McCabe has other ambitions. He wants to raise several hundred million dollars for a “vulture” fund that plans to snap up distressed condos in Florida within 12 to 15 months — maybe sooner. Of course, much depends on when the high-octane condo investment market begins to run out of gas.

“It's clearly a problem waiting to happen when you see these unsophisticated people get into this risky business,” says McCabe, who has encountered everyone from taxi drivers to dentists jumping into the condo investment arena.

Miami is the kingpin when it comes to new condo construction. Developers plan to add more than 70,000 new condo units to the area over the next three years. That's nearly three times the number of condo units that have been built in Miami over the last three years. For now, there appears to be plenty of demand — especially from the most inexperienced investors.

Although South Florida has become the poster child for the condo craze, other markets are experiencing plenty of construction activity. According to Michael Cohen, a senior real estate economist at Boston-based Property & Portfolio Research, a flurry of new condo units are popping up in cities such as San Diego, Chicago, Las Vegas and Washington, D.C. Much of that supply is the conversion of apartments into condos (see table).

In Chicago, for example, as many as 3,500 apartment units will become condos this year, based on data from Chicago-based Appraisal Research Counselors. That would exceed the previous record set in 1994 when a total of 2,424 apartments were converted into condos.

Speculators are major players in Chicago. Appraisal Research data reveals that up to 30% of the Windy City's condo units were sold to speculators this year.

A similar story is unfolding in the nation's capital, where conversion activity is going strong. Transwestern Commercial Services data shows that 91% of all D.C. metro area apartment buildings sold through the end of May were bought by condo converters. In 2004, converters snagged only 51% of all apartment deals, up from 28% in 2003.

Several new Web sites are exploiting the condo craze, making it easier for anyone with an Internet connection to become a speculator. In July, for example, Miami real estate broker Mark Zilbert unveiled CondoFlip.com, which enables buyers, sellers, brokers and developers to flip condominiums before they are even built.

Zilbert says the response is so strong that he plans to expand the concept to markets such as Las Vegas, Dallas, New York and Los Angeles within 12 months.

Another Web site that launched this summer is USCONDEX.com. The online exchange bills developers $2,500 per building every month to feature existing or soon-to-be-built condos. The site plans to launch live auctions of condo properties later on this year.

McCabe predicts that Web sites geared toward flippers will only prime the market by luring investors from other states or countries to buy condos. It's likely to boost the number of buyers executing sight-unseen deals, which already stands at 20%, according to McCabe. He also predicts that the Internet will play a significant role in hastening and deepening a crash.

In the meantime, McCabe is busy raising money for his first vulture fund. He claims that several wealthy families and established financial institutions have expressed interest in his fund. They want in — and McCabe expects others to follow — so he has doubled the minimum stake from $250,000 to $500,000 in recent weeks. The fund will target blocks of new condo units owned by investors who anxious to sell.

McCabe isn't alone. New Jersey-based real estate investment firm Palisades Financial is waiting to capitalize on any distressed assets. In January, the firm will launch a series of $100 million funds that will partly focus on distressed and value-added investments nationally. About 30% of those funds will flow into distressed assets, including condo units. The balance of the funds will be invested in value-added properties.

“The capital markets will throw money at developers, and the developers will build,” predicts Billy Procida, CEO at Palisades Financial, who fears that a condo meltdown is likely. “This has happened before. Put it all together and the southern Florida market will fizzle out.”

For vulture investors that structure their capital-raising efforts around a market collapse, timing is almost everything. But it's far more complex than just hitting the market bottom with a solid war chest of capital, says Doug Poutasse, chief investment strategist at Boston-based AEW Capital Management. AEW manages roughly $27.5 billion in real estate investments for some of the nation's largest pension funds.

“The vulture investors are every bit as speculative as the people speculating on condo units today,” he says. “And the problem is that it can take many, many years for these condo markets to recover. These are tricky assumptions to make.”

There's also the question of competition. According to Poutasse, roughly $20 to $30 billion of capital is sitting idle in U.S. opportunity funds today. It is not likely that all of that capital will pour into depressed condo markets, but a sizable portion of it most certainly will. “A lot of people are talking about setting up vulture funds tailored to certain markets and property types right now,” he says.

Florida is certainly no stranger to condo booms and subsequent busts. In the mid-1980s, for example, offshore investors ditched their condo deposits after an economic downturn swept through Latin America. The banks that inherited these condos through foreclosure were forced to significantly discount the properties prior to sale. Developers typically use the proceeds from the sale of each condo unit to repay their construction loans.

“This is a market-by-market story, and we pay attention to job growth, high single-family home prices and population growth,” says Cohen of Property & Portfolio Research. “In the most expensive single-family home markets, many condo developers are providing the low-cost entry into these markets through their projects.”

For the moment, lenders aren't shying away from big condo deals, despite a torrent of media reports about the housing bubble. If anything, lenders say, demand to finance both conversions and ground-up construction has increased over the past seven months.

Sonnenblick-Goldman, for example, will finance more than $500 million in condo conversions this year, and much of that will be earmarked for conversion projects in Florida. Executives at the New York-based real estate investment bank believe that the conversion of apartments into condos poses less credit risk than building condo projects from the ground-up.

It's all in the timing. “It doesn't take us nearly as long to convert from an apartment to a condo,” says Andrew Oliver, managing director and principal at Sonnenblick-Goldman. “We can turn that apartment around very fast, and that helps cut the risk of missing the market.”

