Real Estate and Housing Industry Outlook

August 11, 2007

Morgan@MorganFlorida.com 

“The pent-up demand is on a theoretical basis
. . . (blah blah blah) . . .

so it is a large theoretical answer.”

Bob Toll, Toll Brothers CEO and the Kool-Aid King
and newly crowned TOOTSIE

( Theoretical Oracle Of Theoretical Statistical Investment Eccentrics)

Quote of the Week Analysis – I wonder if you can take “theoretical demand” to the bank?  Not.  Just when you think you’ve heard it all, you hear something like this.  Do I need to say more?  Theoretically, no . . . but I will.  Then again, I used to play poker with Bob’ cousin, so out of respect for his cousin, we’ll leave the Kool-Aid King to his Kool-Aid and Oreos.  I wonder if he eats the middle first and stacks the cookies.  Or does he use the cookies to build little houses and use the cream center to cement the cookies together?

Mortgage Quote of the Week – “It is going to take awhile before the dust settles.”  George Hanzimanolis, president of the National Association of Mortgage Brokers.  That’s an understatement, since hundreds of billions in mortgages have yet to rest.  More on that below.

Consumer Quote of the Week – “I’m hanging on by a thread, not knowing whether I am going to be living in a car in six months.”  Linda Martin a homeowner in Colorado – Linda is one of millions that is facing higher mortgage payments as mortgages reset at 3-10 times the rate they initially borrowed on. 

Real Estate Broker Quote of the Week – “Mike, I’ve been doing this for 35 years and this is the worst. There are no buyers and builders are still building.”  This California broker called me to talk.  I didn’t learn anything new.  He could have been calling from Florida, Arizona, Minnesota, or any other state.  He wanted to know why the talking heads are still talking about “bright spots.”  I didn’t have an answer, other than to say, the Street relies on rear-view mirror data and data that you need an advanced degree in Calculus to prove the formulas are wrong, misleading and a fraud on the markets.
            By the way, this California broker told me the region is now experiencing negative sales.  Remember last year when I warned of negative sales?  I received calls from people telling me I didn’t know what I was talking about, and pontificating how there can never be “negative” sales.  Well, its here.  More cancellations than sales = Negative Sales.  As Ivy Zelman would say, Do The Math.  By the way, Ivy has opened up her own shop, Zelman Associates.

Story of the Week – Once a upon a time, maybe 600 or more days ago, a young man with a fresh look at the market, started whispering about crazy mortgages and people fighting to get in a lottery for a condo they have never seen.  The wise old-timers in this village shunned him and sneered at him whenever they saw him.  So the man, let’s call him Exaclfius was a very wise man.  He told his people to keep their money and not buy these flippy things.  But they kept coming back to buy.  They would roar, ”I wan to buy NOW.”    Exaclfius calmed them down with his soft voice and a bottle of rum, then sent them away.  Prices came down further, and the clients came back roaring and again Exaclfius sent them away with more rum. Now Exaclfius is making a list of the clients and what kind of homes they want, here and how much.  Exaclfius will go out on his steed and search high and low for the best short sales, forced sales, foreclosures and builder closeouts.  For the idiots that didn’t listen to Exaclfius, and bought on the way down, they need rum.  Lots of rum.
            For the kings looking for big land and condo towers, Exaclfius is still telling them to wait.  He tells them “Wait, my friends, wait for the 10th full moon.  Then the stars will be aligned with the planets, the ocean will sparkle with the light of the moon . . .and with the light of the moon, when you see a few jumpers . . . now it’s time to buy.  When the old lords appear and warn “dalires etes ponacranius gobkintin Exaclfius alamatus coryeschy.”    Then it is time.  If Jack McCabe or Mark Zilbert tell you it is time, ask them if they have consulted with Exaclfius or done any “realistic” ground zero research.  Remember “liars can figure” but “figures can’t lie.”  The hard part is getting the right figures and knowing what you’re looking at.

Mark to Model – “Liars can figure, but figures don’t lie.”  Gimme a break, it’s one of my favorites and it works.  This means we have NO idea how bad the problems are.  But we do know the problems are much worse than anyone sees.  And it gets worse.

