Florida housing expert fears another bubble is about to burst

DELRAY BEACH, Fla. - Jack McCabe watched the last housing bubble rip through South Florida like a hurricane, and he watched the investors from up north roll in to town to buy up the wreckage. For 15 years, he has consulted on real estate deals here, advising clients large and small on what to buy and where, and on when to get out.

McCabe is, by many accounts in the Florida real estate community, a go-to expert on the sprawling market that includes Miami, Fort Lauderdale and West Palm Beach. He predicted the state's housing crash a decade ago and the Great Recession that followed it.

And increasingly, he worries that South Florida is drifting back into bubble territory, in danger of another collapse that could hurt homeowners and investors alike.

"We have short memories here in Florida, as I think they do in most places," McCabe said in a recent interview. "And we're back at it. Every project is getting approved again. Particularly in the luxury condo sector, there's going to be a crash in prices in the next few years."

Housing prices are steadily increasing in the nation overall, at a rate of nearly 6 percent over the previous year, after a deep slide following the housing-fueled Great Recession. In South Florida, though, the price recovery was more pronounced - and there are signs it is already receding.

Home prices grew by 17 percent year-over-year at the end of 2013 in the West Palm Beach-Boca Raton-Delray Beach metro area. In the Miami area, they rose 13 percent. But that growth has slowed recently. Miami prices increased by 11 percent in the first quarter of this year. In the West Palm Beach area, the increase is down to 10 percent.

The last time price growth slowed to this extent in South Florida, at the end of 2005, a huge price drop was just around the corner.

"It's very worrisome," said Dean Baker, an economist and co-director of the liberal Center for Economic Policy Research, who famously predicted the national housing crash that preceded the Great Recession.

There are differences this time, as McCabe notes. For one, the last bubble was inflated by rampant speculation, mortgage fraud and reckless lending to lower- and middle-income borrowers who could not afford to repay their loans. Many of those buyers lost everything when the market collapsed, and they are not the ones driving prices up now.

In their place, McCabe and others in Florida real estate said, two groups of buyers are the major force in South Florida's market today. One is large institutional investors, such as private equity firms, that are scooping up condominium units and renting them out. The other is so-called flight capital - foreign buyers, often from South American countries with shaky political situations, looking for a safe place to park their cash.

Between half and three quarters of residential transactions in the area over the past three years have been cash sales, McCabe said, and hedge funds are responsible for a majority of those sales. Builders, he added, are racing to finish high-end condo units to suit the desires of those buyers.

McCabe explained the upsides and downsides of that dynamic over a beachside lunch, a blue polo shirt covering his tan.

If the area is indeed in a bubble, he said, and if that bubble pops, that concentration of ownership could soften the economic blow to the region, compared with a decade ago. The last housing collapse in Florida led to an economic contraction much worse than the nation's, as distressed homeowners slowed their consumer spending. That would not be as severe this time, because fewer people are exposed to the bubble, and because the price run-up has not been nearly as large; West Palm Beach prices were rising by nearly 30 percent year-over-year at their peak in 2005.

On the other hand, the dominance of big investors and foreign buyers could hasten other economic problems in the area, because they have coincided with falling household incomes in South Florida.

With outside money pushing up home prices - both for sales and for renting - and with economic forces pushing incomes down, McCabe said, most Palm Beach residents are now paying "an unaffordable portion of their incomes for housing expenses."

That makes it difficult for families to save money to buy in the future, he added, and it could "shut off migration of many baby boomers to South Florida" and push millennials and young families to leave the area to improve their standard of living. "Sunshine only goes so far," he said, "and paradise can be disappointing without the income or funds to enjoy it."

It's a cycle that would hurt the economy and possibly send housing prices down again, and McCabe is convinced it is not far away.