Morgan Florida Real Estate Group
3830 NW Royal Oak Drive, Jensen Beach, FL 34957
772-260-5448 – FAX 866-677-8624
Morgan@MorganFlorida.org

“Home Sales UP – Home Sales Down”
May 27, 2007

Most Irrational Quote of the Week – We’ve hit bottom. This is it.” Lee Wetherington, president of Lee Wetherington Companies. (Obviously, a huge addict of Bob’s Kool-Aid)

Most Candid Quote of the Week – “I don’t view this little bounce as a sign the fundamentals have improved.” Dave Seiders, NAHB chief economist. (The voice of the builders)

Most Forward Looking Quote of the Week - "I think we're going to be dealing with this all the way through 2008," Countrywide Home Loans Executive Vice President Jack Haynes told Sacramento home-building industry representatives Wednesday.

Kool-Aid Quote of the Week – Bob Toll said he is “a little more confident, but I would emphasize ‘a little’” I want to laugh, but if I laugh and there is no one in the office to hear me, does it count as a laugh?

Beyond Kool-Aid Quote of the Week – “Florida is faring better than many markets because job growth remains strong, especially compared with many Northeast and Midwest markets.” This was a quote from Amy Crews Cutts, deputy chief economist with Freddie Mac, speaking at the Society of American Business Editors and Writers in Anaheim. And these people get paid big bucks to make statements like this. Where do I sign up?

Best Analyst Quote of the Week – “WARNING! Taking this data too seriously could be a hazard to your financial health.” Alex Barron – Senior Research Analyst at Agency Trading Group. Alex has joined the Agency Trading Group, so we can expect to see a lot more ground zero research and some terrific analysis. Alex is probably the only analyst that has not sipped the Kool-Aid, doesn’t wear the secret 4Xg colored glasses, and use hatchets to get to the heart of the issues. Moreover, I don’t know of any analyst that spends as much time in the field as Alex. He’s like the Ever-Ready Bunny on steroids.

Media Quote of the Week – “What in the world are they thinking?” This was the quote from a prestigious national reporter during a tour of several developments in Florida, most of which are nothing more than horizontally developed money pits . . . with no real chances of monetizing the land at anything close to what they’re telling Wall Street. The new mantra is . . . Impairments, Impairments, Impairments.

It seems like Vice Chairman Kohn is not as convinced about the absence of spillover. Kohn recently said, “But we certainly should not read this experience as meaning that we are free of systemic risk--the risk of financial-sector problems spilling into the real sector or aggravating already difficult economic circumstances. Indeed, I see several reasons for carefully considering the potential for such problems to emerge. (emphasis added)

“How To” Quote of the Week – Mark Zilbert’s company probably sold more condos to flippers in Miami, than any other office in the State of Florida. Now he’s paying the price, with a lot of very angry clients. He’s said some pretty sorry things in the past about the ups and downs of this market, but even after stuffing both feet in his mouth, now he’s trying for a new world record. Here’s his latest: “How to buy a new condo from a distressed seller.” I swear, that’s in his latest newsletter. And he’s got an entire section on his website about this. Last week he used the “P” word, panic. Now he’s telling the world what we all new 18 months ago . . . while he was still selling Miami as the next Manhattan, at prices as high as $1,500 per square foot.

Why All The Quotes? – First of all, you can get all of the fancy spreadsheets and models you want from the analysts you pay a fortune to. Second, that’s all rear view thinking with best “guesses” for the future, and we all know the big shops must dance very carefully around Sell or Underperform ratings. In fact, some must actually balance negative and positive ratings based on a formula.

On the other hand, I give it to you straight. I can give you ground zero from Florida and the states I visit, as well as ground zero reports from the agents, broker and others I speak with nationwide. I try to mix it up each week with different information, since the basic story is negative and getting worse. I felt like a mix of quotes this week would shed some light on why some folks are still so bullish on the builders. There is still a large camp that believes we are at the bottom and 2008 will be a great year. Note: Bet on the Yankees winning the Superbowl next year before you believe we are at the bottom. I’m not an analyst, but what I can tell you, is that there is a lot of foolish money chasing a hard hit industry that is about to be hit by a hurricane. Liquidity is high from hedgies and abroad. The dollar is cheap, and many foreigners simply can’t comprehend how bad US housing can get. Moreover, some of the big guys like Marsico, Hotchkis and others have to put their money somewhere . . . so why not housing. The funny thing is . . . well actually, it’s very sad . . . none of the giants have ever come out for a ground zero tour with me of Florida, California, Georgia, New Jersey, DC or any other markets. And even sadder, is when I hear the analysts on tour with me speaking to their clients . . . and their clients are telling them they don’t know what they’re talking about.

