Morgan Florida Real Estate Group
941 SE Central Parkway, Stuart, FL 34994
772-260-5448 – FAX 866-677-8624
Morgan@MorganFlorida.org

“Only The Shadow Knows”
March 18, 2007

Quote of the Week – ``When will the market rebound?'' Toll said at a conference in Las Vegas today. ``Who knows? The Shadow knows. I have no idea. I would've thought that it would've rebounded by now and I would've been dead wrong, and I was.'' - Bob Toll – CEO of Toll Brothers

Market Conditions – The Florida market has seen little change from very slow, with the exception of an acceleration of price drops in single family and condos. Builders that fixed prices and would not negotiate, are now negotiating hard until the buyers get in the car and drive off. And it doesn’t stop there. Builders are using the registration card to call and email clients until they cry “UNCLE.”

I have also noticed a rise in the fear factor of flippers that are stuck. But what was most unusual this week, were several calls from traditional home owners that want to relocate out of Florida. They were shocked when I discussed market conditions with them. One man grew very quiet, and ended the conversation with, “I don’t know how I’m going to be able to break this to the wife.” His wife wanted to sell and move a year and a half ago when he could have sold his home for $750,000. He will be lucky to sell for $600,000 today. That’s a 20% haircut, and less than what he owes on his 100% mortgage.

I also received two calls from brokers representing 10 and 8 buyers in WCI’s Singer Island Resort. They wanted to know what to tell their clients. Even though they do not want to lose the commissions, they are now going to advise their clients that there is no guarantee they will make a profit on these units. That’s playing it safe, but what they should really be telling them, is that they are going to suffer losses. In any event, the brokers were concerned about lawsuits from their clients.

During calls with brokers in California, Nevada, New Jersey, Virginia and North Carolina, we are hearing more somber news. Traffic has fallen off and buyers are talking about all of the housing stories in the news. Financing and appraisals are also becoming a problem nationwide.

The first sign of a “verifiable” crack in the Miami market showed up this week, when Robert Falor Investments, a condo-hotel developer who was partnered with celebrities in the Miami condo market let the mortgage on the Royal Palm Hotel in South Beach, expire. The missed deadline places another luxury condo project into the hands of bankers specializing in troubled mortgages.

Florida Today is reporting 5,600 Brevard residents on the brink of losing their homes.

A wave of home mortgage foreclosures is sweeping across Brevard County -- signaling a disastrous end to the local housing boom for those who could lose their homes. Many of the cases stem from homebuyers -- both residents and investors -- getting sucked into risky loans, with limited options to refinance or sell because of the recent decline in local property values.
The trend is part of a rise in foreclosures nationwide, and especially in Florida, which ranked second in the nation in 2006 in foreclosures behind California. In Brevard County, there were 982 foreclosures from November through February, more than double the 377 foreclosures during the same four-month period a year earlier, according to data provided by Brevard County Clerk of Courts Scott Ellis. The figures include some commercial foreclosures, but the vast majority are residential.
In addition, there are more than 5,600 local properties where the owners are at least two months behind in mortgage payments, according to RealtyTrac.com, a Web site that tracks such data.
If there is a marked downturn in the economy, "this could be seen as the tip of the iceberg," said David Brown, Bank of America professor at the University of Florida's Department of Finance, Insurance and Real Estate.
"There are a variety of factors here," said Steve Srein, founder of People's First Financial Services of Melbourne. "The first thing is people are not changing their lifestyles to pay for the loans they took on their homes. We've adapted to what I call 'The Easy Society,' in that we made it easy for people to get into houses with submarginal credit. Since they had submarginal credit, that puts them in the

WCI – I don’t think I have ever spent as much time on one issue as I have this week. The phone calls and emails were all the same . . . “What’s Icahn doing?” “Is there anything we’re missing?” The answers are “I don’t know” and “No.” Each of you know far more about Icahn than I do. But I still remember his Green Mail days, and I watched as he surgically entered the gaming entertainment industry with the games he played to gain control of the Sands in Atlantic City and the Statosphere in Las Vegas.

