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Prior Weeks - Click Here

Real Estate and Housing Industry Outlook

September 9, 2007

Morgan@MorganFlorida.org

” What we have on our hands here, folks, is a full-blown, global financial crisis comparable to the junk bond collapse of 1987, the S&L crisis of 1990 or the Asian financial crisis of the late '90s.”

Steven Pearlstein, The Washington Post

Back Up Quote of the Week – “It will take more time to play out.”  - Robert Steel, Treasury Undersecretary.  Steel was talking about the volatility in our credit and mortgage markets.  He said the issues are “far from over,” but in the next breath he is telling us there will be no recession.  Is he serious?  The Fed and the Administration have no idea how bad things are because no one can mark their debt portfolios to market.  Moreover, most of the institutions aren’t even sure “what” they own because it’s all in leveraged “packages” that are written in secret code like CDO, SIV and even SIV-lite.  Let’s face it, when the ECB is telling us we are in trouble . . . we are in trouble. 

Condo Quote of the Week – ”In the next 2-5 years the valuation of Miami's properties will see another boom, as Florida's population continues to explode.” - Mark Zilbert, Creator of CondoFlip.com - Mark had quite a bit more to say in a recent marketing email, but most of it was nothing more than Mark’s super-hype on the Miami condo market.  He tells us he just returned from Europe and makes it sound like the Europeans are queuing up to buy Miami condos like ice cubes in the desert.  Speaking of the desert, Mark wants you to believe big money from the Middle East is moving into Miami condos.  Obviously, Mark has spent way too much time in the sun.  Mark’s probably sold more condos to flippers than anyone else in Florida, so he’s got a lot to lose as this market crumbles.  If you’d like to see Mark’s entire email, drop me a line and I will forward it to you.  It is well worth the read, if for nothing else but the laughs.  On the other hand, if you took any of Mark’s advice, you might want to cry.

This week . . .

WCI – More Bad News

Another Shoe

Market Conditions

Florida Office and Commercial Space

On The Road - Seattle

More Seattle – Condo/Hotel Example

The Numbers – Pending Sales – Use At Your Own Risk

The Numbers – Foreclosures –  Eventually, somebody loses (BIG).

The Numbers – Jobs - Two reasons why the jobs numbers are misleading

Consumer Credit – 33% interest

State and Regional Numbers

Florida Woes – Tax and Revenue Shortfalls

Florida Woes – Lehman Brothers Lottery Proposal

Florida Woes - Homeowners Insurance

Florida’s Sunny Side – Germany’s Max Planck Society

Prior Weeks Outlook Reports - Click Here

Another Shoe – It’s an old shoe, but it is worth repeating.  Here at ground zero those folks with mortgages resetting, are facing a bigger headache than seeing their mortgage rates increase 200-400%.  Those might be the lucky folks, if you can call it that.  Here’s what you’re not hearing about . . . YET.  If you have an 80% mortgage on a $400,000 home and the value of your home dropped 25%, you have now negative equity.  For many mortgages, you will now have to come up with all or part of that lost equity to keep your mortgage.  We’ve heard Jim Cramer rant and rave with advice to homeowners to walk away from mortgages.  He may not be so far off the mark for many homeowners.  If lenders force borrowers to come up with the lost equity, it will spell disaster for the industry.  Keep in mind, the example I used is 80% financing, but we now most mortgages during the last three years were 90-100%. 

Market Conditions – One word . . . dead.  And it is not just Florida.  I am hearing the same thing from California, Nevada, Arizona, Virginia, North Carolina, New Jersey, etc.  Sales are simply not there.  Despite Ara Hovnanian’s rah-rah about traffic, sales have fallen off the cliff.  In fact, in several markets, builders are now seeing negative sales, as cancellations outpace new sales.  When I spoke about this two years ago, folks rolled there eyes.  On one conference call with a dozen financial wizards from one of the world’s Top 10 financial institutions, I was actually openly laughed at and the butt of a few jokes.  That institution is now headline news on a regular basis.  And that would be negative news.

Florida Office and Commercial – Every week I see more Lease signs and more small businesses struggling to survive.  I can’t drive more than a few minutes without seeing a sign twirler promoting everything from mattresses to pizzas, or someone dressed up in a costume, dancing about the edge of the highway to attract traffic to a small business.  We don’t see these things when business is good.  And the pinch to small businesses will be felt all the way up the ladder.  This week analysts pointed a finger at housing as Office Depot hit a new low this week. 

On The Road – I spent a week in Seattle, which is touted to be one of the most secure markets in the country.  Well, it is . . . and it isn’t.  For sales of existing single family homes, it is on top of the world.  And that distinction is due to one reason, and one reason only.  Production builders were not in this market.  There was nowhere to build huge communities.  The Seattle market is primarily an existing home market with a thriving industry catering to renovations of older homes.  But the Seattle market did not escape the condo craze.  It is certainly nowhere near Miami proportions, but I hear the same thing from brokers and flippers that I hear from Miami, Orlando or Vegas.  There are already problems selling and leasing existing condos, without the crunch coming from delivery of all the new stuff going up.  More on this for clients, including some great pictures. 