NAHB/Wells Fargo Index – Nothing new here. Another three point drop to 30, which matches the 15 year low set in September 2006 when everyone was calling for a bottom. Now that the bottom is much further off than anticipated, watch as this number hits 25 before it ever sees 35 again.

This Week’s Update – On Thursday the U.S. Commerce Department reported sales of new single family homes jumped by 16.2 percent in April to a seasonally adjusted annual rate of 981,000 units. Party Time! Break out the champagne. Bob’s dancing on the bottom, despite his dismal report card of two weeks ago. He’s put away the Kool-Aid and popped the cork on the Dom Pérignon.

Ooops, hold the party. Find those damn corks. On Friday NAR reported existing home sales fell by a larger than expected number of 2.6% . . . the slowest pace four years. Hold the champagne Bob. By the way, the new home sales reported above, does not take cancellations into consideration. Talk about nonsense numbers!

My report two weeks ago on Rear View Mirror Experts is confirmed. More below on the numbers, the builders, and the question on everyone’s mind WCI.

Market Conditions – May is an iffy month for real estate. You have Mother’s Day and Memorial Day, and traffic can go either way, but generally it is down. That’s what we have seen in Florida, and that’s what I am hearing in other parts of the country. In fact, as I write this update on Saturday morning, I can tell you we have only had one showing call for this weekend. We have been seeing 6-15 per weekend lately. On the bright side, I have tested the markets to see what kind of interest there is for buyers searching the Internet. Traffic is off from a year ago, but when we turned on the Sponsored Links, we did get inquiries immediately.

Here’s What I Know – There are buyers and there is a small pent up demand. On the latter, these people are prepared to rent for six months to a year. The buyers are for the most part, tire kickers looking for a steal. And some of the builders are obliging. That’s the “Home Sales UP” part of this week’s title.

Here’s What I Don’t Know – Why are builders continuing to bring horizontally developed projects out of the ground? Why are builders continuing to build spec inventory? Why can’t NAR and the Fed give us “real” numbers for housing? (I actually know the answer to that). And why do builders still refer to being near the bottom of this market? One final, What I Don’t Know . . . what in the world is going to happen to Miami over the next two years as tens of thousands of condos come on the market? Actually, I know the answer to that one too . . . buy one get one free. Maybe even buy one get two free.

the absorption rate for single family homes dropped from 31.85 months to 22.58 months. Still pretty scary. And the condo absorption rate dropped from 38.68 to 26.85 months. Horton, M/I Homes, Centex and Lennar are the only active builders in this county right now. Unfortunately for them, sales suck (articulation credit to Tomnitz), they have millions into horizontal development, and little likelihood of monetizing these projects anytime soon. In fact, for each of these communities, I estimate it will take 3-4 years to close them out . . . if not longer. And that’s banking on steep discounts and incentives. Centex just announced abandoning their 1,650 home Indiantown project, but they claim they are still moving forward with an 1,100 home project. That would be a huge mistake, but big companies make big mistakes. You need to see this stuff to believe it. I should have Miami-Dade numbers for you next week.

California – What do you want me to say? Do you want me to feed back the dribble the builders are dishing out, or do you want the truth. The dribble is pretty clear. The builders are desperate with a capital D. Incentives are only limited by your imagination. Auctions have failed miserable, with hundreds of homes on the auction block in Southern California, and most of them going unsold.

Chicago – Great pizza, but nowhere near as good as John’s on Bleeker Street in NYC. No condo problems here, right? Wrong. Chicago just reported a 46% cliff dive in condo contracts for Q1. With more than 7,000 condos on the market and more than 3,000 in the planning stage, Chicago will need some Extra Strength Tums to manage 2008 estimated sales of just 3,500 units. This math computes out to a multi-year supply of condos in . . . Chicago. Stick with John’s and Zabars.

Trump’s Chicago – We’re sold out. We’re the Best. Everyone will want to live here. I’m the greatest and this condo is even greater. Duhhhh How about a reality check of what he said this week - "We're pricing to sell." and “People think we’re sold out but we’re not.” (Trumpian Interpretation: We’re in deep doo-doo) Of the 825 units he has only sold 601. That’s 92 stories of doo-doo, since that 601 represents contracts, not closings. However, as we all know, Trump did not leave it at that. He let us all know, “But it's a great time to buy in our building because we aren't raising prices." And his casinos are going to kick butt in AC despite Pennsylvania trashing the AC properties into submission. NOT.

