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Real Estate and Housing Industry Outlook

August 18, 2007

Morgan@MorganFlorida.org

”U.S. profit growth has fallen more than two thirds

because of the housing slowdown.”

David Rosenberg, chief North American economist at Merrill Lynch

Overview – Below you will find an abbreviated version of my usual Weekly Update.  And this week I am not discussing the global liquidity problems, hedge funds halting redemptions or any of the other issues I’ve been talking about for a year.  My clients will receive additional information and spreadsheets for the information below.  What we’re seeing in the markets now comes as no surprise to my clients and readers of my mass distribution Updates.  If you would like one-on-one color, please call me.

WCI Bal Harbour – I made a trip to Bal Harbour this week, and what I saw even surprised me.  There remains a great deal of work before they can close.  We have been hearing about a September closing.  That will never happen.  From what I saw, and what I have seen, there remains at least 90 days of work before they can get a final CO and close on these units.  My clients will receive photos of this trip and more detail. Here is one photo of the north side of the project.

          The work yet to be done includes outdoor amenities areas, front entrance, North side of the property and a great deal of interior work, as well as exterior finishes.  I did not see enough activity to demonstrate they are even trying to hit a September closing. 

          While speaking with workers at the site, I heard the gamut of a September closing to a January/February closing, and even a few chuckles with no date.  With the overall market imploding, this is not a good sign for WCI. 

WCI Bal Harbour Listings – Another drop in the number of listings as buyers realize they can’t get a mortgage if their unit is listed.  Here’s the real kicker.  While we saw a drop in listings, we saw a lot of new listings.  Some folks get it, and others are going to learn the hard way.  But getting a mortgage to close is not the only problem facing these flippers.  The big problem is falling prices . . . daily.

          Let’s start with the two big penthouse units listed at $13.5M and $11.9M.  They are no longer in the MLS.  As for prices . . . unit 2108 was listed at $7M last week . . . now it is yours for just $6.3M.  Or you could buy a better view, two floors higher in unit 2308 for the same $6.3M.   This unit was $6.5M last week.  How about unit 703 listed last week for $2.95M and now $2.2M.  That’s a 25% drop in one week . . . and still no units at Bal Harbour have gone Pending. Do you get the picture?  For more on pricing, call me.

WCI Rumors – I’ve heard them all from Steve Cohen allegedly increasing his SAC stake to buyers looking at the equity, and Icahn making a new bid.  I simply can’t believe anyone would make the same mistake Icahn made . . . and there is no hidden value.  The Gulf Coast properties at Westshore, Hammock Bay, and Old Colony are dead in the water with flippers falling over each other to lower prices.  Tuscany is a ghost town.  On the East Coast, Oceanside is a complete bomb with estimates of 60-70% of the units sold.  This may be there worst project.  Lousy location, overpriced for the market, and I can’t see more than 30-40% of the buyers actually closing.  That puts WCI at a 20-30% closing rate in Oceanside.  Then you must ask who pays the condo fees and insurance on the remaining 70-80% of the units. 
          I’ve received several calls from people showing an interest in buying all or parts of WCI.  Let’s face it, if anyone does step up to the plate they have several insurmountable obstacles from dealing with the bond holders to carrying costs on projects that are not selling.  It’s not a triple whammy.  It’s a complete knock-out.  More color for clients.

WCI Notes – Second quarter results are due for release on Wednesday, with a pre-release warning of $34-$54M in impairments and a projection of $530-$730M in case flow.  The impairments are not enough, and I don’t see how they even hit the low end target of cash flow.  It will be interesting to see where they think this cash is going to come from. 

South Florida Condos – Still building and still coming out of the ground.  I can understand the still building part.  They must complete these towers, and they are already funded.  I cannot understand new projects coming out of the ground.  When I say coming out of the ground, I mean projects that a month ago were dirt, but now have foundations and cranes on the sites.  I would have thought these projects would have been cancelled and deposits returned.   

Port St. Lucie, Florida – The two hottest markets during the housing bubble where Las Vegas and Port St. Lucie.  The Las Vegas market has a story behind it and foreign buyers will pick up some of the excess inventory.  This market will recover much faster than many other markets.  But consider Port St. Lucie your crystal ball into the future.  What happens in Vegas stays in Vegas, but what happens in Port St. Lucie is coming soon to a community near you.  Oh, by the way, I saw a sign and sales office for Las Vegas condos in South Florida on my trip this week.  It was closed!

          Let’s start with the spillover into the jobs market.  And this is the heartbeat of America.  As people lose jobs, they lose their spending power and their homes.  In St. Lucie County the unemployment rate spike to 6.6% from 4.9% a year ago.  That’s a very scary number and it is NOT a local problem.  In the early 1990’s we saw the unemployment rate top 20%.  It is different this time.  It will be worse.  Enough said.

          You can now buy a home for less than it cost to replace it in Port. St. Lucie.  And even though there are only a few publicly traded production builders still here, there are thousands of homes still under construction and coming out of the ground.  Inventory has swelled to what appears to be a 3-4 year supply. 
          There are 6,233 single family home listings on the MLS system in St. Lucie County with 244 closings last month.  That give us a 25 month supply of single family homes, but with sales cratering, foreclosures skyrocketing, mortgage markets drying up, and builders still building, the 25 month number is not representative of the market.  It also does not reflect thousands of homes that are being rented because flippers could not flip.  A three year supply of inventory is a best case scenario.