A typical condo conversion takes six to 18 months on average to complete. Many urban developments, by comparison, require years to complete due to cramped building conditions and complex zoning laws. Zoning isn't such a problem when converting from apartments into condos, says Oliver, unless the developer is adding additional floors to the building.

If Oliver is a prudent player, he may be one of the few. Lenders aren't showing much restraint in financing these deals. Condo converters bought $13.3 billion worth of apartment properties last year compared to only $3 billion in 2003. What's more, many converters carry floating-rate debt at a time when interest rates are climbing. But floating-rate debt may be the least of their problems, if the market sours.

Fitch Ratings warned in July that many lenders are executing complex, thorny condo conversion loans. And proving that ignorance may be bliss, many have chosen to overlook the inherent risks of these loans in favor of getting deals done.

This could end badly for many lenders. Fitch Ratings predicts that around 10% of all condo conversion loans originated in 2005 will ultimately default. That's a huge number given that only 2% of all multifamily loans originated this year are expected to default.

“These properties don't generate a sustainable cash flow, and another problem is that developers are having trouble completing these conversions on time and on budget,” says Zanda Lynn, a director at Fitch Ratings.

As one Manhattan-based lender sums it up, competition might be forcing some firms to take on more risk than they can handle. “Some of these lenders in south Florida are getting stretched. They've got one developer doing multiple deals, and each new project is riskier than the last,” says the lender, who asked not to be named.

Cohen also credits relaxed lending standards for driving condo demand in markets such as San Diego, Las Vegas, Miami and Washington. With lenders under pressure to make loans, a variety of unconventional debt tools have gained popularity within the past 18 months.

In July, Wells Fargo & Co. started allowing buyers of investment properties to take out interest-only (IO) loans. The typical IO loan enables borrowers to pay back interest and no principal in the first few years of the loan. If price appreciation stalls and the borrower can't sell at a profit before the principal payments kick in, there could be a problem. “It's important for investors to understand the risks, but many either don't or choose to ignore them,” says Cohen.

Generating any cash flow during a conversion can be tough. The reason is that many condo projects rely on skimpy deposits from buyers in order to secure financing. As Lynn of Fitch Ratings notes, these deposits — which may amount to as little as 10% of the entire loan — are spread even thinner when renovations exceed the original budget.

Another risk that borrowers often fail to consider is local market conditions, says Lynn. Since each market poses different bureaucratic challenges, the time needed to secure approval for a project can vary by as much as a year. In New York City, for instance, the time to receive an approval has doubled from three to six months due to a backlog of conversion applications.

Aside from red tape, many investors naively assume they can pull off a condo conversion. The problem hinges on the fact that many novice investors buy apartment buildings as a starter property. But the transition from managing rental apartments to coordinating an involved condo conversion can be arduous.

“Running a small apartment building is one thing,” says Lynn. “But now many people figure that condos are as simple, and the competitive market for loans is helping them become converters.”

Some apartment owners overestimate the number of renters that will opt to jump on the condo bandwagon. Ron Witten, president of Dallas-based multifamily consulting firm Witten Advisors LLC, says that on average only 10% of apartment tenants choose to buy their unit as a condo. “That makes it less easy to fill a conversion fast, but a lot of landlords assume that more will go ahead and buy the converted units,” he says.

Still, there is no question that there is significant demand for real estate. The National Association of Realtors reports that 23% of all homes bought in the U.S. last year were purchased by investors with no intention of occupying them. Another 13% of all homes sold last year were bought as second homes.

“The investment market really runs hot and cold,” says John Kriz, senior managing director of Manhattan-based Fitch Ratings' real estate finance group. He admits that while it's tricky to predict investor psychology in a downturn, investors, developers and lenders should be proceeding far more cautiously.

McCabe, the Miami-based real estate analyst, says that he expects his first vulture fund to be active by early 2006. He envisions doing several large acquisitions — be it purchasing blocks of condo units from one developer or individual units from several investors — through this first fund.

McCabe expects to return his investors' initial stake, plus a 100% profit on top of it. That's after McCabe has taken his cut as an advisor to the fund.

The one thing that McCabe makes clear is that no profits will be distributed until the portfolio of bargain-bin condos is ultimately sold. What's less than clear is how long it will take McCabe to deliver on that promise.

“I plan to hold these units for anywhere from five to seven years,” says McCabe. “But things are moving fast in south Florida, a lot faster than I had expected.”

Parke M. Chapman is senior editor.

The total number of apartment units bought by condo converters, and the total dollar value, has risen sharply year over year in the following five major metropolitan areas.

	Number of Units Converted		Value in Millions of Dollars
City	2004	2005* through June	2004	2005* through June
Chicago	448	2,156	$39.4	$474.8
Las Vegas	2,070	3,255	$147.7	$408.9
Miami	4,866	5,588	$676.5	$660.3
San Diego	2,338	2,439	$422.7	$487.1
Washington, D.C.	157	820	$43.4	$262.9
*Figures for 2005 are through June. Figures for 2004 are for the full year. Source: Real Capital Analytics

Not all Florida condo investors are bent on the quick flip. Just ask Kenneth Balin, CEO of Philadelphia-based private real estate investment firm AMC Delancey, who is developing a $280 million condo development 300 miles north of Miami. “We're prepared to hold properties for the long term, and that makes us different from many of the investors today,” insists Balin, who has generated double-digit returns on previous condo investments.

Balin typically maintains an interest in a condo development's retail component for several years after a project is completed. That's a different strategy than most condo developers, who typically relinquish their full stake after all the units have traded.

“We structure our real estate transactions with the best local operating partners in such a way that if the bubble bursts, we are insulated,” emphasizes Balin. So, what makes his 450-unit Anastasia Island project near Saint Augustine less vulnerable to the boom-and-bust cycles of the condo market?