            Just like the Street has been marking these portfolios to a “model,” the builders are doing the same thing with land and communities.  You’re all probably getting tired of me saying the impairments are not over, but it is a fact etched in stone.  More impairments to come.  Bigger and better  . . . for the shorts or those waiting on the sidelines to buy.
            Take a step away from Wall Street for a moment and join me at ground zero.  Real estate appraisers think “mark to model” means putting magic marker marks on a plastic airplane model.  They don’t even realize they have been “marking to model.”  Instead of creating a realistic appraisal, appraisers were pushed by greedy lenders and builders to appraise homes at the sale price, not the realistic market value.  And with no regulations in place, this practice fed the rise in home prices to levels that we all see now . . . were wrong and unrealistic.  The cliché of a Perfect Storm is the best way to describe the mess we are in.  All of the pieces fell into place, and everyone looked the other way when it came to safeguards.

Bank to Bank – When you start hearing about banks hoarding cash and refusing to lend to other banks, the hurricane flag is up.  And you don’t have any time to take cover. 

BNP Paribas – The initial reports talked about three of Paribas’ funds.  But these are not Paribas funds, they are managed by Paribas.  Personally, I don’t see much of a difference.  A few talking

heads seem to feel it is a big difference.  I don’t think the sharks will see it that way.  If Paribas managed the funds, they are responsible for anything they did wrong.  We know there is at least

one large firm talking about suing Bear Stearns, and I don’t think the investors on the losing end of the Paribas “managed” fund will go away quietly.
            The sad thing about Paribas, is just eight days prior to the bad news, Paribas told the world everything was fine. 

Liquidity Collapse - The ECB feels things are bad enough in Europe to inject $130.2 billion into the system, while the Fed injected $24 billion.  Then the Fed came in with another injection.  No, strike that.  I lost track, but the Fed came in several times this week to boost the total to $87.5 billion with “bam bam” injections trying to kick it up a notch.  Note to Fed, it might work for Emeril, but we need more than a little spice.  The $87.5 billion was still mild compared to the ECB, when they boosted their initial $130 billion injection north of $200 billion this week.  Let’s face it, banks are hoarding cash.  Funds have turned off withdrawals.  The American consumer’s housing ATM is closed for good, and some banks are refusing to make home equity loans.  Now you have consumers cashing in mutual funds and life insurance policies.

Bundesbank – If you think the problems are contained, or the problems are not going to effect global markets, think again.  The Bundesbank bailed out IKB Duestchse Industriebank this week, and that is by no means the last we are going to hear of bail outs.  In fact, the Bundesbank warned that this “could” be the worst financial crisis since the 1930’s.  Read some of my prior Outlooks and you will see that I warned of the worst Recession since the Depression, more than a year ago.  When you look at things from ground zero, you don’t use fancy models and spreadsheets.  You are looking at the future through a crystal ball. 
            By the way, on July 20^th, IKB’s CEO told investors IKB had little exposure to subprime mortgages.  Just a week later on July 28^th, German banks and regulators met to form a bailout plan. 
            And let’s not forget the German state bank WestLB.  They announced that their US asset management unit Brightwater is not exposed to the mortgage crisis.  Unfortunately, WestLB is already in the spotlight for trading losses at Brightwater.  If you believed Paribas when they announced no exposure to the mortgage crisis, you can believe WestLB too.

Duestche Bank AG – I’m going out on a limb to say DB is going to be one of the big boys to announce major problems.  DB’s name is on more foreclosure filings in Florida than any other company.  They say they are not on the line, because they are there in name only.  But if they were instrumental in facilitating these deals, they will be on the line.  The sharks will be at the other end.  And DB was at the top of the list of American Home Mortgage’s creditors!

Under the Radar Screen – If one bank has been running under the radar screen, it’s Corus Banks of Chicago.  Corus has more exposure to the condo tower implosion than any other bank relative to their size.  In fact, they probably have more exposure than most of the major banks.  When I say under the radar screen, I am referring to the Fed, not Wall Street. There is a large short position in Corus. Wall Street has it on the radar screen, but the Fed is still looking in the rear-view mirror.
    In South Florida alone they have about $2 billion on the line.  And they are in the major markets

throughout the country with the worst problems, like Vegas, California and Orlando.  At some point the Feds will step in.  It’s hard to imagine Corus even surviving the problems they are facing in South Florida alone.  Visit their website www.Corus.com for a list of properties and markets. 

