Morgan Florida Real Estate Group

3830 NW Royal Oak Drive, Jensen Beach, FL 34957

772-260-5448 – FAX 866-677-8624

Mike@MorganFlorida.org

“No one in the subprime business wants to ask the question

of whether they need to re-mark all the assets. 

That would open the floodgates”

Janet Tavakoli, president of Tavakoli Structured Finance

June 24, 2007

Quote of the Week –  It’s the head line.  And it is not to be taken lightly.  About a year ago I was contacted by one of the Top 5 institutions concerning their portfolio of debt.  They were going to schedule a tour with 15 of their executives.  The objective of the tour was to determine when they should sell their debt.  They never made the tour, and now they are one of the big guns in trouble.  And it gets much worse.

Eventually I’ll Be Right Quote – I read with complete amazement some of the things Stephen Kim put out.  Forget about Bob Toll’s Kool-Aid, Stephen has the double-shot version.  Kim is actually bullish on housing stocks.  He said, "The linchpin to our bullish stance on the public home builders remains our conviction that a widespread, entrenched supply constraint emerged in the home-building industry in the mid-1990s — in the form of a bottleneck in the land development pipeline."  Maybe he used the word linchpin because he knows he’s eventually going to get lynched. 
            Of everything he said, this makes the least sense. "While unnaturally high demand did provide a boost to the builders' 2004 and 2005 results, we believe this effect was minor compared to supply constraints."   Maybe he missed Economics 101 about supply and demand.
            I almost fell off my stool when I read, Kim thinks the builders' stocks will appreciate aggressively late in the third quarter.  They pay this guy a lot of money, but I’d take a shot a predicting builders’ stocks will be 10-20% lower between now and November.  We might see these stocks appreciating aggressively this year, but not until they’ve hit their heads on the bottom.  We’ve not see the worst of the bad news.

Hardest Hitting Quote – “Home sales most likely will erode somewhat further in the months ahead and improvements in housing starts probably will not be recorded until early next year," David Seiders, chief economist for the builders group, said in a statement. "As a result, we expect housing to exert a drag on economic growth during the balance of 2007."  This one is all you really need.  This is the mouth piece for the builders, and he’s telling you sales will erode AND exert a drag on the economy.  I’d put my money on Seiders before I sipped the double-shot Kool-Aid Kim is serving.
            I think this deserves a double-shot of my preferred drink Milkfee.  "We think we're just starting to see the tip of the iceberg," said Karen Weaver, global head of securitization research at Deutsche Bank Securities. "We believe more and more [subprime borrowers] will default, and that's a process that we think will happen over two years." 

Spillover Contained (NOT) – Despite all of the bravado we heard a few months back, it’s becoming painfully clear that there is serious spillover of the subprime issues.  Last week I reported about some of the big guns blowing up.  This week there are more.
            Bear Stearns is shutting down two big hedge funds after a “rescue plan” flopped.  Who in their right mind would rescue this stuff?  The Wall Street Journal commented that this “could have wide-ranging consequences for Wall Street and investors.”  I guess that’s news because it is in the newspaper, but it’s old news that’s just coming to light.   Several articles noted how it is difficult to value these assets.  I guess that’s why the company referenced above wanted to take a tour with me.  I’d bet they’re kicking themselves pretty hard right now . . . or they’re enjoying the summer in the Hamptons.
            Watch for reports coming out of Merrill, Goldman, BOA, Credit Suisse, Deutsche Bank, Citigroup, Barclays and a healthy list of the top players.  And then keep your eyes open as Wells Fargo, Washington Mutual, and their colleagues shine a little light on just how deep the water is.
            The big surprise will be announcements from the pension funds that were saddled with this junk.  The sharks will not be far behind with the lawsuits.
            Maybe Jeffrey Gundlach, the CIO of TCW Group, said it best . . . “Mortgage finance occurs in slow motion compared to other parts of the financial markets.”  I guess that goes hand in hand with my comments about rear-view mirror thinking. 

The Numbers – I preface this by noting, I do not believe the numbers.  We have seen confirmation of my concerns for many months now.  Housing starts in May fell to a level that economists expected, as the homebuilding market continues its drag on U.S. economic growth.
            Starts came in down 2.1%, but that was a combo of multi-family and single family.  On the surface, this is a good thing for the market in general, but it is not enough and it is not a good sign when an industry sees it’s production falling.  Builders need to slow down starts even more, but that prevents them from monetizing their land and/or converting horizontally developed properties into cash.
            The year over year number was a drop of 24.2%, and that’s not enough when you consider the May number means an adjusted annual rate of 1.47 million homes.  How many industries do you know of  that can cut production 24.2% and not feel the pain?  And in this case it is not only a 24.2% in production, but disappearing margins.   

The Numbers – continued -   Of more concern is the permits number.  It was actually up from April to May by 3% for a run rate of 1.5 million units.  It was down 21.7% from a year ago, but once again, that’s not enough to get inventory into line.  We the longer the builders ignore this, the more painful the end of this saga will be.        