First, the project will consist of low-rise buildings spread over a 132-acre parcel of land. And roughly 70,000 sq. ft. of retail and commercial space will also be developed. Those two factors should make the project somewhat unique, Balin believes, compared with the bursting supply of taller condo projects popping up in the big Florida cities. With 70,000 condo units on the drawing board in the greater Miami area, Balin finds it hard to believe that there is sufficient demand for all of the new condo units planned or under construction.

What's more, Balin observes a stark contrast between the outlook of younger investors and industry veterans.

“None of these people in their mid-30s have ever lived through a recession before,” says Balin, who developed his first condo project in downtown Philadelphia in 1979. “They're too bullish, they believe it will never end. I'm 54 years old, and I can tell you that there will be plenty of blood on the street in places like south Florida.”
— Parke M. Chapman

MIAMI (Reuters) - Workers are painting, patching stucco and peeling protective plastic from gleaming panes of balcony glass at a new 1,000-unit condo called The Plaza, two towers that rise 43 and 56 stories over Miami's bank district.

A mile to the north, the exotic stonework at a new 500-unit downtown tower known as 50 Biscayne has been polished and the first residents closed on their contracts this month.

Prices in Miami's condominium market -- a poster child of the real estate boom that swept much of the United States until 2005 -- seem to have held up relatively well to date.

But the opening of a raft of big complexes has analysts predicting the market -- fueled by a frenetic construction spree that saw cranes sprout like mushrooms on the skyline -- is edging toward a cliff.

Values may be poised for a wrenching tumble in the next year as thousands of units in the downtown and Brickell banking districts are readied for residents, analysts say.

As a result, the vultures are circling. Hedge funds and private equity pools are busy scouting locations where they can snap up dozens or hundreds of units at sharp discounts to hold as rentals for up to 10 years, until the market turns.

"Everybody thinks south Florida is on sale," said Peter Zalewski of real estate consultancy Condo Vultures, who is advising private equity buyers. "They're all coming to kick the tires."

Futures traders on the CME Group exchange are predicting Miami will be the worst U.S. regional housing market over the next four years with prices falling nearly 30 percent.

Experts have been predicting a fall for Florida condo prices since the market peaked in late 2005. In Miami, sales figures have been falling for months but prices have been resilient as sellers refuse to budge.

In August, for example, condo sales in Miami-Dade County dropped 44 percent while the median price rose 5 percent to $262,000, according to the Florida Association of Realtors.

But the number of condos on sale has climbed to 25,000, a 36-month supply, compared to six to 12 months in a healthy market.

Market analysts say vulture funds could move on a stone-cold market in the next year.

"We have $200 million to acquire distressed condo conversion projects in Florida," said Matthew Martinez, point-man for a Connecticut-based private equity fund. "We're looking at purchases of $7 million and up, all-cash."

Some analysts believe 2008 will be the turning point, when pre-construction buyers are forced to pony up the full purchase price or walk away from deposits, speculators feel the pain of holding too many properties and developers need to dump excess units at discounts of 30, 40 or even 50 percent.

"In May or so, the true blood is going to flow," Zalewski said. "Many of the hedge funds are looking for a minimum of 100 units in the same building."

UNPRECEDENTED BOOM-BUST

Miami's condo-building spree was the biggest in its history -- a history replete with booms, busts, and swampland scams.

At the peak some 60,000 units were under construction, planned or permitted in the city of Miami, whose 400,000 people represent only 16 percent of Miami-Dade County.

Some of those projects have been canceled. But the ones already underway and soon ready for residents are shrouded in uncertainty as buyers look to back away from contracts, unable to get mortgages or fearing they are paying too much.

"We have definitely not seen the bottom yet. In the next six to 12 months we'll see the beginnings of that moment of truth," said Brad Hunter of Metrostudy, a housing research firm.

"It could be 2012 to 2014 before this market needs to build more condos."

Between 2006 and 2009, one analyst said, developers will drop 28,000 new units into the Miami market. The downtown buildings are part of a daring plan to revitalize the city's dingy core, a few years ago a haven only for the homeless.

In just eight prominent buildings in the downtown and banking districts more than 6,600 units are nearly ready.

The Related Group, Florida's largest condo developer, expects The Plaza to be finished next month. The first tower of its 1,700-unit, $1.25 billion bayside Icon complex is scheduled for August of next year with the second following in December.

Another developer's 516-unit, $360-million tower called 900 Biscayne Bay is expected to be ready next spring. Down the street, the twin-tower, 870-unit Everglades on the Bay, is expected to be finished in the fall of 2008.

While conceding the market is tough, Related chief executive Jorge Perez said he is willing to join the hedge funds and private equity pools and has upward of $100 million to snap up unwanted units to hold as rentals.

"There isn't a city where I can see the type of growth Miami is going to experience," Perez said. "Given that, do we have a blip, whether it's two years or four years, where we're going to have it rough? No question about it."

A smaller Miami-area condo glut in the 1980s took six years to correct, analysts say. This one could be worse.

"I think we've only seen the tip of the iceberg in terms of the pain the market will see," Martinez said.


By Jim Loney

HIS CASE

• Cheap money artificially fueled the boom. Exotic mortgages with low introductory interest rates were gobbled up by speculators as well as borrowers stretching their wallets to afford pricier homes. Those loans are now resetting to higher rates, pressuring many borrowers into foreclosure.