Here’s What I Know – There is no hidden value in WCI. Icahn has NOT made a tender offer. One of my clients spoke to me two months ago about buying WCI this summer after the stock priced cracked from failed tower sales. Now he’s scratching his head, because he probably knows the value of WCI than anyone. WCI sales associates started an annoying campaign of phone calls this week with a smorgasbord of new incentives and deals, in a failed attempt to generate sales. Tower sales have stopped in Florida. They have not slowed. They have stopped. As the market continues to flood with inventory and as prices continue to drop, WCI will be hard pressed to have successful closings at Hammock Bay, Bal Harbor, Oceanside or any of their other Florida properties. More than 90% of the units in Mosaic are on the market with prices dropping this week by 10-30% . . . with no sales.

Here’s What I Don’t Know – I don’t know why Icahn is even thinking of offering $22, when if he had just waited six months, he could have bought the company for $12. I don’t know why so many hangers-on are piling into this stock like wildebeests crossing crocodile infested rivers. I don’t know why Wall Street and the media have not reported more intelligently on WCI and Ichan. The Wall Street Journal is trying to put together a story for this week, but after speaking with the reporter, I can tell you he is going to miss the mark by miles.

Here’s What I Think – Icahn comes up with excuses why not to buy WCI and the stock drops into the low teens.

TOA – When TOA hooked up with the Falcones and Transeastern, I had to read the Press Release three times. The guys in the fancy perches in Wall Street couldn’t see through the clouds. Monday’s conference call will be ugly. Deutsche Bank has already made it quite clear they have had enough, and I don’t believe TOA can survive without them. If they do, they do so as a shell of the company they are now.

KB Homes – Thursday’s conference call will be the shot heard round the world. KB has been doing a lot of house cleaning at ground zero here in Florida, as well as California and other markets. In Florida they sold all of their scattered lots to Adams Homes. And we are hearing a lot of good things about KB’s marketing and sales efforts. But the call on Thursday is the perfect opportunity for current management to clean house. If they are smart, they will take huge impairments and point the finger at Karatz, leaving the current management with as clean a slate as they can get away with to move forward. More on impairments below.

Home Builders – We visited some of the builders in Port St. Lucie this week. It was the fastest growing market in the US. The only builder with traffic was Mercedes. This is a large private builder that operates in Florida, Texas, and North Carolina. They had lots of traffic because of very creative marketing, but sales were down. The other builders summed it up with the S words . . . sucks, slow, stopped.

Mortgage Industry – One of our residential single family home buyers is actually moving forward with 100% financing. The mortgage brokers have found ways to keep this going, despite new Fed guidelines. It’s scary, but it is still going on. Refinancing is becoming more of a problem for flippers and traditional homeowners. Payments are skyrocketing from the low rate short-term ARMS and tougher qualification requirements. This adds to the pressure of massive spillover from subprime into Alt-A and prime. I would bet my life this is not going to be contained within subprime. I am at ground zero, while the Fed is a good month behind anything we see and hear. More on the spillover below.

Suppliers, Vendors and Subs - One regional trucking company had 72 trucks on the road two years ago delivering building supplies and hauling trash away. Sit down for this one. They now have 3 trucks on the road. Subs are emailing and calling real estate agents for work, when two years ago we had to plead with them to take a job.

Land – Nothing much new to report here. We have not spent any time this week speaking with any sellers or buyers of land.

In the News – This week we are going to look at a number of statements in the news.

State Revenues Hit
Florida is struggling with the loss of $1.2 billion in tax revenue generated from real estate transfers. Needless to say, what happens in Florida doesn’t stay in Florida. Other States are and will be facing the same revenue losses. It is further expected that this loss revenue loss will exceed $2 billion next year, as the housing bubble deflates. For those talking heads talking about NO spillover, this is just one more example of Extreme Spillover that will strike doubly hard.

CNN Money – By Chris Isidore
“I expect prices and sales to be modestly growing by June in most of the country,” said David Lereah, the chief economist for the National Association of Realtors and perhaps the most bullish housing economist. “But we’ll have to go into 2008, maybe even 2009 before we get even close to the peaks we saw in late 2005 or early 2006.”

Celia Chen, director of housing economics for Moody’s Economy.com, says she thinks it will take until 2009 for prices nationally to reach the peaks hit in 2005. Take inflation into account, she said, and a full recovery could take more than 7 years.

NOTE: I have been commenting for more than a year that we will not see prices return to 2005 levels until 2009-2010 at the earliest. We are seeing the same meltdown in housing prices that we are seeing with subprime lenders. Flippers are running scared now and stumbling over each other to drop prices. Unfortunately, there are simply not enough buyers for the inventory in the United States.

