” Hardin said. “In the case of condo conversions—when investors convert multi-unit apartments into condominiums—we found that the answer is ‘yes’.”
Condo conversions soared in South Florida between 2004 and 2006. Initially, rental investors actively bid against condo converters for apartment buildings, but converters often out-bid them. Over the entire period, converters paid a premium of seven percent more than rental investors. At the peak of the conversion boom in the last half of 2005, converters paid seventeen percent more than rental investors. By early 2006, the premium declined to zero, and the end of 2006 saw few sales to condo converters. In the present market, apartment sales are based on income rather than on conversion.
“The competition between converters and rental investors drove a sharp rise in per-unit apartment prices,” Hardin said. “Condo converters led all buyers to pay more, including those who intended to operate the properties as rentals.”
According to him, “No one is doing condo conversions now. It makes no economic sense. Really, it’s indicative of what’s happening today in the South Florida marketplace . . . what I call the ‘local bubble’ mindset—and that bubble is bursting.”
Hardin believes that activity for both multi-unit and single-family properties won’t rebound very quickly.
“I hope we’ll see a pick up in sales next year,” he said. “But first, unfortunately, prices need to drop. With proper pricing, properties will sell in today’s market. However, the era of large short-term gains in value has ended.”