More Big Funds in Trouble? – Goldman Sachs announced that GS North American Equity lost 11% from July 1 through July 27.  I think it’s safe to say the loss is quite a bit larger since July 27.  But the point I am trying to make is this:  No one is immune from this. 

Buyers Market – It’s been a buyers market for housing for quite some time now.  But now it is a buyers market for CDOs . . . and just like in the housing market, there are very few buyers.  The mortgage markets are facing a much more severe problem, because they don’t know what the debt is worth . . . and they don’t know how to value it.  Nor does the market know how bad foreclosures are going to get.  The housing market doesn’t have a problem that huge.  You can see the house you want to buy.  You can determine what the other homes are selling for.  And you can place a value on the home based upon ground zero work.

Week in Review – Residential Markets – At ground zero, a definite increase in lookers for residential homes.  Unfortunately, mortgage qualifications are a major issue.  This has become so much of an issue that it pushes prices down further for two reasons.  One, with mortgages more expensive, buyers affordability drops.  We all know that.  But when you don’t hear is the part of this problem.  Generally, a real estate contract on a home provides for a 30 day financing contingency.  During that period, the home must be pulled from the Active MLS.  It is marked pending, and no one looks at it during this period.  At the end of the 30 days, as more buyers fail to qualify for mortgages, the home goes back on the Active list.  Unfortunately, the seller just lost a month of selling time AND has a month of additional carrying costs for taxes, insurance, mortgage, utilities and maintenance.  It gets worse.  During that month, prices of competitive homes have come down, so the seller has no choice but to leap frog the competition and drop even further. It’s an ugly cycle with no short term end in sight.
            In my residential business, I have addressed this issue by demanding 10 day financing contingencies on contracts.  If you can’t get a mortgage approved in 10 days, you are not going to get a mortgage.  Cutting the financing contingency time to 10 days serves two purposes.  First, I find that most people that were going to write a contract, don’t.  If they were a strong qualified buyer, they would write the contract.  So we have taken a huge step to qualify buyers.  Second, if the buyer still fails to qualify, we have only lost 10 days of selling time instead of 30.  Unfortunately, I have not heard of any other offices doing this other than mine.  Brokers just don’t get it.

WCI and Icahn – Icahn has been mighty quiet lately.  $22 a share?  What was he thinking?  Even worse, what was the board thinking when they turned him down?  I’d probably expect Icahn to file a lawsuit against WCI, but time will tell.  As for WCI, despite the rally in the price of the stock, they are simply toast.  Bal Harbour will crush them, followed by a more severe crush at Oceanside.  No sense to talk about the Gulf Coast, since sales are dead.  Nothing new here to report.  If you look at some of my prior Outlooks, you’ll see just how dire WCI’s position is.  I expect them to file for bankruptcy before the end of the year.  If you want community by community analysis, call me.
            I received a few calls this week from potential buyers of WCI.  I’m not talking about people looking to buy a few shares.  I’m talking about groups looking to buy the company.  I wanted to ask if Bob Toll sent them any of his Kool-Aid.  Hey folks, there is no hidden value in WCI . . . and here’s why.

