Distribution Notice: Although this page is copyrighted, you use any part of this page free of charge providing: (1) you send me an email with a link to the use, or you send me a hard copy of the use and (2) you properly credit the use of the material to "Mike Morgan, J.D. - Morgan Florida Real Estate" If you use an excerpt from this page, I reserve the right to add an explanatory comment or revoke permission to reprint.

Real Estate and Housing Industry Outlook and Review
Week of July 15, 2007
Mike Morgan, J.D., CRS, GRI
Morgan@MorganFlorida.org - 772-260-5448

Prior Weeks Outlook Reports - Click Here

“ No one is buying into their Kool-Aid;
that’s why prices are falling.
It could be that they’re going to fall a lot more."
Paul Kasriel, Chief Economist with Northern Trust

Quote of the Week – Mr. Kasriel was speaking about the Kool-Aid being offered by the National Association of Realtors. He’s right on the money with the exception of the word “could.” I can assure you, prices “will” fall a lot more in most markets. Simply put, we have too much supply, and the builders continue to build.

Kool-Aid King Quote – I refer to Bob Toll as the Kool-Aid King because of Ivy Zelman’s remark on one of the conference calls when she asked Bob which Kool-Aid he was drinking. This week Bob told Jon Birger at Forbes that the market will not get better until April 2008 at the earliest. From where I work, at ground zero without Kool-Aid and without rose colored glasses, there is not a chance this market corrects by then, unless we invite in a few million immigrants. Bob and the rest of the builders’ CEOs need to get out of the office and spend more time at ground zero. It’s not limited to Florida, Phoenix, Southern California and other hot markets. I hear the same thing from brokers in Minnesota, Texas, New Jersey and Georgia.

Impairment Quote of the Week – “The lower prices will also likely trigger significant additional land charges.” Dan Oppenheim, Banc of America. Once again, the language doesn’t tell the whole story. Why say “likely trigger” when we know lower prices and zero margins WILL trigger significant impairments? Sitting on the fence has become a dangerous spot to be for many analysts. And the cost to their clients has been in the hundreds of millions of dollars.

Warren Buffet and Hovnanian – When I received the first call on Friday, I thought it was a joke. When I realized the caller was not joking, I told him it was highly likely it was nothing more than a rumor. In May of this year Warren Buffet spoke about the cyclical nature of housing. He sure didn’t sound like he was bullish on builders, nor did he sound like a home builder was a good fit for his conservative value-based investment style. I’d put the chances of him buying Hovnanian at less than 5%.
Unless he knows something the rest of the world doesn’t know, there’s no hidden value in Hovnanian. In fact, Hovnanian, just like all of the other builders, has a long way to go with impairments. I don’t know of any builders that have impaired more than 25% of their communities. Does that mean the other 75% of their communities are in the clear? Not a chance. Look for massive impairments accumulating throughout the next 12 months. So why would he pay a premium for a company that is going to be hit with further deterioration of book value? He wouldn’t.

WCI and Icahn – Last year when I received the first call about Icahn wanting WCI, I laughed. I told everyone, it would never happen. And I stand by it today, unless he can get it south of $10 a share. Just like there is no hidden value in Hovnanian, there is no hidden value in WCI. In fact, WCI’s value erodes each day as more towers come on the market, flooding condo inventories.
Watch for Icahn to unravel his positions this month. It will be interesting to see who gets caught holding the bag, but I’d bet Icahn sells before all of his followers do. His holding period expires this month, so he is free to extricate himself from this ugly mess and focus on his other targets.

Market Conditions – Providing a weekly update on market conditions is becoming simply more of the same. Market conditions are bleak and still stuck in a downward cycle of sales and sentiment. I do not see or hear anything encouraging that we have bottomed out, nor that we are near a bottom. Yes, there are buyers, but they remain extremely cautious throughout the country. We’ve been hearing how this is a Buyers’ Market for quite some time. Well, now we are seeing articles and reports in Florida how it is also a “Buyers’ Market” for boats. Resales have skyrocketed with more folks being hurt financially from the housing market. I guess your boat is the first thing you give up when faced with a financial problem. Adding to boat owners’ woes is the price of fuel . . . up 50% at the docks over the last year and a half.
For my clients that would like additional color on specific regions in the country, please email or call me.