Risk Numbers – PMI Mortgage Insurance Company released their rankings of the top 50 MSAs.  This ranks the probability of lower prices in two years.  The average rating was 34.6%.  but for the hot markets, it was 60%.  I’d like to see the numbers for one year out, because if they are this bad for two years out, you know a year out must be downright coyote-ugly.

NAHB Numbers – At 28 the Home Builder Sentiment Index hit a 16 year low.  Wall Street predicted a number of 30.  I predicted 27.  And I think we’ll see 25 before we see 30 again.  Take a peak at the visual below.  We are still not back to the 1991 level, and in 1991 we did not have anywhere near the problems we have now.   The speed of the current drop in confidence is even more alarming.

WCI – Nothing new and no breaking news on the hidden value that may have influenced Icahn’s $22 bid.  No reports on a sales pick-up, traffic pick-up nor a drive-by pick-up. 
            Bal Harbour Watch – Please contact me directly.

Auctions – Maybe for art, antique cars or an estate sale, but houses?  This has become a daily occurrence in many of the hot markets.  Lennar even tried it online . . . once.  I guess it was a flop, despite the Wall Street Journal reporting it was a success.  If it was such a success, why only one auction?  And why did they have to go to the bidders . . . after the auction . . . to negotiate prices up.  Still no headlines about how many of the units actually closed. 
            In St. Lucie County there was an auction of 14 homes on Saturday.  No word on the results yet.  The homes are expected to sell for $200,000, which represents a $100,000 hit to original sales prices.  These homes range from 2,400 to 2,700 square feet.  A quick search of the MLS shows me that homes of this size are listed for $250,000 to more than $400,000.  And the builders are still trying to sell comparable homes for closer to $300,000 than $200,000.  If you do the math, you can see we are at negative margins.

Downgrades – Moody’s downgrade 131 mortgage investments tied to subprime loans.  Expect more of the same.  This story has kind of taken a back seat lately.  But we will soon be hearing of the spillover to Alt-A at a much more serious level than anyone wants to admit.  I can assure you of that from what I see and hear at ground zero.  It just takes a little time for the guys on the hook to admit the problem. 

Foreclosures – Highest rate in 50 years.  Enufsaid.

Flip Flop – It was just a couple of months ago that the University of Florida’s Bergstrom Center for Real Estate was telling everyone to BUY, BUY, BUY, because we were “definitely” at the bottom.  Flip-Flop – now they admit a statewide survey of real-estate “experts” of appraisers, brokers and other professionals are decidedly more pessimistic than they were earlier this year.  But they were kind enough to admit this reversed their Q1 outlook.  "Things have gotten a little more sober," said Wayne Archer, director of UF's Bergstrom Center for Real Estate Studies. Duh.

Florida Woes – Moving in or Moving Out? - Once again, our economists need to stop looking in the rear-view mirror.  Florida has some very serious problems, and the Legislature is not addressing any of them.  They’re making the usual soap box speeches, but there is nothing to any of it.  Nothing.
            Think about this.  The media wants you to believe there 1,000 people moving to Florida a day.  Whoa.  Hold on a second.  How about the folks leaving?  The number of Florida drivers seeking licenses in other states has increased, while the number of drivers moving to the state has decreased.  Public school enrollment dropped last year for the first time in almost 25 years.   And

the three largest van lines reported that more customers moved out of the state than into Florida. 
            Talking about numbers that don’t add up . . . the 1,000 new residents a day is quite a bit less than what the Census Bureau reports.  They’re reporting 430,905 new residents for the 12 months ending April 1, 2006.  That would be almost 1,200 a day.  But that was rear-view for the last nine months of 2005 and the first three of 2006.  I still don’t buy it.  The other numbers are not there to support it, unless we are talking about illegal immigrants, and that is entirely possible.  However, that’s a major drain on the Florida economy when there are fewer and fewer jobs in construction and farming for these folks.
            Homeowners Insurance – A task force is investigation Citizens Property Insurance.  This is the state owned and operated insurance company, and the largest insurer in the state.  Seems like Citizens hasn’t paid claims from the 2004 hurricanes.   So now we have the State of Florida versus the State of Florida.  What’s next? 
            I’ll answer that.  Citizens Insurance will bankrupt the State of Florida.  If the insurance companies could not make a profit here, how in the world is a bogged down government going to do it?

Watchlist – Keep you eyes on Corus Banks.  They have not even started to see the train wreck.  I believe the Fed will wake them up, but it is too late.  I would also be watching SSD, BLG, EXP and BLDR on the supplier side of the housing bust.  And MTG, PMI, FNF and RDN on the mortgage crisis that no one wants to admit will spill. 

Disclosure:  Of the stocks referenced today, I have no positions but I am involved in two lawsuits with Lennar.  I am the defendant.  They are suing over my public service website.   Ralph Nader’s Public Citizen Group has filed an Amicus Brief in support my position.  For a copy of the brief, please email me.