Bad News - “Home Sales UP” – even though “new” home sales from builders were up with a strong number . . . sales are down more than 10% YOY and prices are down more than 10% YOY and we have been spoon fed an irrationally exuberant number of just a 6.5 month supply. Add 50% to that number, and we might be a bit closer. Fewer sales at lower margins with a huge inventory hangover . . . Bad News. Remember – cancellations don’t count in these numbers.

Bad News – “Home Sales DOWN” – It doesn’t take traditional home sellers very long to realize the builders are kicking their butts. So traditional sellers of existing homes must drop prices lower than the builders in order to sell and/or avoid foreclosure. Same goes for the banks. They are not in the business of selling real estate, so it means nothing for them to drop prices below what the builders are hawking. I’ve seen this first hand with a full one third of our listings this week dropping prices . . . still no reasonable offers.

Good News – Housing Starts Up – And in the Northeast starts were up a whopping 31.3%. Wowee. Super Duper. We’ve seen the bottom and we’re ready to start building again. If you’ve sipped the Kool-Aid, that’s good news. If you have not sipped the Kool-Aid, why would more inventory be good news? Note: Margin of error for these numbers is 9.3%, so what good are these numbers?

Bad News – Permits Down – If permits are down, then builders are building less homes and generating less revenue. The permit number was down a staggering 28.1%. So you can just carve out at least 28.1% of earnings right there, right? Wrong. Prices are down and incentives are up, so margins are down on lower sales. Oh, and let’s not forget the basics of SGA and all of the other line items it takes to carry the inventory and run a company. Get the picture?
By the way, Florida permits were down 51% from a year ago!

Good News – Permits Down – This is the double edge sword that the builders created, and now are preparing for hari-kari with. Certainly not all of them, because there will be some of the Samurai builders that will be standing by to perform the final ritual of hari-kari . . . slicing off the head of the hari-karier (not sure if that is proper use of the term, but you get the point). In this case, slicing off the head will be picking up bargains on those builders that goofed big-time.

I know, I’m off the subject again. Permits Down – Good News. It’s also good news, because this is the only way we will get back to a rational balance of inventory. Builders must stop building more homes than we need. See Economics 101 (Week 1, Day One). It’s also good news because builders must build. If they can’t build (and sell at a profit), they must sell their companies to the guys with the big swords ready to slice their heads off.

Bad News – Deutsche Bank wrote to clients recently – “We think the housing downturn has decisively moved to its second act of falling prices.” You think? That’s bad news when a powerhouse like Deutsche Bank starts “thinking” we might be entering the second act. Just wait until they stop looking in the rear view mirror and see the steel reinforced wall staring them in the face at 90 miles an hour. Obviously, someone is still buying the home builders.

Inventory – Let me just talk about Florida for a moment. The U.S. Commerce Department reported that the number of vacant homes in Florida doubled “last” year to 4.3% of the total housing stock in the state. Do you think the number went down this year or up? I’d be willing to bet a bottle of Hennessy’s Timeless cognac that the number will be almost double last year’s number when the 2007 numbers are reported. Any takers?

There is nothing more to say about inventory except it is outpacing demand throughout the country. I hear the same reports from everyone I speak with. I have yet to hear one agent or broker tell me inventory is shrinking. So what’s in store for the builders in 2008? Maybe as bad as half the production numbers of the peak years, and much worse for others.

Spillover – More and more spillover believers are starting to show up, but you’d never know it looking at the Dow or the S&P.

Home Depot – Q1 worse than expected with same store sales off a hefty 7.35%. Let’s not forget how many subcontractors for the builders use Home Depot and Lowe’s for everything from lumber to nails. Simpson Manufacturing recently boasted about their increased stocking efforts in the big boxes for contractor related supplies.

ML TELEBRAS (PGT) - They make impact resistant windows and doors, and they generated 92% of that business in Florida last year. Q1 they announced a 25% drop in sales. But wait until the wind starts to blow (housing starts fall off). With starts off 51% in Florida, the only thing I can say is . . . do the math.

USG Corporation – No spillover? Tell that to the 500 people that just lost their jobs at USG. That’s 10% of their salaried workforce. USG makes wallboard – sheetrock. Even though it emerged from Chapter 11 last June (asbestos related), the housing slump has hit them hard.

Florida Rock Industries – Another one of my former Florida favorites is being bought by Vulcan Materials, but that’s old news. The new news is Q1 sales at Florida Rock were down 33%. These guys supply concrete and cement.