Subprime Spillover
Bernanke - On March 2 he said that the central bank sees no ``spillover'' from the rising delinquencies in subprime mortgages.

Greenspan - ``If prices go down, we will have problems -- problems in the sense of spillover to other areas,'' Greenspan said in remarks to the Futures Industry Association meeting in Boca Raton, Florida today. While he hasn't seen such spreading yet, ``I expect to.''

NOTE: Opposite views? Bernanke and Greenspan are too far away from ground zero, as are most economists, hedge fund manager and analyst. There is no longer a question of IF prices go down, only how much. In Florida we are expecting a further 20-30% decline in single family homes in the hot markets, and a minimum of 10-15% declines statewide. For the hot tower condo markets we are expecting a 30-50% decline, and a minimum of 15-20% statewide. For the Miami tower market we are expecting a 50-60% decline from the highs, and even worse for the towers built in “lousy” locations

By the way, if there is no spillover, did anyone tell GM and H&R Block there is no spillover before they made their public statements this past week. And this is just the start of how deep the spillover goes.

Lonski - "The markets may have over-reacted," said John Lonski of Moody's Investors Service. "Only businesses significantly exposed to subprime will be hurt. Mortgage repayment problems aren't as widespread as we are led to believe. If most people were having trouble paying the mortgage, it would lead to declining consumer confidence and we haven't seen that."

NOTE: As for Lonski, I don’t think he could have made a dumber statement. We are only now starting to see the problems which will lead to declining consumer confidence over the next few months. He’s following in Bob Toll’s footsteps by making statements with a hope and a prayer. Lonski’s still trying to move forward, when he’s only looking in the rear view mirror.

"Mortgage credit-quality problems go well beyond the subprime sector," wrote Jan Hatzius, chief U.S. economist at Goldman Sachs in New York, in a research note. "The underlying problem is not the subprime market per se, but the reset of large quantities of adjustable-rate debt -- some of which is classified as subprime some as prime -- to higher interest rates in an environment of flat or falling house prices in most of the United States."

NOTE: Bingo

"These people who say there's no contagion - I don't know what world they're
living in," said Roubini. "This housing recession is nowhere near bottoming
out."

NOTE: Double Bingo

Jobs
Housing and related industries, which account for about 23 percent of the U.S. economy -- including makers of everything from copper pipes to kitchen cabinets -- fired about 100,000 workers last year. The total will be higher this year, according to Amal Bendimerad of the Joint Center for Housing Studies at Harvard University in Cambridge, Massachusetts.
By the end of this year, job cuts at companies including Benton Harbor, Michigan-based Whirlpool Corp., Masco Corp. of Taylor, Michigan, and St. Louis-based Emerson Electric Co. may exceed the fallout from the 1991 housing slump, said Paul Puryear, managing director at St. Petersburg, Florida-based Raymond James & Associates.
Workers at Andersen Corp. said they've been notified that the window and door maker will lay off more than 400 workers by the end of the year. (This was in a release from December 2006) Obviously, the spillover has already started.

Data produced by the Bureau of Labor Statistics

NOTE: We have not seen a massive spillover into the jobs sector, but we will. The first to go are the illegal immigrants the builders used. This labor pool is estimated to be 25-35% of on-site labor. But this pool does not show up in our numbers. As builders slow down starts, we will see the number of jobs lost show up in the numbers. But we must also consider the jobs lost in ancillary positions from landscapers to lawyers and engineers to architects, mortgage brokers, real estate agents, etc. Many of these self employed individuals do not show up in the reported numbers.
From 1993-2006 overall employment increased by less than 22%, while employment in residential construction increased by more than 70%. We are, conservatively, facing a loss of 2-3 million jobs during the next 12-18 months in housing/construction and related industries.

2.2 Million Homes At Risk
The Center for Responsible Lending in Durham, North Carolina, said in a December study that as many as 2.2 million borrowers are at risk of losing their homes, at a potential cost of $164 billion, from subprime mortgages originated from 1998 through 2006.

NOTE: You’ve got to question those geniuses that calmly state there will be no spillover, when we are projecting 2.2 million homes in trouble, and the loss of 2-3 million jobs.