            First, they booked revenue for sales throughout the construction process.  As this unravels, they will have to book reversals.  And let’s not forget sales are dead. 
            Second.  This is almost amusing.  Callers tried to push me for land values and tower values.  As for the towers, why would you want to own towers that are going to have high cancellation rates and towers that they can’t sell out?  Some of these towers fail to meet the oldest rule of real estate – location, location, location. 
            Now for the land.  Are you kidding?  Who in their right mind wants to own land right now, unless you’re buying it for 30-50 cents on the dollar.  We have an oversupply of homes that is underestimated by Wall Street, builders and NAR.  We thought NAR stood for National Association of Realtors, but it also means our Numbers Are Rubbish.  You can read some of my prior Outlooks for more on why NAR’s numbers are misleading and misinterpreted by Wall Street.  Back to WCI land.  One caller read off the list of lots they owned and the areas they are in.  This would be fine if they were all premium lots, but they are not.  Or I should say, we don’t know what they are, since they don’t list them with specificity. 
            You can buy a lot in Palm Beach County for $500,000 in a nice area where you can build a fine home.  Or you can buy a lot in Palm Beach County for $50,000, where you can grow weeds.  Here’s a perfect example.  Old Palm a WCI community in Palm Beach County.  It is built next to the Florida Turnpike.  These are multi-million dollar homes.  A few months back I had a client that was very interested in a $5 million dollar home in Old Palm for the golf and location to malls, restaurants, etc. 
            It was a magnificent home that the husband fell in love with.  He was all set to write a check.  His wife looked at him and said, “Are you nuts. I’m not going to live in a $5 million home and listen to the &$%#@ trucks all day.”  You see, you could hear the Turnpike traffic whenever you were outside the home.  You could not hear it from inside the home, because WCI was sharp, and they used impact glass.  In the back yards of these homes WCI built “water elements.”  Read: water fountains to knock down the noise from the Turnpike.  They work to some extent, but only if you are hard of hearing. 
            The point is this.  Location is important to the value of WCI’s lots.  So there is no way to accurately value the land, unless we get into the books and find out “exactly” where the land is,

and then go out and look at the land.  That applies for all builders.  And I’m not even talking about the hits these guys WILL take for off balance sheet JVs and other creative bookkeeping.

            The bottom line for WCI is a failure of the equity, and a brawl between the bondholders. So if you are interested in WCI, buy the debt.  And don’t pull an Icahn.  Do your homework with someone at ground zero that really knows the markets.
            Bal Harbour Update – Almost $500 million on the line.  Several new listings here and quite a few price drops.  There are 73 official listings on the MLS system, but my research has turned up more than 160 listings overall.  The difference is “pocket listings” that brokers hold in-house.  As noted in prior updates, they do this so the buyer can get a mortgage.  If your property is listed prior to closing, mortgage companies will not provide you with a mortgage.  If you want more on this, please email me, since I have discussed this in prior Outlooks.
            There are at least 160 units offered for sale at the Bal Harbour project from flippers.  There are a total of 160 units at Bal Harbour and more than 116 on the Regent side, so more than 50% of the units are on the market . . . competing for buyers that do not exist.  You can buy units at Bal Harbour today, for less than the original sales prices.  The big question is: How many people will walk?  There are three groups:

            1 – People that are actually going to live here.  I believe this is less than 30%.  Yes, Bal Harbour is a magnificent property in a great location.  These people are the most likely to close, but some of these people might walk from their deposits, and buy a unit from a flipper at a lower price!

            2 – The second group are buyers with more money than brains.  They will close and let the unit sit empty if they have to.  This group is not going to want to admit they have a loss on the unit, so they will hold on till the market turns up.  That could be several years.

            3 – Pure flippers make up the most troublesome group.  Most of these people will walk.  Some of my clients ask me why someone would walk away for a $200,000 deposit.  The answer is easy: so they don’t lose $400,000.  The other problem the flippers face is getting a mortgage.  That is not going to be an easy task, with appraisals down and tightening of mortgage standards.  By the way, WCI has 20% deposits on Bal Harbour units but they can only keep 15%.

            Oceanside Update – $237 million sell out value. Closing set for January 2008, but they have only sold 67% of the units, and that number is questionable.  I have not been able to verify a sale here in more than eight months, so the chances of selling out this building are nil.  Will WCI carry the unsold and cancelled units?  They will have to, but that gets very expensive.  I don’t think it will be a WCI problem, because I don’t expect them to survive till January 2008.

            The Watermark - $233 million sell out value.  Last I heard they were not sold out.  More of a concern is the stability of the buyers.  If we see a market slide, the hedgies are not going to see the bonuses they are expecting.  We also may see a lot of hedge funds evaporate.  The Watermark has the location.  It’s just a matter of time before we see if they can hold it together.  But if you take a look at just these three projects, you have almost $900 million on the line.  Let’s not even talk about Lesina, Tuscany, Hammock, Westshore, Old Colony.  If you want to talk about them, I have ground zero color and spreadsheets with all of the buildings, broken down to unit levels.