Haverty Furniture – Like Modernage and other furniture retailers, they are now admitting (finally) that the housing downturn is hurting sales. As Gomer would say, Suurrrprise, Suurrrprise.

Zale Corp. – They swung to a Q3 loss, but that’s no surprise. The surprise is where they placed the blame . . . higher gas prices. Chief Executive Betsy Burton put the blame on higher gasoline prices that are taking a bigger chunk of middle-class consumers' spending money. Earth to Betsy. Anyone home? She must be kidding. Q3 was bad and the rest of the year will be worse because the housing ATM is closed.

Mortgages - Rates on 30-year mortgages jumped to the highest level in seven months. I think that puts a damper on any Fed rate cuts in the near future. Bankrate.com polled mortgage industry experts, and by a 64% majority they said now is the time to lock, because rates are going higher. Freddie Mac reported that 30-year, fixed-rate mortgages averaged 6.37 percent nationwide this week, up from 6.21 percent last week. It was the highest level for 30-year mortgages since they averaged 6.40 percent the week of Oct. 26. Higher rates = higher mortgage payments = lower home prices and smaller pool of qualified buyers.

The Blame Game – It was just a few bad apples. That’s actually what John Robbins, president of the Mortgage Bankers Association told the National Press Club on Tuesday. Is he kidding? Now he’s calling for licensing of brokers. Hey John, the horse is already out of the barn. By the way, he also said, he’s “mad as hell.” That’s a quote. This guy is not only the pinnacle of rear view, but he wants the world to believe the problems are over and it was just a “few bad apples.” Tell that to some of the big Wall Street bankers that are going to be facing the sharks.

Condos – Miami is a disaster. I know I’ve been saying it for a long time, but you have no idea how big a disaster. If you want to see a 1929 Style Crash in the making, come down and visit me. Orlando is another problem, but we still have Mickey. The Orlando Sun Sentinel recently reported that Orlando may have the biggest "shadow market" of rental condos in the country, because during 2004-06 it led the nation in condo conversions. Orlando was the epicenter of condo conversions during the housing craze. Now we have condo reversions. But the real story is in the condos that are in the hands of folks that put these condos in rental pools. These suckers pay fees upon fees, in hopes of their condos being rented out to Mickey Mouse visitors. Lots of luck. As I’ve noted previously, the biggest losers here are the Brits. They sucked this stuff up like kidney pie and warm ale. The bright spot is, the Brits are not dumping, even though the US flippers are seeing 50% hits on what they paid for their properties just two years ago.

Lawsuits – The mortgage issue gang is still in the balling mode (that’s a fishing term for how whales, sailfish and marlin ball the bait before they eat ‘um), and now they are getting help from Congress, the Senate, the States and a host of public interest groups. The Ohio AG referred to the subprime lending industry as armed robbers and he wants to sue Wall Street firms. After all, as he notes, it was Wall Street’s bond sales that enabled consumers to get mortgages they could not afford. I love this quote from the AG, Marc Dann, “``If somebody was buying guns and giving them to people to go and take people's houses at gunpoint in Ohio, we'd be prosecuting them and throwing them in jail.”

I can tell you, from what I hear at ground zero and what I gather from the media, the sharks are going to be feasting for years to come. When have you ever had the politicians ganged up with the liars, (sorry I mean lawyers), and the two ganged up for the benefit of the suckers (consumers)? Never.

More on Lawsuits - Shutts & Bowen LLP has launched a complex loan workout practice group to focus on clients who are grappling with the effects of a slowdown in the real estate market. The firm has more than 170 attorneys . . . but they also represent builders. This could get quite interesting. And this is just one of more than a couple dozen big firms that have started what they refer to as workout groups . . . read – sharks ready to feast on the flesh of the banks, mortgage companies, builders, and anyone else that gets in their way.

Question of the Week – If anyone has the nerve, ask the King of Kool-Aid what the plans are for the Jupiter Country Club, and how high the impairment will be. This property is horizontally developed with more imported palm trees than any other community I have ever witnessed. In fact, I think they wiped out the all of the palm trees from the entire island country of Vanuatu. Toll also built a golf course that needs to be mowed and watered daily (Florida is in the middle of the worst drought in its history). There are three spec homes under construction . . . and it sits on the busy and noisy Florida Turnpike. This is just one example of many . . . nationwide, where builders have poured hundreds of millions into projects that are going to sit, and sit, and sit, and sit . . . as prices come down, and down and down . . . and carrying costs go up, and up and up.

