Miami's Building Boom Faces Mounting Interest Rate Concerns

I ventured back to my old haunts in downtown Miami this weekend for the first time in nearly two years. The changes to the area in that short time span were palatable. Unlike Chicago, San Francisco or New York City, the homeless population seems to have dissipated by two thirds since when I left the Magic City. Not coincidentally, police and private security presence seem to have increased notably. I also saw myriad license plates from California which was a rarity when I lived here.

In addition, there were a score of new restaurants that have opened in the area since the lockdowns ended. However, what was most shocking was the amount of massive construction projects going on within this part of Miami. A couple of large hotels and several residential skyscrapers have come online since I departed an hour north to Delray Beach. At least a dozen residential buildings between 40 and 90 stories are in various stages of development.

Of course, being Miami, nothing significant seems to be being done about improving the core infrastructure of the area. This is going to be quite problematic. The core artery into Brickell and Downtown Miami runs over the Miami river and over drawbridges that open once or twice an hour depending on boat traffic. Absolute gridlock exists for four to six hours every day as it is and will only get significantly worse as these new residential buildings get completed. My free real estate advice for anyone that doesn't need to drive and fancies a place here is this: Wait three to five years, you should be able to pick up something for 60 to 70 cents on the dollar due to this overbuilding.

In my opinion, this surge in construction is a consequence of the easy money the Fed supplied the market until recently. Most of these buildings would never have been greenlighted at the current interest rates. This also is why I remain quite cautious on the overall market. We have seen the sharp rise of rates start to cripple the housing market. It is easy to see why. A typical $500,000 place in Delray Beach with 20% down costs around $3,800 a month all in with prevailing mortgage rates. The same place would have cost roughly $1,000 less a month if bought at the beginning of this year before rates had their huge spike up.

It is not the easy to project impacts from higher interest rates that has me nervous, it is the unanticipated ones that has me cautious. I worry about what 'naked swimmers' will be discovered as the tide of cheap money continues to recede. Already, we have seen the Bank of England have to intercede to save pension funds from imploding as gilt prices broached the 4% level and the British pound nearly reached parity with the dollar. The aftermath of this even helped make the latest administration all but stillborn and prompted the resignation of the new Prime Minister there.

There are already mounting concerns about the health of Credit Suisse (CS) and higher interest rates should be a huge concern for sovereign debt given the massive amounts of deficits and national debt prevalent throughout the G7.

Hopefully the markets and the economy can come through this wave of monetary tightening relatively unscathed before inflation levels ebbs and the central bank can 'pivot' to a more accommodative stance. However, my view is significant landmines will be uncovered before that occurs and it will be some time before the 'all clear' signal can go out.

At the time of publication, Bret Jensen had no position in the securities mentioned.