Mortgages – If you’re looking for color here, it’s black and white.  We have not seen the light here . . . yet.  Or should I say, we have not seen the dark side.  If you think it’s bad now, think about how bad it is going to get when hundreds of millions of mortgages reset.  I’ve heard numbers for 2008 from $400 billion to one trillion dollars.  It really doesn’t matter if it is at the high end or the low end, it is still a dark picture.  My guess, from what I have been reading, is the number is most certainly more than a trillion, and might be north of $1.5 trillion dollars.  But let’s not leave it there, because we are seeing a collapse in all classes of mortgages.
            These mortgages will reset at rates that will send mortgage payments up by 300-400% (and more) in many cases.  Just think about the teaser rates we saw of 1-3%, as well as interest only.  Real mortgage rates are now at the 7% level, but that’s not the worst of it. The people that took these teaser rates were at the bottom of the barrel in terms of credit.  These folks could be looking at 9-12% rates . . . or worse, they may not be able to refinance.  So for those analysts with the rose colored glasses, sitting in their comfy Manhatten offices, smoking the big cigars . . . wake up dudes and dudettes.

Mortgage Applications – The numbers were up.  Good news?  No . . . if you’re looking at it from ground zero.  More people are failing to qualify, so they try again after the are turned down.  We may be counting actual buyers three or four times. 

Pending Sales – Same story as mortgage applications. If you use either of these numbers to call a bottom, you’re out of your mind.  Pending sales simply means someone signed a contract.  When they fail to qualify for the mortgage, the pending sale goes away.  So we count these people more than once as well.  A rise in pending sales in this market, without a corresponding rise in closed sales, is a trigger to demonstrate how tough times are getting.  Getting is the keyword, because it is getting worse.

Home Banc Quits – This week Home Banc said it will “quit” the home loan business and sell its assets to Countrywide.  They didn’t do this willingly.  Their credit was cut off, so you can see just how dire the liquidity crisis is . . . and where it is going.

National City Home Equity Quits – National didn’t quite doing business, but they shut off the housing ATM . . . a little late.  National stopped taking applications for home equity loans this week.  Once again, like a broken record, it doesn’t end with National.

Foreclosures – We’ve all seen the number for the first six months, with foreclosures up 58% compared to 2006.  But this does not reflect ground zero.  Banks that I have spoken with are trying to avoid foreclosure at all costs.  It’s a bad reflection on them, and it makes the slippery slope that much slipperier.  Short sales and work-outs are the first choices.  Unlike a couple of years ago, banks are doing everything they can to avoid foreclosure.  Unfortunately, this number will catch up with the markets, since the liquidity crisis is not only effecting Wall Street . . .
consumers can’t afford their mortgages, and they can’t borrow anymore to carry them through the perfect storm.

            Florida’s increase was 77% for the same period, but Nevada, Colorado and California had the worst numbers in comparison to total number of households.  Minnesota has seen foreclosed properties almost double over last year.  Even a state as isolated as New Hampshire is reporting serious concerns about foreclosures.  Nationwide we have about a million homes in the foreclosure pipeline.  Broken record:  It gets worse when as the tickler rate mortgages reset.  Look for this number to be north of three million in 2008. 

Who Survives – Over the last year I have discussed the guys that don’t make it.  When Tarragon was 10+, I told my clients it was the poster child for the walking dead, along with Corus.  Tarragon cracked this month, and is now trading under a buck.  Bye Bye Tarragon.  Their bets on the condo conversion and apartment market was nothing more than the epitome of the flip market.  And even though six months ago everyone was talking about how strong the rental market was, I stood my ground and told you the rental markets were collapsing from an oversupply of inventory. 
            Maybe I should take a page from Bob Toll’s book and assign grades.  Let’s start with the Fs – Brookfield Homes, Comstock, Standard Pacific, Beazer, WCI, Orleans, Technical Olympic and Corus.  Nothing new here.  I have been giving you the straight scoop on these stocks for a year now.  And nothing new about MTG, RDN, PMI and others in this group that I wrote about for the last year.  These three are not Fs, but they are still in deep trouble.
            On to the As – none.  Not yet.  And we simply don’t know when.  Just like the mortgage market can’t value portfolios, we can’t value the builders because: (1) we have no idea what their land is worth, (2) we don’t know what the off balance sheet stuff is, (3) we don’t know how bad things are going to get, and (4) the impairments are not over.  But if you want to look at builders that have the ability to pull this off, look at Horton because of strong management and a business model of affordable homes.  Look at Lennar and Toll, but these are wild cards until we learn more about what’s under the covers and how bad the spillover is going to be. 
            The big unknown for Lennar, Horton and Toll is how dark the off balance sheet items are going to be.  For example, Lennar has JVs with LNR, Calpers, MSD Capital, and Cerberus Capital. In fact, if you go back to the October 2, 2006 issue of Barron’s, there was an excellent article titled Housing’s Hidden Headaches.  The article noted that “[a]mount the country’s major homebuilders, Lennar has the larges exposure to joint ventures . . .”  
            A few of the companies that may have less exposure to land problems are Ryland, Hovnanian, KB, NVR, Pulte, Centex and Meritage . . . but only time will tell.  Beazer falls in this group, but they have too many other problems to be considered a survivor.
            For my clients that want specifics on the group, call me.  We can talk about land, impairments, JVs to the extent we know of these, business models, ground zero sales, incentives and more.  And if you are a hedge fund manager or portfolio manager, you must be in touch with Alex Barron at Agency Trading.  No one does as much research as Alex.  And some of the areas he can certainly provide detailed color on are, covenants, impairments and financial docs.