Florida Facts – Florida is suffering it’s worse drought on record. I guess I just noted that. It’s worth noting again, because we have a major problem, drinking water for the Baby Boomers. I put on my Wizard of Wonder hat the other day and saw a vision. God will balance out our drought problems with a lot of rain this summer . . . in the form of hurricanes. Many builders have huge stakes in Florida, so one must keep an eye on what the Baby Boomers are looking at:

1. Out of control property taxes.

2. Massive budget cuts proposed that will effect basic and emergency services.

3. Out of control homeowners’ insurance, with more insurance companies fleeing the state.

4. Citizens Insurance – the state owned insurance company of last resort racking up billions of dollars in losses that taxpayers are responsible for.

5. Hurricanes that will have a tremendous blow on the economy now that the State of Florida no longer enforces the Florida Building Code.

7. Renewed threats of an income tax. This would be a crusher.

Numbers – Two weeks ago I commented about how numbers are basically unreliable, and you really need to get your feet dirty. Here’s confirmation of my comments: Barry Ritholtz at Ritholtz Research & Analytics in New York called the latest home-sales data "very unreliable monthly data points [that are] mostly due to the way the builders self-report their sales" to the Commerce Dept. And as Forrest would say, “And that’s all I have to say about that.”

Book Value – Quick comment to follow up on another reason for the strength in the builders’ stocks. Forbes just ran a piece ranking MDC as one of the top 5 bargain stocks because of book value. What book value buyers don’t understand is the “I” word . . . Impairments. And we are going to see some hefty impairments this year and in the first two quarters of 2008. No need to comment on the knuckleheads that look at P/Es and think the builders are steals based on historical P/Es. I can still remember Cramer on his soap box about what great buys the builders were because of their Book Value and P/Es. But we all take Cramer with a double shot of whiskey, right? Right? You’d better.

Ratings – S&P is catching up, but still looking in the rear view mirror. I’d love to get some of these guys out in the field. We’d do the diaper tour with a bottle of Extra Strength Tums. So this week, S&P finally caught up with a few open items, like downgrades from stable to negative for Centex, Horton, Pulte and Hovnanian. That’s nice, and a bit overdue, but someone at S&P needs to push aside the Kool-Aid, take off the secret 4Xg colored glasses and get with the program. They left a few off the negative list.

Odds and Ends - Fannie Mae announced that former FBI Director Louis Freeh will join its board of directors. Hmmmm.

The Bottom - The median price of a new home fell to $229,100, a record 11.1 percent below the March level. The price was 10.9 percent below the level of a year ago, the biggest year-over-year price decline since 1970.

Rumors – Keep your eyes on TOA. Rumor is, if they can shake the ka-ka off their shoes from Transeastern, they are going to be taken out. That’s a lot of ka-ka to shake off, and an even higher hike up the hill, but stranger things have happened.

I’ve reported on a number of rumors over the last few weeks, but I have not commented on one rumor that crossed a few too many loose bridges. But now that some of you have asked about it, I guess it has made the rumor-mill. Yes, it is true that there are lookers. Jack McCabe’s done deal is now clearly nowhere to be seen, and Jack hasn’t had a thing to say about it. But the lookers, from what I have learned, are not interested in WCI as WCI.

They are interested in pieces of WCI. Some very sharp players have been taking a look at the parts, not the whole. Sure, there are some pretty parts to WCI, but I’ve yet to see anyone cut out the filet mignon and leave the cow standing strong. So the same holds true here. The guys looking at the juicy, choice cuts of WCI can’t have them . . . at least not without a major shareholder class action, and SEC investigation and maybe worse.

And here’s the kicker. The juicy parts are not so juicy when you look at them at ground zero. When you’re sitting in an office in Manhattan or Chicago or LA, the pictures look great and we all know liars can figure . . . but figures don’t lie, and reality is reality when you are really looking at it. So for those looking at the brochures, models, pictures, videos, DVDs and all the rest of the sizzle . . . the steak ain’t there. At least not without a lot of indigestion once you gobble.

Once again, I refer you to Alex Barron’s recent review of the WCI-Icahn issues. It’s an analyst’s view that covers most bases. If you want the ground zero view, call me. We’ll go for a ride.

One final note on WCI, and remember I am not the financial analyst that you pay heaps of money to. But it would seem to me the way to the heart of the goodies at WCI is through the debt . . . if you can buy it right, like Sternlicht did a few years back with Le Meridian. Even if Icahn wins board control, then what? So he’s got a cow that can’t stand up and the guys holding the feed and the water say – uh-uh – no more.

Disclosure: Of the stocks referenced today, I have a put position in Toll Brothers and Simpson, and I own one share of Lennar.

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

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