Bail Out of the 2.2 Million
"The impact of losing 2.2 million homes I suspect will be in a lot of areas of our cities and towns that are already pretty hard hit, so we clearly want to look at that and legislate," Dodd, a Democrat from Connecticut, told reporters in Washington after a speech to the National League of Cities.

NOTE: It will never happen. If we bail out the flippers and irresponsible buyers, does that mean we bail out the speculators that lose money on options and commodities? How about the guys that lose money in the stock market?

Subprime and Alt-A
Bank of America estimates that subprime mortgages account for about 14% of total outstanding mortgages and Alt-A mortgages account for about 27%. My math tells me that is 42%, and that’s a hefty number. It is an even scarier number when you think about the prime mortgages that are or will be in trouble.

NOTE: There is no need for me to discuss or share much information on this issue. Ivy Zelman of Credit Suisse wrapped it up with one of the best pieces of research the housing industry has seen. If you have not listened to Ivy Zelman’s Homebuilding Conference Call from Monday, March 12, you need to.

Inventory
I was hoping to have our monthly Treasure Coast spreadsheets for you, but we are still waiting for a data update from the local board. I can tell you the Absorption Rate for single family homes has jumped from 23.91 months a year ago to 30.88 months. And for condos, 18.68 months to the current 47.69.

Add to the current inventory explosion an expected 20-25% overall increase from foreclosures . . . and the growing builder inventory that builders have tried to hide and color any which way they can . . . and the flippers that now realize how bad things are getting. Then add in all of the people that will be forced to sell, because they cannot refinance exotic mortgages.

Remember one thing that is key to this inventory. Much of it is in weak hands. Banks with foreclosure inventory are not in the business of selling homes. They dump, and they dump fast. Flippers that are busting out are driving prices down in an ugly spiral on a very slippery slope. Now toss in the builders that have to keep pace with some sort of sales . . . even if that means dropping prices to cost . . . and below cost.

Impairments – We saved the best for last. Hovnanian took hits to four projects, Ft. Myers, two projects in MN and one in NJ. The other builders have also limited the impairments they were prepared to take, hoping and praying the market would turn. The market has turned . . . down. Builders are dropping prices on homes across the board, whether they want to admit it or not. If you hold the sales price steady at 100X but you give away 10X in incentives, closing costs, etc., then your real sales price is 90X. U

Unfortunately for the builders, prices are dropping further than they anticipated, and they are forced to drop their prices to move inventory. The second part of this is heavier expenses tied to the properties because sales have slowed. The longer they are in a property, the more expensive the carrying costs, sales costs and marketing costs are. And the third part of this trifecta is falling land prices. I’ve received calls from several builders interested in moving entire projects that are already under construction, as well as land deals. No takers. So as prices for homes fall, and prices for land falls, and sales, marketing and expenses rise . . . impairments grow like a weed on steroids.

Taking small impairments on 1-3% of properties is not going to hold up. We are going to see huge impairments across the board. So for guys like Stephen Kim who is riding high on Book Value . . . I hope he has a soft landing when he falls off the horse.

All of My Outlook Reports - Click Here

Mish's Blog:  If you haven't been following Mike Shedlock on Global Economic Analysis, here is a link to his blog – Click Here  It is a great read on a macro level where Mish (Mike Shedlock) zooms in on micro issues as well.

Patrick.net – Patrick provides a great daily update on the real estate, housing and financial markets worldwide.  He also puts out a daily e-mail blast with top headlines.  A very comprehensive website for information – Click Here

My Contact Info:
Mike Morgan, J.D., CRS, GRI
Morgan Florida Real Estate
Morgan@MorganFlorida.org 
772-260-5448

Additional Data and Information: I offer my services to a variety of clients, including builders, portfolio managers, hedge fund managers, REITs, private investors, etc.  My clients receive additional information and data that does not appear in my free Internet version. If you are interested in more detailed data or color on any of the areas highlighted in my Outlook and Update, please email or call me.  Morgan@MorganFlorida.org - 772-260-5448

Broker Services: I offer the same block of time fee structure if you are a buyer . . . and any commission I earn as your Broker is returned to you at closing.  For example, if you purchase a $5 million property with a 2% commission, you will receive $100,000 at closing to be applied to the purchase or a check to you.  The same holds true if you are a fund looking at a $100 million condo tower.  I will do the ground work, research and follow through on the closing.  If the commission is 1%, you receive $1,000,000 at closing.