Impairments – Not enough and More to Come.  That’s been my mantra for many many months.  Here’s a perfect example.  Toll Brothers announced this week, they have impaired just 42 out of 350 communities.  When the builders impair 70-80% of the communities, we might have crossed the worst of it.  Until then, expect another round of impairments when the next round of conference calls start. 
            Here’s another glitch in the “theoretical” value of these communities.  All of the builders use different formulas to determine when and how much to impair.  “Liar can figure, but figures don’t lie.”  As prices continue to fall, they will be forced to impair more communities, no matter how they slice the numbers.  Moreover, since no one knows the value of land right now, this is a major wild card.
            More to come? Yes, and you can take that to the bank.  In fact, Horton sent a clear signal in their 10Q, even though they failed to offer real colors on the conference call.  In the 10Q, Horton tells us to brace for more impairments.  So why bury it in a 10Q?  Covenants and dividends at risk?  See the 10Q. 

Covenants – not being a high paid Wall Street analyst, I do not have the time or the staff to scour all of the financials.  And IR will not talk to me.  But it becomes very clear looking into the rear-view mirror, that WCI is out of covenant, and it will be impossible for them to address this.  It is only a matter of time before we hear about covenant issues with most of the builders.  Then what?  With banks hoarding cash like Granny, it is going to be very difficult and very costly to renegotiate this debt.  Some of these debt holders will force the weaker builders out of business, either selling the land or forcing them into an unfriendly merger with a stronger player. 
            If you haven’t seen the red flags, think about Beazer and WCI delaying 10Qs.  There not stalling because they have too much good news.  They’re trying to find the light at the end of the tunnel, but we all know what that light is.

Inventory – Ugly.  Dark Ugly Colors – Builders are still building, even though inventory continues to grow.

Miami Condo Market – If you believe the brokers in South Florida, go ahead and buy.  I guarantee you this.  A year from now your unit will be worth 20+% less than today.  The wholesale close-outs have not even started, but one developer is going to auction next month with 20 units at Platinum in Miami.  He built 119 units, most of which are on the market for a flip.  Good luck to the developer and the buyers will even need more luck.  The Miami condo market will not be priced to market for another year.  The lag is due to the number of units under construction and the tens of thousands of units coming on line in 2008 and 2009.
            More auctions coming.  In fact, www.condo.com has announced a new component of their website to facilitate auction. 

The Numbers – For my clients that want regional numbers for Florida, Virginia, New Jersey or California please email me.  The same for foreclosures by region.

Spillover – July retail sales were up 2.6%, compared to 3.9% for the year ago period.  That’s a 30% drop.  And the year to date numbers were 2.3% compared to 3.9% for the same period last year.  This represents a 55% drop.  Let’s face it, as mortgages reset, consumers have less to spend.  As jobs are lost, consumers have less to spend.  And with the shutdown of the housing ATM, consumers have less to spend.