Bottoming Out? – A year ago I would have thought the worst of it would be over by Q2 of 2008. Today I am revising that forecast to Q1 of 2009 with some caveats, and here’s why.

1 – Inventory – It’s still increasing and builders have not cut production enough for inventory to stabilize, let alone fall to reasonable levels of market absorption. We have enough inventory nationwide to carry us into 2008 with a hefty oversupply. If builders continue to build excess of inventory, the bottom will be stretched out to Q1 of 2010. At some point, builders will be forced out of business, as the market forces the inventory to correct.

2 – Flippers – They are long gone from the buy side, but they are active on the sell side. Builders have created a new competitor that they cannot beat in the marketplace. A flipper must eventually sell, even if that means a foreclosure sale. Flippers don’t have margins to meet and stockholders to report to. You can add this to the #1 reason for a delayed bottom, since the flipper supply of inventory is in reckless hands.

3 – Mortgage Issues – No one has accurate numbers of just how many ARMs and interest-only short-term loans are resetting. I’ve heard numbers all over the place. I’m relatively confident even the most dire numbers don’t express the enormous magnitude of this problem. And as mortgages reset, more owners will be forced to sell their homes . . . adding to the inventory problem. This will also have a tsunami like effect throughout the economy. It will not be a ripple as many would like you to believe.
The sales side of the mortgage problem is just as dire. It is more difficult to qualify for a mortgage now, and this means the affordability of homes drops. In turn, this means lower prices for builders. I don’t even have to speak about lower margins for builders, since I believe margins are already at or near zero.

4 – Inventory – Important enough to repeat. It is Economics 101 – Supply and Demand. Even though we hear that people losing their homes must live somewhere, we simply have more homes and apartments than we have people to live in them . . . and we’re still building. If we stopped building homes today, I believe it would still take 8-12 months to absorb the inventory and return us to a stabilized balance of supply and demand!

Ryland and Horton – These are the latest national builders to admit things are getting worse. Both companies warned this week. But their warnings are not enough. Ryland is going to book impairments of $145 million to $155 million, representing more than 5% of book value. Not enough. Horton didn’t provide a figure, but it looks like it will be several hundred million. Not enough. Until the builders impair 75-80% of their communities with “real” impairment numbers, this problem will linger with additional impairments and erosion of book value.

Centex - Tom Smith, one of S&P’s equity analysts actually placed a SELL rating on Centex this week. And he didn’t stop there.

Subprime Not Going Away – I’ve said it for many months . . . we’ve only seen the tip of the iceberg. And at best, only on a foggy day. This week Moody’s and Standard & Poor’s warned us to expect “greater-than-expected” losses. In fact, they have no idea just how bad things will get because rating practices are now admittedly unable to rate this paper. “We call ‘em as we see ‘em,” said David Teicher, a Moody’s managing director.
Unfortunately, they can’t see ‘em and when they do, they either don’t know what they are looking at or it is too late. Another problem for Moody’s, Standard & Poor’s and Fitch . . . their models don’t take into consideration all of the issues regarding falling prices and ARMs resetting.

Spillover – Furniture Brands (Thomasville and Broyhill) was referenced this week by Tom. He noted that his outlook for Furniture Brands has “dimmed a little further,” pointing a finger at the housing market. Sears and Kmart also pointed fingers at the housing market for hefty hits to same store sales. And let’s not forget Home Depot with a very gloomy outlook this week.

Recession – Yes, the “R” word was used this week by Mark Zandi, senior economist for Moody’s economy.com. Mark was speaking at the Southeast Builders Conference in Orlando when he referred to St. Lucie County being in a recession. St. Lucie County was one of the hottest market during the housing boom. Now you can buy homes in St. Lucie County for less than replacement cost.

Orlando MSA Numbers – Ouch. What concerns me most are the May to June comparisons, with sales off 21.94% and contracts off 25.96%, this is worse than anticipated It just goes to show we are not stabilizing . . . even at rock bottom prices. Strike that. I should have said, prices that appear to be rock bottom. We still have further to go, but homes are already selling for less than they can be built for.
The other disturbing Orlando statistic is New Listings . . . four times the level of sales! Inventory is still exploding.

