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MIAMI (CBSMiami) – This week the Governor of New York blamed budget shortfalls on the state of Florida.
He said New Yorkers are fleeing to the sunshine state to save big time on taxes.
It all goes back to the tax reform passed by Congress. The changes increased the incentive to move to the sunshine state dramatically.
On Sunny Isles Beach, developer Edgardo Defortuna has a lot to smile about. His development Jade Signature, an ultra-luxury beachfront condominium building, is nearly sold out.
“We have 7 units left of 192,” Defortuna said. His timing could not be better as affluent buyers are shopping for one of a kind home. “Yes, the timing was perfect and now we are targeting those buyers that want immediate gratification. We are finishing some of the unit so they can basically bring their suitcases and move in.”
Who is buying condos for $5 to $30 million dollars?
“Two New Yorkers. Two CEO’s. One of a major pharmaceutical company and one a hedge fund,” Defortuna said.
He first noticed the uptick of affluent buyers from the Northeast last year. The sudden increase in people moving is not by chance. Barry Horowitz, a CPA and estate planner with Withum, says last year was one of his busiest.
“I have done a lot of planning over the years. You know I would have maybe 10 people call me a year. Last year I was averaging 2-3 people a week calling me to see how they can move out and what we can do,” he said.
The big change in the tax reform was the long-standing deductions have disappeared. For a person who makes a million dollars a year, they are now paying $40,000 more come tax time. For the person who makes $10 million, it’s costing them $400,000 a year.
“People are just saying they want to get out of here in droves because the dollars involved that we are losing, tax-wise, is not worth it to stay,” Horowitz said.
It could not be happening at a better time for South Florida. The luxury condominium market has seen a surge in building in recent years, while demand from foreign buyers has dropped dramatically.
There are growing concerns of what could be on the horizon. Jack McCabe of McCabe Research but it bluntly this week.
“We are definitely headed toward a recession,” McCabe, a real estate consultant, predicted the great recession more than a decade ago, well before anyone was really talking about it on TV.
“I had a lot of people that tried to discredit me or had negative things to say and of course those people are now sitting at the front of my speaking engagements,” McCabe jokes.
Now he is saying a recession is likely in the next year. Unlike the last recession that hit all of real estate, he believes this one will target the wealthy.
“This time we are going to see a large drop, especially in the new luxury condominiums. And anything priced over $750,000 in South Florida is going to see some price declines.” he said.
Much of his prediction is tied to the growing number of countries in or headed toward recession. Foreign buyers make up roughly 70% of Miami’s luxury market.
As they preserve money or withdraw money he expects them to walk away from 50% deposits on many of Miami’s new buildings.
McCabe explained, “The developers are likely to tell you there is no way that is going to happen. I am going to tell you it’s going to happen. At least 10% or 20% of these are going to walk away.”
Defortuna admitted he has already had a handful of foreign buyers walk away. But at the same time, New Yorkers are walking in.
“Certainly demand slowed down and there is obviously more concerns. But Miami doesn’t really depend on anyone given economy. So certainly, New Yorkers and the US it’s important for us. But the Latin American influence is a key component to fill in the Miami gap.” Defortuna said.
Defortuna told us he does not expect the fire sales we saw a decade ago on luxury condominiums. By and large, he says developers learned their lesson, are not overextended and have significant deposits this time around, that they get to keep.
There may be some properties they decide to sell at a discount, but ultimately they will be whole because of the deposits they keep this time around. That said a leading indicator something was up last time around was realtor commissions. Typically, a realtor gets 3% of a sale. Today some developers are offering 10% if you bring them a buyer.