Finally, after several years of denial, real estate stakeholders in the many hard-hit areas have finally come to the breaking point. Distressed sales continue to be the driving force in most regions, particularly, South Florida, California, Arizona,  and Nevada. Sellers of residential properties are trying desperately to remain competitive amid a flood of units for sale. According to Metrostudy, a national housing research firm, the inventory level of unsold condos in South Florida represent a 31 month supply. Many people think that a two to four month supply represents an equilibrium with demand. Even in the face of these extreme conditions, there are some signs of light.

Using data gathered from the multiple listing service focusing on key areas of Miami, I can report that sales have picked up considerably. By my rough estimate, the rate of monthly average rate of sales is up almost 70% from the severely depressed  levels I saw earlier this year. On the supply side nationally, we also see new construction projects falling dramatically in April to to a seasonally adjusted annual rate of 458,000, which is the lowest since record keeping began in 1959 and much lower than the peak rate of 2.27 million in January of 2006. Metrostudy found that housing starts in Miami are almost zero, which is in line with my own cursory observations. While most might see this as a negative, I see it as an essential step in reducing inventory glut. There have been meaningful pieces of legislation passed recently at both the federal and state level (Florida) that have the aim of encouraging buyers and supporting the real estate industry. Even though high inventory levels, impending foreclosures, and increasing unemployment will keep prices at bay in the near future, it seems that the ingredients are in place to slowly start forming a bottom in the residential real estate markets.

Unfortunately, there are almost no signs of life at all in the commercial market of Miami because most sellers are not budging. There is a trickle of sales activity for smaller multifamily properties with the yields are starting to look attractive in some areas. I expect the sellers and mortgage holders to cave in eventually. Condos will likely have a greater share of foreclosure problems, other supply issues, tougher lending standards, and increased maintenance fees; so one should require a greater discount in price and carefully consider the financial health and other characteristics of the condo association before jumping in. Also, even though property values are declining, one should not infer that tax bills will fall by an equal proportion (or at all) from these levels because the tax rates are likely to be raised in order to offset the lower assessed values and balance city budgets.

Central areas in Miami will likely present the better investment values. These areas the most high-end development in the recent years. These areas stand to continue to benefit from gentrification and the positive agglomeration effects that will likely occur as a result of the newly constructed luxury skyscrapers that are just now reaching high levels of occupancy. Even though the citywide economy might be contracting, there are specific areas that will continue to improve in quality and appearance even in the near term, albeit at a slower pace than otherwise would be the case.

In contrast, I expect more blight to set in the outskirts of the city, in areas that might not look so bad because they have a lot of new construction but still have a lot of vacancies. This is because of the increased congestion and travel time to the central business district, lack of comparable public utilities, prolonged property abandonment, and lack of maintenance. In southern Miami-Dade, the many new housing subdivisions within Homestead are almost ghost towns with low prices that are still not attracting buyers or renters. These areas may suffer from negative reinforcing conditions as more blight creates a less desirable living environment and more crime and, therefore, should be avoided even though pricing and potential income yields might appear to be attractive.

I wouldn’t say we are at a bottom but I would say that we are getting close. Within  a year or less the best opportunities will likely emerge. Individuals will increasingly need to protect their savings and investments with certain types of real estate, in part because it is a hard asset, which cannot be printed at will by a central bank.

At the current rate of government spending (even assuming normal GDP growth) the U.S. government debt will likely be over 100% of GDP in a couple of years. When one factors in the unfunded liabilities of Medicaid and Social Security it becomes clear that foreign central banks will not absorb all of that debt. With so much debt to finance, the situation could spiral out of control. While higher taxes are most probable, another likely event is that the mysterious Federal Reserve will buy up any excess treasuries in the market which will be significant. Isn’t that a neat trick? Not if you are expecting the dollar to retain its purchasing power. As I mentioned in my previous commentary, individuals need to stay away from long-term bonds denominated in U.S. dollars that are not indexed to some measure of inflation. While inflation might not be imminent, the recent steepening of the yield curve indicates that the markets seem to waking up to the fact that Uncle Sam is a drunken sailor that will not sober up before its too late.