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

My Prior Weeks Outlook Reports - Click Here

“Decimate: 1 : to select by lot and kill every tenth man of
2 : to exact a tax of 10 percent from <poor as a decimated Cavalier -- John Dryden>
3 a : to reduce drastically especially in number <cholera decimated the population> b : to cause great destruction or harm to <firebombs decimated the city> <an industry decimated by recession>”
June 10, 2007

Quote of the Week – Bill Gross of PIMCO made a startling statement this week after commenting that 30 year mortgage rates are approaching 7%. He said, this will “decimate the housing market.” It might be a startling statement to many, but not me. The housing market has only been scratched in terms of public builders’ stock prices and housing prices. The blood in the streets has not even started to flow. But it will.

Market Conditions – One word. Dead. I’d say “sucks,” but that would be to amporphous.

California Update – Less traffic. Lower prices. More foreclosures. Builders still building!

Florida, Georgia, New Jersey, North Carolina, Arizona, Nevada, Texas – After speaking with a lot of folks, the consensus is the same as the California update.

Metro DC – This is the Northern Virginia and DC Maryland market. Things are a little better here, but margins are still under extreme pressure from price cuts, incentives and super bonuses to real estate agents.

Foreclosures – It gets a rest this week. What more can I say. One word, “ugly.”

Spillover – Also resting.

Interest Rates – Bill Gross said it best, but I’ll say just a bit more. I’ve said for a year or more, rates cannot go down. Even though I am not an economist or analyst, I’m not stupid. New Zealand just popped rates above 8%. Yeah, I know . . . big deal, New Zealand. Well it is a big deal, because other smaller markets will raise rates to stay competitive and support their currency. And then the medium markets will follow. And then U.S. will be forced to maintain or raise rates. Can we let the dollar go lower?
Now add to the global interest rate race, a bit of home grown news. Robert Pavlik, chief investment officer at Oaktree Asset Management said, “Higher unit labor cost strengthen the bears’ argument for higher inflation and the need for a rate increase from the Fed.” Enuf said.

Maybe not. Housing. Bernanke seems to think we have seen the worst. He’s beyond Kool-Aid. As housing continues to crumble, the economy will slow down. People are losing jobs, but the jobs we are losing are not all in the numbers. As noted previously, many of the job losses are independent contractors. Other people in the numbers are now taking low paying jobs at Wal-Mart and the service industry, so the job numbers look semi-bright. But the real effect will hit the Fed numbers within the next six months.
More Housing Woes – foreclosures and loss of equity in homes is a double edged sword. First, those that face foreclosure are not out spending money, so the economy will slow. Second, the loss of equity in homes means the ATMs are closed. And at the point of the sword, are the resetting of millions of mortgages at much higher rates. When a mortgage jumps from $1,000 a month to $1,500 a month, that takes $500 a month out of the retail sector.

NAR – They “lowered” their forecast “again.” Now they see a 4.6% drop in previously owned homes. That’s a 58.62% increase in the sales drop. On the goofy side, they only lowered their new home sales drop to 18.2% from 17.8%. That tells me two things. Builders are going to be the driving force in the price wars and margins will go negative by the end of the year. It also tells me NAR is not yet ready to admit just how bad the numbers are going to be.
“The NAR’s prospective on housing is irrevocably skewed because its very existence depends on the fiction that housing is a good investment.” Seth Jayson of the Motley Fool. He also said, “NAR is talking out of both sides of its mouth in its continuing effort to calm homebuyers as the housing bubble rapidly deflates.”

A year ago I attended a speech by David Liar (Lereah) at the invitation of the press. They wanted me to ask questions at the end of his cheerleading session. The room was packed with 600+ real estate agents, all cheering and applauding throughout Lereah’s confluence of nonsense. Unfortunately, nothing he said met anywhere near a juncture. As I stood up to ask questions, the reporter on my right grabbed my arm. As he glared at me with a bit of fear in his eyes, he said, “Where the hell do you think you’re going?” I replied that I was going to the podium to ask questions. He told me to forget it. “We’ll never get out of here alive.”

Centex - What Are They Thinking? – Centex announced plans to build 4,000 homes in Port St. Lucie, one of the most overbuilt markets in the country. The only bright side to this announcement, is that Centex plans to build a Village. They are not going to repeat mistakes of the past and simply put homes up for flippers . . . in the middle of nowhere, with few if any amenities. But before you get the idea that this is a good thing, consider that one of the major retail projects in Port St. Lucie was just cancelled.

Meritage – Following Hovnanian’s lead, Meritage admitted things are getting worse. They pulled their guidance and warned of further impairments. Folks, that is one of the keys to the crash these builders are facing. Impairments are going to continue and grow in size and scope.