• Speculation is rampant. Visits his staff made to sales centers for new condos showed that 70 percent to 80 percent of all buyers were in it to flip. Single-family housing developments and used homes saw plenty of speculation, too. This fake demand spurred record development, and now between 30 percent and 50 percent of purported buyers -- many of them speculators who can't flip their contracts -- will simply walk away.

• The oversupply is worsening. Thousands more condo units under construction -- 37 buildings are scheduled to be completed in the next two years alone -- will further drag down a market where already it would take nearly three years to sell the condo units listed right now, at current rates. Plus, many who bought in other buildings will continue to put units up for sale to escape higher mortgages, taxes and insurance; others will end up in foreclosure. The result: Prices will drop significantly.

• The buyers just aren't there. Baby boomers will flock to South Florida to retire, but that is years away. For now, declines in public school enrollment in Miami-Dade and Broward counties are bad signs for demand. More people are leaving the state to escape higher costs of living.

PREDICTION

Prices will drop 10 percent to 15 percent each year into 2010. Few buildings and areas will be insulated from the downdraft. Foreclosures will spike. Not until the decade is over will prices start to stabilize. These problems will send the area into a recession in the third quarter of 2008.

BUY OR RENT?

Rent. Given the price drops foreseen over the next three years, it doesn't make financial sense to buy. All the speculators who can't sell their properties will rent at below costs, so rental deals will be plentiful.

 BY: MATTHEW HAGGMAN
 

Michael Cannon and Jack McCabe -- the bull and the bear of local real estate -- make their cases.

Cannon says he called the last housing bust in the 1980s. But the real estate analyst who has studied the South Florida market for four decades says he's not ready to say that about this downturn.

For more than two years, analyst Jack McCabe has loudly and consistently said the housing market is going to deliver a hard fall?

Who's right? Read on, and decide for yourself.

By MATTHEW HAGGMAN  - Miami Herald

Brickell

15 projects completed	3,724 units
10 under construction	6,078 units

Downtown Miami

Four projects completed	1,292 units
Eight under construction	4,006 units

Miami Arts District (north of downtown)

Seven projects completed	1,155 units
Nine under construction	5,603 units

Miami Beach

14 projects completed	2,087 units
20 under construction	3,383 units

Sunny Isles/Aventura/Bal Harbour

27 projects completed	5,499 units
12 under construction	3,174 units

Kendall

Three projects completed	864 units
Two under construction	971 units

SOURCE: Integra Realty Resources

HIS CASE

• Sales are stopping their slide. Since, the market peaked in the second quarter 2004, the number of sales has declined dramatically. But in recent months, sales have flattened rather than continue to dip. That suggests the market may be stabilizing, although it's still too early to tell if it's a trend.

• Project failures are isolated. Condo projects built by inexperienced developers in over-saturated markets will fail, to be sure. But overbuilding in the new condominium market that draws so much attention is actually relatively contained compared to the overall body of new and used homes across South Florida. For the vast majority of homeowners who bought before or in the early part of the boom, their homes are still worth far more than they paid for them.

• Walkaways are fewer than predicted. The number of speculators who bought new condos isn't as high as other analysts claim; it's roughly in the 30 percent range. And buyers aren't walking away from their sales contracts as often as alleged. For all condo buildings constructed and completed in the past five years, 96 percent of the units have closed, his research shows.

• The economy is strong. Unlike in the 1980s, South Florida is now part of a world economy that is flush with cash. There is more wealth in South Florida than many realize. Studies reporting more moving trucks carrying people out of Florida than into the state miss the tremendous international in-migration.

PREDICTION

Prices are rolling back to around 2004 levels -- where they would have been anyway if the boom hadn't produced unusual, and unsustainable, price gains. Few will lose real money. A readjustment to normal market conditions -- a better balance between buyers and sellers -- will continue for the next 18 months. But, so far, this relatively orderly transition has not produced panic sales.

BUY OR RENT?

Buy, if you plan to stay for at least seven to 10 years. There are good values out there, but negotiate hard and you must be thinking long-term.

36 -- Months it will take to sell all the condos on the market in Miami-Dade

29 -- Months it will take to sell all the condos on the market in Broward

23,215 -- Number of new condo units expected over next two years in major Miami-Dade markets

5% -- One-year median price gain for condos in Miami-Dade

27,724 -- Number of existing single-family home sales in Miami-Dade and Broward in 2003

8,455 -- Number of existing single-family home sales in Miami- Dade and Broward the first eight months of this year

2% -- One-year median price gain for existing single-family homes in Broward

SOURCES: Ronald Shuffield/EWM; Michael Cannon/Integra Realty Resources; Florida Association of Realtors

SPECULATORS

HOW BIG A ROLE

DO THEY PLAY?

McCabe says he would poll buyers at new condo sales centers, where buyers would camp out over night to get a unit or pay people to save their place in line, and ``without a doubt the great majority were all in it to flip the property.''

Speculators getting out will put more downward pressure on prices over the next two years. ''It is survival of the fittest at this point,'' McCabe said.

Cannon contends his own study of new condos has not found nearly the number of speculators. Whatever the number, though, he says speculation in new condos isn't as important as people make it out to be. That's because the housing market is more than new condos.

New condos make up about 15 percent of the overall market; 10 percent are new single-family homes. The rest are existing houses and condos, which were speculated on but are already starting to roll back back from artificially high levels, he says.

''Speculators are a fractional portion that are being blown way out of proportion,'' he said.

DEMAND

ARE PEOPLE

COMING OR GOING?