          St. Lucie condo inventory was at 1,310 with just 17 sales . . . 77 month supply (6.5 years).

Levitt and Port St. Lucie – Levitt announced they are accepting “offers” on their Tradition Square commercial section, the Landing at Tradition.  Tradition is a 2,515 acre residential and commercial project. If things are turning, (and they are not) why would Levitt be willing to accept offers on what the media has stoked as the hottest area?  Tradition is going to be the home of the Torrey Pines Institute of Molecular Studies . . . if and when this is built.  There are 120 residential listings in Tradition, and just four closings last month.  That’s a 30 month supply in what is pegged as the best market in St. Lucie County.

          Levitt and BFC Financial – The deal is off, citing a cold housing market. I’m not sure there ever was a deal when you look at how this was structured.

Existing Home Sales – Confirming what I noted above about St. Lucie and Las Vegas, the two biggest declines in existing homes sales were Florida with a 41.3% drop and Nevada with a 37.5% drop. 

Housing Starts – On the bright side, we saw starts drop to 1.4 million.  The last time we saw this level was in January 1997 at 1.355 million.  This is a start in getting inventory under control, but it is not enough, when you consider 2-3 million foreclosures coming to market over the next 18 months and a huge inventory sitting idle in rentals. 

Housing Permits – At 1.373 million, it is clear builders are still intent on building into a market that can’t handle existing inventory.  The builders want to monetize land they have sunk money into with horizontal development, and they see this as the only way to do it.  We will see this number under one million within six months, and only then will we start to absorb “some” of the inventory that is choking the market.  We are starting to see some of the horizontally developed projects shut down.  Gates are being locked, sales offices closed and builders are quietly shopping for buyers of these communities.  We need to see more of this.  The builders that want to monetize this land are willing to take losses on vertical development to reduce their land carrying costs and meet covenants. 

Mortgage Applications – Up 3.4% but that is probably the most misleading number we hear about.  As some of the reporters have noted, buyers are submitting multiple applications, because they are not qualifying initially.  In some markets we are seeing a 3:1 rate of contracts to closings.  And even though the mortgage average rate is only showing a small uptick in the reported numbers, it does not jive with what we are seeing and hearing at ground zero.

Buying Opportunities – I haven’t seen anything that makes sense to buy and bank.  I believe we will see lower prices as builders feel more pressure from lenders.  If you are interested in land, started communities or towers, call me.  When the timing is right, buyers will be in control.  But now is not the time to buy.  Not enough blood in the streets.

Commercial Arena – More problems ahead, as we see more For Lease signs popping up throughout the state.  Owners of strip properties and office projects are feeling the pinch first.  And just like the residential builders overbuilt the market, so did the commercial guys.  You can buy entire strip centers . . . with zero tenants.  And as noted above in the Levitt section, owners are planning on more pain ahead. 

Impairments – Until the next round of reporting starts, this is a ticking time bomb.  Builders have only impaired 10-25% of their inventory.  Do I need to say more? 

Florida Woes – The big story in Florida is the crumbling prospects of property tax and homeowner insurance reform.  Governor Crist has failed, and he has backed down on the rhetoric . . . other than to continue to threaten the insurance industry.  Robert Hartwig, president of the Insurance Information Institute has categorized the Florida homeowners’ insurance market as a “poisonous environment.”   He didn’t stop there.  He attacked Governor Crist, saying the governor’s reforms are “arbitrary, capricious and punitive and violate virtually all laws of modern economics, finance, statistics and actuarial science.”  Enough said. 

Corus Update –  I was in Dade, Broward and Palm Beach counties this week, and it is clear several Corus properties in these markets are in trouble.  For more than a year, I have provided color on the progress of their condo projects throughout Florida, California and Nevada.  It’s not good.  Despite Corus assertions that they have a 35% cushion, that will not help.  Nor does it help they have non-recourse loans and they are the primary and mezzanine lender on many projects.  With more than $2B loaned out in Florida, more than a billion in California and almost a billion in Nevada, they have a major problem on their hands.  Here is a link to their condo portfolio where you can sort by state. http://ramc.mlxchange.com/Pub/EmailView.asp?r=1681680435&s=MRT&t=MRT  

          Clients that want color on specific tower projects, please call.

Mortgage Melt Down – More banks are refusing to lend to the frothy condo market in Florida, and more lenders are tightening standards.  Getting a mortgage for a flip property is very difficult.  If you can get one, it is going to cost pre-construction buyers more in fees and probably double what the rates were when buyers plunked down deposits on these units. 

Disclosure:  Of the stocks referenced today, I have a put position in Corus.

Mish's Blog:  If you haven't been following Mike Shedlock on Global Economic Analysis, here is a link to his blog - http://globaleconomicanalysis.blogspot.com/   It is a great read on a macro level where Mish (Mike Shedlock) zooms in on micro issues as well.

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