Horton – Moody’s added Horton to the downgrade list, from stable to negative. But they didn’t stop there. The statement noted that Horton’s debt is likely to be reduced to junk within the next 12 to 18 months. If Horton is going to junk, it is just a matter of time before the entire industry faces a credit crunch . . . and a beefier debt expense to deal with that will further cut into profits.

Washington, DC – This week 1,300 home builders were in DC to lobby. Lobby what? They’re already in enough trouble. And this coming Tuesday, there is going to be a Congressional Hearing touching upon defective homes and binding arbitration clauses.

Other Builders – I wish I had something new to report. It’s the same old story. They are still building and they are still increasing incentives, price drops and bonuses to real estate agents. I get invited to BBQs and parties every week. They offer raffles, prizes and anything else you can dream of. And believe it or not, some of them pay you $25-50 in a credit or gas card just to show up for a tour. If you bring a client, you get double. I kid you not. Not more than a couple of hours after writing this on Saturday, I received this from WCI – Free Lunch for Two - http://maildogmanager.com/page.html?p=0000015Fu8vj7kD4pe0e3sk5O3bZTLUQiOKs1cItBSPCw=
None of the builders are immune from the falling knife, and all of them have bloody hands from trying to catch it. Unfortunately, they are carving each other up. Without question, we will see consolidation within the next 12 months.

The Bright Side – Metro DC – We’re coming into an election and that’s always positive for the housing marketing in Metro DC. It will be even more of a positive if the Democrats win. Looking back at this market, you can see that elections always help this market. And when the incumbents lose, it is a bigger shot in the arm. If the Democrats get in, you will see a new group of buyers coming to town. You’d expect to see an equal amount of Republicans leaving town, but that doesn’t happen. Many of these folks stay to become lobbyists, join the underground fight against the new incumbents, or simply because they like living in the Metro DC market. I lived in Alexandria, Virginia, smack in the middle of a lot of lobbyists, talking heads and politicians. It is a great place to live.

The Bright Side – Florida Biotech – More reports this week that the state is going to focus on developing the biotech industry. I spoke about this last week. Long term, this is going to be a solid foundation of high-end growth for Florida. For investors, there is not much of a play on public stocks, but there will be opportunities to buy land for development and/or resale. It’s not going to be “buy and flip,” but I believe we will see some tremendous opportunities for the sharp operators with patience.

The Bright Side – Florida Power & Light – FPL was denied a permit for a clean coal plant, but this company doesn’t miss a beat. The very next day, they announced plans for “two” new nuclear reactors at Turkey Point, just south of Miami. And they didn’t stop there.

FPL’s sister company FPL Energy LLC, is the largest producer of winder power in the country. They have 47 wind farms in 15 states. Now they want to add another wind farm in Florida off the coast of St. Lucie County. This company has consistently shined as a solid operator and a great corporate citizen. When we were clobbered with hurricanes in 2004, everyone thought FPL was going to take a major hit. Never happened. These guys have things under control, and they understand what it means to . . . Do The Right Thing.

The Really Bright Side – Water from Air – A Miami Beach company, Aqua Sciences, is doing just that. In fact, FEMA just bought two of their units that produce drinking water out of the air. Years ago I remember writing a paper on how the war of future would be over water. Well, we might not go to war, but clean water is now a global problem. Companies like Aqua Sciences will be snapped up by companies with the capital and distribution channels to capitalize on their technology. Another local company with less credibility in the water market is Ecosphere Technologies (ESPH.OB). They have a patent on a process to convert bad water to good water.

WCI – I’ve attached a file with a few shots from my recent Miami condo market trip. I spent almost two hours at Bal Harbour. Much of that time was spent watching and waiting for opportunities to see what’s going on inside. I used binoculars and had to wait for workers to leave doors open as they worked on the building. I also had a mile walk to find beach access to get to the ocean side of the project. And that was the most startling part of the visit.

From the street, Bal Harbour looks like it is just about finished. From the ocean side, it is clear there is a lot of work to be done. Their construction elevator is still on the building, and two garbage shoots are still active from the top floor down. The entire ocean side amenity area is basically sand and gravel. The north side of the building looks like it is in the mid-stages of construction, rather than the final stages.
I can’t imagine they are going to finish by August. At best, I want to say October/November. At worst, this project goes into 2008.

I’ve attached three files for you. One is a file with photos from Bal Harbour that I sent to Alex Barron, and he put together a release for his clients. The comments in this attachment are Alex’s. The second is a file with the active listings (as of this morning) at Bal Harbour. I hope you’re sitting down if you’re long WCI. There are 99 active listings on the MLS. But during my conversations with local brokers, it is painfully clear there are anywhere from 20-50 pocket listings. A pocket listing is a listing that is not placed on the MLS board. The reason for this is financing. These flippers know they are going to have a tough time getting a mortgage if there property is listed. It is a tough new requirement of lenders. They don’t want to make loans that are going to be turned over quickly. So we know there are between 119 and 149 Bal Harbour flippers out of 184 units. Not a very pretty statistic.