McCabe: ``The majority of people who live in South Florida can no longer afford this market, and they're leaving. They are not coming, they are leaving. We have [fewer] children in our public school systems in all three South Florida counties, but in particular Dade and Broward, now than we did five years ago. Private schools that didn't have openings for a year or more, you can now get your kid in easily.

``The vast majority of families are finding it a financial struggle, almost to the point of hardship, and they are leaving this marketplace and moving elsewhere. The [number of] electrical hookups [for homes has] not gone up. When you talk to the moving van line companies or look at their latest reports -- Atlas, United and the third major one -- all are saying they are moving more households of furniture out of the state of Florida than they're moving in.''

Cannon: ``We are having an influx of a different demographic group here. That is the biggest uncertainty we don't know. No. 1, we are in between the Census. And even when we do have the Census, we don't know how many people because municipalities sue the government because they say they are undercounting. . . .

``[In a similar way,] the school statistics are wrong. They say there is a decline in school enrollment in the public schools. Do you know why? Because there is increased enrollment in charter and private schools. . . . We don't know how many people are here. We don't know what our net migration is here.

``And you take pieces, with all due respect, you take pieces of statistics and make it an absolute guarantee, and it's not true. Because I don't know, and I don't know if you guys know.''

LENDING

HOW WILL RISKY LOANS

IMPACT THE MARKET?

McCabe fears that risky mortgages -- particularly adjustable rate mortgages slated to reset to a much higher interest rate -- could deliver another blow to an already struggling housing market. He says $2 trillion dollars in adjustable rate mortgages are slated to reset across the country, including a big chunk in South Florida.

Cannon's not so sure. He says such fears are overblown, and it's wrong to assume adjustable rate mortgages will result in catastrophe. Cannon said his research reveals between 70 percent and 75 percent of the entire South Florida housing market is not affected by risky mortgages currently making headlines. He claims the dicey loans offered by high-risk lenders were only in a corner of the overall market.

''If you go to legitimate lending institutions and look at foreclosure rates, it is de minimis,'' Cannon said.

DANGER ZONES

WHICH REGIONS

SHOULD WE WATCH?

McCabe says the majority of the downturn is still ahead of us and will be widely felt. Not even the best buildings will be spared, he believes.

Cannon disagrees, saying there is no basis for such a sweeping conclusion. Yet, he says, a sub-market by sub-market analysis does reveal there are some areas to worry about.

''Miami Beach overall is not doing bad; Coral Gables overall is not doing bad,'' said Cannon. ``Downtown Miami and Brickell Avenue, that is an area to watch. Aventura, certain buildings. Coral Way, I would watch very carefully. Dadeland I would watch very carefully.''

``But I have not seen any panic selling yet.''

CONCERNS

DO THESE GUYS

AGREE ON ANYTHING?

Yes, Cannon and McCabe do agree on some points. Here are concerns they share for South Florida's housing market:

• Fraud: Bogus sales may have artificially boosted prices and made discerning what's really going on in some neighborhoods difficult.

• Property taxes: Taxes are high and getting higher, particularly for second-home owners who make up a significant chunk of the market. Concerns over taxes are delaying home purchases, and lawmakers still have not agreed on a plan.

• Insurance: Premiums remain too high for many property owners and could quickly rise again with another busy hurricane season, further increasing the cost of owning a home here.

• Foreign visas: Rules that make it more difficult for foreigners to travel here will impede their purchases of second homes.

• Bailouts: The government should not bail out speculators, developers or lenders, many of whom made bad decisions.

OTHER HIGHLIGHTS

• On investing: ''If buying for investment, go buy commercial real estate,'' Cannon said. Buy residential property only if you plan to remain in it for the long-term.

• When will the bear turn bullish? ''In 2010 and 2011 is when we will see real demand from real end-users in South Florida,'' said McCabe. ``That is when the baby boomers start to retire. That is when baby boomers will want to live in these buildings.''

• On the weak dollar: ''It's good news for Europeans and Canadians. That's really where the lion's share of the buyers are coming from,'' McCabe said.

Cannon says Latin Americans continue coming as well.

• On foreclosures: ''We will see foreclosures double next year and double the year after that,'' said McCabe, citing a shakeout from excessive speculation, overbuilding and risky mortgages resetting to higher rates.

Said Cannon: ``There are foreclosures, but I still can't reconcile the numbers I read in the media. Did you know in 2006 there were [fewer] foreclosures than in 2002, 2003 or 2004? . . . Locally, the real lenders are overloaded today processing refinance mortgages. The majority of people are being taken out of these high-risk loans.''

By Nick Carey Sun Oct 7, 3:50 PM ET

DEARBORN, Michigan (Reuters) - Robert Neal is in heaven. "This is not a buyer's market, this is a buyer's paradise," said the 37-year-old former auto worker as he waited for a foreclosure auction to start in this Detroit suburb.

Wearing dark glasses, a black baseball cap and a chunky silver necklace, Neal was a sprayer for 12 years at Chrysler LLC until June - when it was still owned by DaimlerChrysler AG - when he took a buyout offer to leave the company.

He wouldn't disclose the size of his buyout -- offers for someone with his experience were typically around $100,000 -- but came here to buy one or two houses to rent out to working families. Neal wants family homes with a market value of up to $90,000 and will pay up to $15,000 for them.

"If the price is right, I'm buying," he said. "When the market rebounds, I'll probably sell them."

This is where economic misery meets business opportunity, as investors look to snap up properties for a fraction of their value while the housing market is in a slump. The auction room in Dearborn is full of people seeking bargains.

This depressed city had five times the national foreclosure rate for a U.S. city in August - behind only the three California towns of Modesto, Stockton and Merced.