More Spillover – Consumer credit rose more than double what economists had predicted.  Talking about liars lying and figures don’t lie.  Consumer credit rose 6.5% to $2.459 trillion.  Massachusetts bankruptcy filings are up 85% this year . . . and yes, they are pointing the finger at the housing market.  In fact, the Boston Herald reported that this is being used by consumers to save their homes. But it doesn’t end there.  Consumers are now racking up record debt on high interest credit cards and cashing in savings and mutual fund accounts.  If you don’t see the macro economic implications at this point, you either need to take off the sunglasses or get your head out of the hole. 

Ground Zero – Here’s another ground zero fact that you haven’t heard about.  Local communities, county governments and state governments are facing budget shortfalls.  As housing prices continue to fall, so do appraised value, and this means a lower tax base and lower tax revenues.  The answer seems obvious.  Raise the tax rate.  Not so easy.  Just about every state has a limit on how much you can raise real estate taxes.  So the answer is less services, loss of jobs and the cycle expands out.  Some of these shortfalls will not be felt for another year.

Florida Woes – I discussed the problem Florida and other states are facing with the loss of tax based revenue from property taxes.  Here’ a perfect example of how one county intends to deal with it.  In Martin County, Florida there is a proposal to “double” impact fees builders pay to $24,654 for every home they build.  That’s not a misprint.  This means you tack on $24,654 to every home built.  That either cuts into margins or raises the price of the home, which then hits the affordability of that home. 

Flip Side – I want to laugh about the talking heads trying to get us to believe, for everyone on the Street losing a buck, someone is making it.  Not true.  And this time it IS different.  The losers are all going to have to put their hands up.  The winners, if we can call it that, are the homeowners.  Sure there is a portion of this market where the guys betting against the mortgage markets are going to make a bundle.  But on the other side of the mortgage crisis sit the homeowners that should never have been spoon fed these mortgages.  They walk away, and the  
up some of the debt will win.  And the future buyers picking up properties for deep discounts win.   But, other than the guys on the short side of the debt, I don’t see a clear winner on Wall Street, so there is a lot of liquidity that is going to simply vanish from the Street.

Light at the End of the Tunnel – If you’re looking to the future, keep your eyes on St. Joe.  They were smart enough to get out of home building.  They are the largest land owner in Florida, with more than 800,000 acres.  A lot of this land is trees for their forestry business.  The land is also old land they have owned forever.  Unlike builders carrying expensive land with expensive options, St. Joe’s land just gets better.  And let’s not forget, as time goes by, the trees grow bigger and are worth more money.  So even if they have to sit back for 5-10 years, they are sitting in the chair above the other guys.  The key here is brining in a very sharp operator to capitalize on the vast tracts of land, and all that comes with the ability to build communities, cities and entire regions of the future.  I don’t believe current management is the team to pull this off.  If an operator is looking to buy the best of the best with housing industry potential, this is it.

Manhatten is Still Hot – I heard an interesting conversation this week about the NYC real estate market.  Even though it has remained hot, there are cracks in the market starting to show up.  And one broker tells me it is going to be a “super” buyers market by the end of the year.  Why?  He is starting to see hedge fund managers and financial executives lose their jobs and put their condos, apartments and homes on the market.  He feels bonuses will not be there this year.  I’d agree with that. He’s predicting a 15-30% drop in prices by February.  That’s great ground zero info, but it will depend upon just how many managers and executives lose their jobs.

Shark Update – I’m still hearing from law firms interested in predatory lending and mortgage fraud issues. And they’re not calling to talk to me about mortgage companies.  They’re calling to gather information about the role the builders played.  Give it 6-12 months, and this will be a very bloody feeding frenzy of sharks chewing up the builders.  Why the lag?  One, they need time to prepare.  Two, the worst is yet to come.

To The Rescue – Lots of talk about lower interest rates to get things rolling.  It isn’t going to help.  This is not an interest rate problem.  Interest rates are at historically low levels.  This is an inventory problem, a greed problem and a complete failure of the system to regulate.   The talk about Fannie Mae riding in to the rescue was shot down yesterday by the Office of Federal Housing Enterprise Oversight.  They said, no way, not going to happen, zip, nada, nope. 

Disclosure:  Of the stocks referenced today, I have a put positions in Corus and WCI.

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Michael C. Morgan, J.D., CRS, GRI
Morgan Florida Real Estate Group
Morgan@MorganFlorida.org
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