I ventured out to my old haunts of downtown Miami this weekend for the first time in nearly two years. The changes to the area in this short time were acceptable. Unlike Chicago, San Francisco, or New York, the homeless population seems to have dissipated by two-thirds since I left the Magic City. It is no coincidence that the presence of the police and private security seems to have increased considerably. I also saw a myriad of California license plates, which was rare when I lived here.
In addition, about 20 new restaurants have opened in the area since the end of the closures. However, what was most shocking was the number of massive construction projects going on in this part of Miami. A few large hotels and several residential high-rises have hooked up since I left an hour north of Delray Beach. At least a dozen residential buildings between 40 and 90 stories tall are in various stages of development.
Of course, being Miami, nothing significant seems to be done to improve the area’s basic infrastructure. This is going to be quite problematic. Brickell and Downtown Miami’s main thoroughfare crosses the Miami River and drawbridges that open once or twice an hour depending on boat traffic. The absolute traffic jam exists for four to six hours every day as it is and will only worsen significantly as these new residential buildings are completed. My free real estate advice for anyone who doesn’t need to drive and dreams of a place here is this: wait three to five years, you should be able to buy something for 60 to 70 cents on the dollar due to this excessive construction.
In my opinion, this surge in construction is a consequence of the easy money the Fed was providing to the market until recently. Most of these properties would never have received the green light at current interest rates. This is also why I remain fairly cautious on the global market. We have seen the sharp rise in rates start to cripple the housing market. It’s easy to see why. A typical $500,000 Delray Beach home with a 20% down payment costs about $3,800 a month, all inclusive with prevailing mortgage rates. The same place would have cost about $1,000 less per month if purchased earlier this year before rates rose.
It’s not the easy-to-project impacts of higher interest rates that make me nervous, it’s the unforeseen impacts that make me cautious. I worry about which “naked swimmers” will be discovered as the tide of cheap money continues to recede. Already we have seen the Bank of England having to step in to prevent pension funds from imploding as gilt prices approached the 4% level and the pound neared parity with the dollar. The consequences of this even helped to make the last administration almost stillborn and prompted the resignation of the new prime minister there.
There are already growing concerns about the health of Credit Suisse (CS) and rising interest rates should be a huge concern for sovereign debt given the massive amounts of deficits and national debt prevalent across the G7. .
Hopefully, markets and the economy can weather this wave of monetary tightening relatively unscathed before inflation levels recede and the central bank can “pivot” to a more dovish stance. However, I believe that significant landmines will be discovered before this happens and it will be some time before the “everything is clear” signal can be given.