"This city has been hit by the slowing economy, the housing slowdown and the fact that lenders are being much more cautious with new loans," Dave Webb, a principal at Dallas-based auction firm Hudson & Marshall, which organized this recent auction of 700 Detroit area homes, said. "But you also have the problems of the God-danged auto industry, which just makes things worse."

Detroit and Michigan were further hit recently by budget wrangling that came close to shutting the state government and by a two-day strike by United Auto Workers union against top U.S. automaker General Motors Corp..

"Detroit is just unlucky," Webb said.

The recent auction here was in a Ford Motor Co convention center. Buyers had to pay a non-refundable $3,000 cash deposit and, in a sign of the times, Hudson & Marshall repeatedly cautioned prospective buyers they should have their loans cleared with lenders in advance.

The auction included smaller family homes as well as large houses in once posh neighborhoods, such as a 3,500 sq ft (325 sq metre) building in the city's Indian Village. Many homes in the neighborhood were designed by prominent 20th century architects for the auto barons.

In a leafy area a few miles from the center of Detroit, this 1920s mansion would be worth many hundreds of thousands of dollars. At the auction, it sold for just $116,000.

WAITING FOR THE REBOUND

Nigerian-born Robert Festus came here looking to buy homes to rent out in upscale suburbs of Detroit.

"The homes I am looking at should be worth up to $300,000, but I'm going to steal them for around $100,000," he said.

Like Neal, Festus said he plans to wait for the market to pick up before reselling his properties.

Detroit has lost more than half its population in the past 30 years and has been hurt by rising crime - according to 2006 Federal Bureau of Investigation statistics it had the third highest violent crime rate in U.S cities with more than 100,000 inhabitants - failing schools and other social ills.

At 7.4 percent Michigan had the country's worst unemployment rate in August. In Detroit, unemployment runs near 14 percent and a third of the population lives in poverty.

Given the decades of decline here, some might question whether a rebound will ever happen here.

"The Detroit area will bounce back. It has to," said Joe Tuttle, 28, who works in medical sales.

He and girlfriend, Carla Kumrow, 26, a buyer at an automotive supplier, want a home to live in, a rarity at this auction. They want a specific home in the well-heeled suburb of Birmingham with a market value of around $300,000. Willing to pay $200,000, they are outbid at $216,000.

Hudson & Marshall's Webb also says the area will recover.

"Michigan will need to diversify its economy more, which takes time," he said. "If investors are willing to hold their properties for a long time, their investments will pay off."

"I am becoming more optimistic about Michigan's medium-term economic prospects given that GM and the UAW have agreed on a new contract and a state budget accord has been reached," Comerica Bank Chief Economist Dana Johnson wrote in a recent note. "However, in the near term, the local economy is likely to remain pretty stagnant."

While the market is down, property auctions in the Detroit area are the stomping ground of people like Pat Karbon, 28, and Dave Ehrlichman, 27, who buy small family homes valued at around $80,000 to $90,000 for up to $15,000 then "flip" them - sell them quickly on the market for around $40,000.

"In five years of doing this I've never seen prices so good," Ehrlichman said waiting to bid on a house.

Sales of existing homes were down yet again, to the lowest level in five years, according to data released by the National Association of Realtors. Sales declined 4.35% from the previous months total to an annual sales pace of 5.5 million homes. Last month's pace was 5.75 million homes.

This reflects the activity of August closed sales. September sales data will be released near the end of October.

We are now selling about the same number of homes that sold in 2002, when values increased by almost 7%. Once again, if there are problems with sales or values in your local area, it is not likely due to the sales pace, but because of an oversupply of homes for sale. Inventory oversupply creates a "buyer's market."

Sales Pace by Region - Month to Month

For month to month comparisons, the largest sales decline occurred in the West region, down 9.82%. Sales were down in the Midwest by 5.19%, the South by 2.65% and the Northeast by 1.96%.

Comparing sales to last year makes it look even worse because last year we were still selling homes at a pretty good clip. Nationwide, sales were down 21.7% in the West compared to last year, 12.7% in the South, 10.49% in the Midwest, and only down 5.66% in the Northeast.

The above figures are seasonally adjusted and based on how many homes would sell over a year's time at August's current sales pace.

September figures will be released near the end of October.

Price Appreciation

Nationally, the median average sales price increased very slightly compared to last year, up just .22%. The national median sales price is $224,500. Since the early sixties when experts began tracking this data, there has never been a year when the national median average price declined. This year, it may be close.

The Northeast showed an increase of 3.56% in median sales price. The Midwest increased 3.08%. The price decline in the West was 3.76% and 0.7% in the South.

We compare values to the same period a year ago, because month-to-month there are sometimes huge fluctuations in the size of houses that sell. Larger houses sell during the summer when it is more convenient for families to move because school is out.

Median Average

The median average is the "midpoint" sales price. Half the home were sold above that price and half below.

Inventory Jumps Again

Inventory is measured in two ways. "How many homes are available for sale?" and "How many months would it take to sell the total number of homes available for sale right now, at the current sales pace?"

The actual number of homes for sale in the United States remained fairly stable, with a slight increase to 4,581,000 homes. However, because the pace of home sales declined, it will take longer to sell those homes.

Assuming no new homes came on the market and the sales pace remained stable instead of continuing to decline -- it would take ten months to sell every home currently listed.

During 2002 when the sales pace was close to what it is now, there were only approximately 2.1 million homes for sale at a given time. This is the main problem. Too many homes on the market.