June New Sales – 1,431 v. 2,841 – DOWN 49.63%
June New Contracts – 1,853 v. 2,727 – DOWN 32.05%

May v. June Sales – 1,745 v. 1,431 – DOWN 21.94%
May v. June Contracts – 2,334 v. 1,853 – DOWN 25.96%

Listings? You don’t want to know. The Orlando MSA saw 5,667 new listings in May. This represents four times as many sales. What business do you know that produces four times as much product as sales? For my clients receiving this via email, if you would like to receive additional pdf spreadsheets for the Orlando markets featuring more detail and breakdowns, please email or call me. I’ve attached the basic Housing Trends Summary.

WCI – If you’re still waiting for Icahn to close the deal or if you’re waiting for Jack McCabe’s “done deal” buyer, I’ve got Florida condos you might be interested in. No need to beat this rock anymore. WCI is in dire straits with no good news on the horizon.
Sales, or lack of them, are not the only problems plaguing WCI. Two condo associations in Palm Beach County are suing WCI, and a third project has threatened a lawsuit. The Admiral and Mariner have filed lawsuits, with CitySide talking to attorneys.
WCI Bal Harbour Update – No chance of an August/September closing. And chances are they are going to have to drag buyers to the closing table in chains, when they do try to close. Look for a November/December close at the earliest.
There are 70 active listings on the MLS system for Bal Harbour. Even though this is the same number as last week, there were five new listings, which means five listings expired or were withdrawn. Remember . . . it is very difficult to get a mortgage in this market if your property “is” listed or “has been” listed recently. The last thing the mortgage companies need, is a short term loan that is going to be pulled out of a pool of loans they sell. Their expenses for these loans exceed their profits.
To demonstrate the fact that there are more flippers in Bal Harbour than the MLS data reveals, consider this: There are 102 listings on the website one of South Florida’s leading brokers. Why? As I noted, if the listings are on the MLS, the mortgage provide will see it. If the listing is a “pocket listing” with a broker, the mortgage company would normally not see it. However, the mortgage companies are getting more creative, and they are looking at more than the traditional MLS system.
If one broker has at least 30 additional listings in Bal Harbour, you can only imagine how many other “pocket listings” are out there, and how many more flippers have not even listed yet. Let’s not forget this one project could bring WCI to their knees.
WCI Oceanside Update – I cannot verify a WCI sale at Oceanside for more than eight months. At this point, why even keep the sales office open. As for the 67-71% of the units they claim are sold, look for most of these people to walk away. That leaves WCI with less than half the building sold. Not a pretty picture.
WCI Gulf Coast Report – No better than here on the East Coast. Sales have all but stopped. Flippers continue to drop prices in Hammock Bay, The Colony, Tuscany Reserve, Westshore, etc. Very dark and gloomy.
WCI Singer Island – email or call me if you would like an update on listings and sales.

Legal Woes – I spoke with attorneys on the East and West Coast this week that are suing builders and looking at the future for a flood of lawsuits over defective homes, predatory lending and mortgage fraud.

The Next Big Thing – Reverse mortgages are gaining popularity at an alarming rate. Unless the government steps in to provide the kind of disclosure we should have had in the creative financing we saw for the last few years, we’re going to hear more about the problems created with reverse mortgage companies.

Next Week: In addition to the standard format I will report on Foreclosure numbers, Virginia Numbers and a few specials areas. I am also going to provide a spreadsheet with Bal Harbour listings and changes from week to week.

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

Prior Weeks Outlook Reports - Click Here

Mike Morgan, J.D., CRS, GRI
Morgan Florida Real Estate
Morgan@MorganFlorida.com
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.com - 772-260-5448

Consulting and Project Fees: The first hour of consultation is billed at $1,500.  Additional hours are billed at $450.  Clients may also purchase 30 hour blocks of time at $350 per hour and 75 hours blocks at $300 per hour.  Fees for research and field projects vary depending upon the scope of the project. 

Real Estate Tours: $10,000 for the first day.  $3,500 for second day.  For longer and more extensive tours, call to discuss.

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.

Helping Families with Disabilities - My passion is helping families that have a family member with a disability.  20% of your fees go directly to this project.  Of course, we are always in need of a few solid people to support our larger projects.  If you're one of those, please call me to discuss what we are doing.