Jack McCabe thinks Federal Reserve chairman Alan Greenspan is asking the wrong questions about housing price bubbles and busts. McCabe, a veteran real estate feasibility and marketing analyst who works for major apartment developers and owners, believes that speculative bubbles exist within a growing number of large real estate markets -- especially his own in South Florida.

Rather than debating whether the price bubbles will deflate, McCabe says the better question for astute real estate investors is: Are you getting ready to pick up the pieces? Are you positioning yourself to snap up post-bubble, troubled properties?

McCabe, principal of McCabe Research and Consulting, based in Deerfield Beach, Florida, is putting together a series of what he calls "opportunity funds" to acquire condominium units and projects in the Miami/Dade County market during 2006-2007. He says he's already raised over $10 million from large and small investors without even marketing his limited liability company (LLC) funds.

"A lot of smart people think there will be fallout" from the overbuilt, speculator-driven condo conversion and new construction sector in places like Miami. McCabe says some large properties in South Florida are "70 to 80 percent" sold to speculators who are highly-leveraged and betting that prices will keep going higher and allow them to flip their units profitably after short holding periods.

The problem, however, says McCabe, is that Miami/Dade's already-glutted market has 64,000 additional condo units either announced or in the advance stages of construction planning. On top of that, 25,000 new condo units have certificates of occupancy and will be delivered to investor buyers by the end of 2005.

Prices are often "ridiculous," he says. Units that went for $500,000 last year are on the market for $700,000 this year, and only selling because speculators are using high-leverage creative financing including negatively-amortizing interest-only loans.

"People are buying this stuff thinking they can't lose, and that they're in some sort of gold rush. But they don't know what they're doing," says McCabe. A bank executive who recently visited Miami said speculation in pre-construction and converted condos is so out of control that his airport taxi driver boasted that he personally owned 20 units and was expecting to make a killing on their resale.

"The question is not whether, but when," said McCabe. "We are in a transition period" -- the peak of the speculative binge -- "with a major price correction beginning later this year and continuing through 2006-2007.

"We think there will be very attractive opportunities (starting) in the first quarter of 2006." To pick up defaulted or troubled units, McCabe's LLCs are structured for maximum flexibility. With up-front cash commitments ranging from $50,000 to $1 million and more, the LLCs will vary acquisition and holding strategies according to the situations that present themselves. Some projects may be held for as long as 3 to 5 years as rental real estate; others may require renovation and repositioning to market.

Could McCabe's concept apply to other markets around the country? Will there be deals for people with cash when the speculator-driven sectors of local markets come back to earth? McCabe feels that is definitely the case.

"Wherever you have prices going higher every day solely because speculators think they'll always be able to flip for a profit" -- 2005's version of the greater fool theory -- "then I think you're going to see corrections and adjustments" that produce buying opportunities for heads-up investors.

Published: June 13, 2005

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.