Home Sales Pace Defined

We generally report on the annual sales pace. What that means is that the National Association of Realtors calculates how many homes were sold, makes adjustments for seasonal factors like weather, school, vacations, and calculates how many homes would sell in a year at that given pace. When we use raw data, we try to state that clearly.

All figures in this report are for August closings. September data will be released near the end of October.

Month-to-Month Appreciation Graphs, regional and nationwide - click here.

Prices are higher than ever in Manhattan, while inventories and time-on-market are down. You got a problem with that?

Panama's developers hoped to lure U.S. retirees with cheap prices. Then came speculators, 380 tower projects representing more than 40,000 condos, rising prices and the possibility of a bust.


PANAMA CITY, Panama -- Cement prices have doubled, and it's hard to get a truck to come to your building site. The situation is similar for steel, glass, bricks and all the guts of a high-rise condominium.

The real-estate business is having a party in Panama.

As of July, 380 tower projects were under way or announced, representing more than 40,000 condos and apartments. A year ago, it was 11,000 units.

The builders say Americans looking for the urban high life in retirement will snap up these buildings in a new Miami that's half the price of the real Miami.

''The baby boomers, simply put,'' wrote Roger Khafif, builder of the Trump Ocean Club in the Punta Pacifica shoreline neighborhood, in an e-mail about his target buyers. ``Without them, Panama's real-estate boom would bust.''

Retirement properties have been considerably cheaper in Panama than in Florida, and the climate is as good or better. The local currency is the U.S. dollar. And although Medicare doesn't reach Americans abroad, healthcare is much less expensive there than in the United States.

But speculators are the ones who have put down deposits on 70 percent to 90 percent of these units, said Paul McBride, chief executive of Prima Panama developers. There's no beach on the bay, which is where the 1 million residents of this city pour their sewage. A seven-year, $300 million cleanup is underway.

And falling prices in Miami and elsewhere in the United States may make those Panama condos seem less cheap.

It's hard to find evidence that white-haired North Americans are mounting an invasion of retirees, and you can almost hear the air escaping from the bubble.

The Ice Tower, a 104-story dream of blue and silver, has melted. Two other towers of 96 and 54 floors are not going to get off the ground, either. There are mutterings about whether some developers were simply looking for interest-free loans from the people putting down condo deposits. A Panamanian legislator is proposing to a law requiring developers to pay 6 percent interest on refunded deposits.

Khafif's Trump Ocean Club, a venture with New York developer Donald Trump, is starting to rise. The skyscraper shaped like a sail, he hopes, will be completed in October 2010 with 500 condos and 500 hotel suites with a market value of $404 million.

''Of course we can build a 90- or 104-floor building in Panama,'' Khafif wrote. ``Almost anything can be done if the price is right!! And that was precisely the problem. Plain and simple, the developers sold toooooo cheap.''

A builder needs to sell condos during the construction phase at prices high enough to cover inflation in materials and other construction costs, Khafif argued. ''We . . . launched our modest 66-floor building at three times the market value,'' he wrote, and thus he expects no problems.

There are real-estate booms like this in a dozen Chinese cities and in the Persian Gulf emirate of Dubai.

Whenever the discussion turns to where all of the money comes from, people look over Panama's shoulder and see Colombia, where cocaine has built fortunes looking to be laundered.

Such whisperings have not stopped other investors from coming. Condos priced at a total of $5.7 billion are on the market in a nation with a $16.5 billion economy. The expansion of the Panama Canal, hopes for big energy investments and happy days in the banking industry all point to rapid economic growth.

In the first five months of this year, Panamanian banks reported profits of $444.1 million, up 19.4 percent from the same period in 2006. The banks say credit is expanding 15 percent a month.

McBride of Prima Panama said the average Panama City condo is selling for more than the average single-family home in the United States. This doesn't hurt the luxury market so much, but it may make a difference for North Americans hoping to stretch their nest eggs by retiring abroad.

''Two or three years ago, the price of a luxury condo was $120 a square foot. Now it's $250 to $300 a square foot,'' McBride said.

BY JIM LANDERS  -  The Dallas Morning News

Panoramic views of BiscayneBay. A short distance to the Carnival Center and downtown Miami. Living in the heart of Miami's emerging Edgewater neighborhood.

It's all yours -- for auction next month inside a Marriott Hotel ballroom.

In what may preview the straits the ailing South Florida condo market faces in the coming months, developers of the Platinum condominium are auctioning 20 condos in its 119-unit, 22-story tower. Eight will go to the highest bidder, no matter how low the sales price. The rest require the developer's approval.

Carmen Redondo, a principal with Maysville, the property's builder, said buyers started closing on units at Platinum, 480 NE 30th St., in May, but the remaining inventory couldn't attract enough interest in the sluggish market. ''We decided to auction the last 20 units so we can finish this project and go to a new thing,'' Redondo said.

The move echoes the condo bust of the 1980s, when new units were auctioned in bulk across South Florida. Recently, individual condo owners, companies converting apartments into condos and single-family builders have already experimented with auctions, both online and in person with full-throated auctioneers.

But South Florida condo builders, who are completing a record spate of new towers, have been slow to adopt auctions to move unsold units.

''This may be among the first auctions for new condos in South Florida'' in the current downturn, said Jack McCabe, a Deerfield Beach real estate analyst who has long warned about condo overbuilding.

Market watchers bet more are to come, given conditions in the condo market. In June, the number of Miami-Dade condos sold dropped 52 percent from the same month a year earlier -- although prices held on, gaining 7 percent year-over-year to a median price of $275,500.

Richard Swerdlow, chief executive of condo seller condo.com, said the company is launching an online auction business for new condos within the next two months.