I’ve also attached a few extra photos. These shots are within one mile of Bal Harbour. This area is called Sunny Isles. The biggest chunk of it is being developed with the Trump name. Not that he is stupid enough to have a stake with liability, but he has licensed his name to quite a few of the towers. This area used to be a strip of small hotels, as you will see in one of the photos. The sole remaining hotel has towers going up on each side of it. Keep in mind that this is less than a mile from Bal Harbour, and it is actually in a better area, since it is closer to the Aventura hub. But that’s another story. Call me if you want more color. (I hate that word, so call me if you want more information.)

Miami Condo Market – It was a rainy day in Miami, so the beachgoers were looking for things to do. I visited a number of sales offices and spoke with quite a few people leaving sales offices. I also bumped into people in a coffee shop and on my lunch break that had condo brochures in hand. It is absolutely amazing to see and hear this stuff. There are actually quite a few foreign tourists still looking at these towers. I couldn’t find many people seriously considering buying one, but they are listening to the hype. The hype was very convincing to some.

I spoke with a family from Norway that probably sipped some of the Kool-Aid. This couple actually was considering buying six units as a package! They glowed as they told me how they were going to rent them out, make piles of Krones and have a place to visit with friends and family during the cold Norwegian winters. With their two little blonde hair girls looking on, smiles as big as the moon, I popped their bubble. The wife was almost in tears. The girls looked at me as if I were some kind of monster that just pissed in their sand box. And the husband couldn’t thank me enough. It’s so sad. The slick sales people are selling a dream that will be the worst nightmare for many folks.

I also spoke with people that knew the score. They were looking and listening, but they were laughing at the hype. “This is the Next Manhatten” “$1,500 a square foot will look cheap a year from now” and the latest one . . . “Castro is going to die soon, and Cubans will be snapping up the Miami condos.” The coffee I was drinking spurted out my nose. Cubans can’t buy rice and beans. How are they going to buy million dollar condos?

Oceanside – This is another WCI project in Pompano Beach, about 45 minutes north of Bal Harbour. Still no new sales. I think the last sale was made about a year ago. It is 67% sold, and can’t see anyone buying the remaining units. In fact, the can rate here is going to be at least 50%. The second tower has been cancelled.

WCI Wrap Up – I wish I had a pile of money to short this stock. Every day things get worse for WCI. The longer it takes for Bal Harbour to close, the more gunpowder the flippers have that are filing lawsuits to get out of contracts. The longer it takes to close any WCI tower, the higher the can rate. Prices are falling, mortgage rates are rising . . . and the more likely flippers will walk from contracts . . . voluntarily and involuntarily (can’t get a mortgage). I don’t believe for one second that anyone is looking at this company as a company, for anything north of $10 a share. I should qualify that by saying, no one is looking seriously if they have done “any” due diligence . . . unless there are some hidden assets.

The debt holders are going to be the ones to decide the fate of WCI, and it’s not going to be pretty. When that time comes, you might see some of the interested parties step in and cherry pick the best tower and projects. But that will not be without great pain. Oceanside is an example of a tower that has no hopes . . . even in a fire sale, unless the fire is so hot that these units are priced at 30-40 cents on the dollar.

Next Week – I will be visiting WCI projects on the Gulf Coast and attending the meeting.

Bal Harbour Updates – If you want to be added to the email list to receive new listings and price changes at Bal Harbour, call or email me.

Condo Lawsuits – These are mounting daily. And one of the strongest arguments is condo docs. Florida law provides for condo docs to be given to the buyers. For new condos the buyers have 15 days to void the contract. This loophole here is, any amendments must be given to the buyers, and the 15 days starts to run again. So when the condo maintenance fees change, as many are now, the developer must provide a set of the changes. Buyers are in court arguing that they have the right to void the contract if there is a material modification. In one lawsuit, the fees rose 36% from the time the original docs were delivered to now, as they approach closing. It will be interesting to see how the courts rule. If they rule in favor of the buyers, one of two things happens. Developers are going to have to eat the cost of any modifications or buyers will be using this to void contracts . . . just about all contracts on hundreds of thousands of units.
Developers are so afraid of this, that they lobbied the Florida legislature with a lot of punch and pockets of dollars. Needless to say, our builder-owned legislature changed the law two weeks ago. But that’s not the end of the story by a longshot. The sharks are in the pool, and they are not giving up. It could spell disaster for the developers.

Disclosure: Of the stocks referenced today, I have no positions.

My Prior Weeks 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.