Real estate analyst Michael Cannon said auctions are not necessarily a sign of distress but another marketing tool. Developers have adopted a range of measures to sell units, from lavishing incentives on buyers to offering to temporarily lease back units.

Cannon also said the 1980s auctions were not always successful. ''The state of the market was so depressed then,'' he said. ``That is not necessarily the case today because there are still buyers in this market. They are just looking for better deals.''

The Platinum auction, meanwhile, presents an interesting twist. Typically, auctions establish a floor price at the start of bidding. If the minimum is too high, bidders sit out and the seller keeps the unit. But at the Sept. 20 auction, eight of the 20 units will be sold without any minimum -- meaning the highest bidder, no matter how low the winning price, gets the unit.

''It will be very interesting to see what prices they fetch for those,'' Swerdlow said. ``I may go down there and buy a unit.''

Miami Herald staff writer Steve Rothaus contributed to this report.
Posted on Fri, Aug. 10, 2007  BY   MATTHEW HAGGMAN  mhaggman@MiamiHerald.com

For further insight, let's review some compelling trends that have shaped each of the mortgage submarkets.

1. Condo conversion crisis

   Not long ago, condo conversion loans were easy money. If you weren't in a condo conversion, you felt like the guy who never bought tech stocks in 2000.

   Today, with few exceptions, no lender or holder of this paper is feeling good. Interest reserves are running out, 3% cap rates don't seem like such a great idea, and writedowns are beginning to occur. A good condo deal is about three things: basis, basis, basis. The music has stopped for lenders who underwrote to escalating residential values and to investor presales. Many of these investors also planned on using subprime loans.

   For condo conversion players, the fourth quarter of 2005 was as good as it gets.

2. Single-family loan meltdown

   At one point, the rule of thumb in qualifying for a single-family loan was, “If you can fog a mirror, you can get a loan,” regardless of ability to repay. Lenders solved poor credit issues with higher rates. Low documentation loans, also known as “liar loans,” saved the day for people with no income, making the American dream possible for just about everyone.

   These loans were originated by commissioned mortgage brokers who sold the loans to mortgage companies, who then packaged them and sold them to investment banks, who then packaged them and sold them as bonds to investors. As long as home prices kept rising, and owners could tap into home equity lines to make payments, all was well — but not for long. When the subprime market eventually tanked, it left in its wake defaulted loans and a string of bankrupt mortgage companies that got caught holding inventory at the wrong time.

   For mortgage bankers, realtors, homebuilders, and subprime investment banks, the fourth quarter of 2006 was as good as it gets.

3. Land loan roller coaster

   As the condo market boiled over and subprime was hot, land began to attract capital. Land seemed fine because there was a strong demand to build the new homes and condos financed by the subprime market. The thinking was if the residential markets were good, land was too.

   At the height of the land craze, any sponsor with a contract and PowerPoint presentation was a legitimate lending candidate. All that was needed was a contract, a development budget, and a compelling story about how the approvals would be obtained. The phrase “new paradigm” rang out once again, and land was deemed to be a standard real estate asset class.

   Lenders who went into the land business in 2005 and 2006 are now struggling with many of their land positions. Land has now joined the realm of the once-great condo conversion and subprime residential asset classes.

4. Commercial mortgage bravado

   Despite turmoil in the other submarkets, commercial real estate mortgages remain relatively unscathed, with defaults at all- time lows. In recent weeks, rating agencies have tightened subordination levels, causing an increase in spreads and the elimination of the 10-year interest only loan. The commercial collateralized debt obligation (CDO) market is also nervous, as subprime CDO bonds are getting marked to market.

Most professionals in the commercial mortgage market agree that at the outset of the third quarter of 2007, the top of the market is in the rear-view mirror. For this, there are multiple reasons. First, much of the money made in the commercial real estate seven-year bull run has resulted from cap-rate compression, versus real estate managers' ability to increase net operating income at the property level. Second, the consumer keeps spending despite higher debt ratios, and we have yet to see the consumer fallout from the declining housing market.

There are no dire predictions here, but we can expect cap rates to rise and asset prices to decline. Value-added transactions originated over the last 18 months that were structured to perfection are now in jeopardy. While only time will provide the final outcome for commercial real estate finance, we will all look back on the second quarter of 2007 and conclude that is as good as it got.

Jay Rollins is president of JCR Capital, a Denver-based real estate investment bank. He can be reached at jayrollins@jcrcapital.com.

Air brushed photos are becoming more common as prospective homebuyers turn to the Web as the first point in their house hunts.

Two years ago, Jonathan J. Miller, a Manhattan real estate appraiser, bought a house outside New York City. Shortly after the sale, he looked up the listing on the Web site of the seller's agent and noticed something unusual: The utility lines running over his house were nowhere to be seen in the listing photo. They had been airbrushed out of the picture.

Although he would have bought the house anyway, Miller says, he was annoyed by the falsified photo.

"We physically saw the property, and therefore the utility lines, before buying, but did they really need to modify the photo that much? It didn't really seem right, either legally or ethically."

Miller posed this question on his real estate blog, Matrix, and it immediately became his most-read posting. Real estate agents and graphic designers across the country debated the ethics of altering photos to show homes to their best advantage. Some saw no problem with it; others said it crossed a line. "I was really surprised by the debate," Miller says. "But it seems like what happened to me was one of the least-harmful examples."

Internet driving the trend
According to the National Association of Realtors (NAR), 83% of homebuyers check home-listing photos on the Internet before they visit a house, and photo views outrank video tours by a 2-1 ratio.