          On the plus side, Seattle has a robust job market from the technology and biotech industries, as well as a variety of other healthy industries from logging to shipyards.  There will be pain in Seattle, but there will also be opportunities for sharp money to step in for condos, office buildings and commercial space.

Seattle – Condo/Hotel Example – In the fall of 2009, Seattle’s “1” will open its doors with 51 regular condos and 176 condo-hotel rooms.  This project has not opened for sales yet, and just recently the developers revised the mix to add 66 condo-hotel rooms and 47 less regular condos.  What does that tell you?  Investors.  Well, actually, speculators.  Developers are still sitting high on the hog, since Seattle is still showing increases in property values . . . but, they are not looking at things from ground zero.  And they are not considering the number of units under construction and the difficulty selling many of these units. 

          But let’s forget all of that for a moment and take a look at reality for the condo-hotel owners.  One potential buyer interviewed by The Seattle Times expects to pay $600,000 for a condo-hotel room.  The buyer expects to make a huge down payment of $240,000 and get a 30 year loan at 6.88 percent for a $2,366 monthly payment.  But this does not include taxes, insurance and condo fees.  If you’re still with me, you’ll love this.  The buyer estimates he needs to see his room booked 22 days of the month at $300 a night to break even.  Oh, and that’s if Starwood returns 40% of the revenue after Starwood’s cut for management, maintenance, marketing and booking commissions.   The average room rate in downtown Seattle is $173.83 and the current occupancy rate is 73.5%.  Let’s give our buyer the benefit of the doubt, since this will be an upscale hotel, but his math still does not add up.

          One other problem facing “investors” in Seattle’s condo-hotel rooms.  You have competition.  In addition to the hundreds of condo units under construction, there are two high end towers under construction - The Four Seasons and Hyatt.  But if the numbers are not enough to discourage “investors” in condo-hotels, Dante Alexander, the CEO of the National Association of Condo Hotel Owners, downplays the money-making possibilities of owning a condo-hotel room.   Alexander warns, “Buy a condo-hotel because you think you’ll enjoy it.” 

The Numbers – Pending Sales – Down 16.1% YOY and 12.2% from July.  Surprise, Surprise, Surprise.  Not.  And please remember that this number is much worse now that what you see.  If you look at the percentage of Pending Sales that closed a year ago and the number of Pending Sales that close this year, you will see the disconnect.  With mortgages tougher to come by, pending sales are not converting to closings as they were during the free money days.  My advice to those watching Pending Sales, is to look at carefully.

The Numbers – Foreclosures – This week’s numbers point to a deepening crisis.  But the numbers only tell part of the story.  The banks are still doing everything they can to keep these numbers down.  Just this week I heard of one homeowner that has not paid their mortgage for months.  The bank called to offer a work out with across the board assistance and forgiveness of missed payments.  Unfortunately, these folks can’t make any payments . . . and that is the story that is building to a sonic boom.  The banks, the Fed and the financial institutions can only drag it out for so long.  Eventually, somebody loses (BIG).

The Numbers – Jobs - Finally a crack in the jobs numbers.  Not just a crack, but two months of revisions.  As I have discussed here many times, these numbers still fail to reflect what is truly going on at ground zero.  Here are just two reasons why the jobs numbers are misleading:

s1 – The loss of jobs in the construction industry hit the undocumented workers first and hardest.  Over the next few months we will see larger job losses in construction.

2 – Real estate agents, mortgage brokers, real estate attorneys and appraisers are primarily independent agents.  This massive group of workers does not show up in the numbers, even though hundreds of thousands of these folks are out of a job.

Consumer Credit – With the housing ATMs closed, consumers seem to be having some problems paying traditional credit card debt.  Another surprise?  It shouldn’t be.  This week Moody’s announced that late card payments for the first five months of this year surged 30% from a year earlier.  And get this . . . credit cards are now charging up to 33% for those folks behind in payments.  That’s not a misprint . . . 33% interest.  But that’s not the real kicker here.  Since 2000, more than $400 billion in credit card debt was shifted to home equity loans.  With home equity shrinking along with falling prices, and tougher lender restrictions, transferring debt to home equity is no longer an option.  Big deal?  Well it is, since a good chunk of consumer spending over the last few years has been a result of the housing ATMs and moving debt from credit cards to home equity loans . . . freeing up credit cards for more spending.  Yes, that was the fat lady leaving the “consumer spending” stage.

State and Regional Numbers – Clients that want spreadsheets and numbers for state and regional markets should call or email me. 

Florida Woes –The loss of sales tax and transfer fee revenue, as well as impact fees from the hot real estate market has hit Florida hard.  I’ve discussed these problems over the past few months, so no need to rehash them here.  The Wall Street Journal finally picked up on the problems and ran a small piece, but far too little, far too late.  This might be the only hurricane to hit Florida this year, but this one is Category 5.  Local and county governments have been living high on the “housing bubble” hog for the last few years.  Now with 20%+ cuts in revenue, the cuts to services are going to be very painful.

Lehman Lottery Proposal - Here’s the latest giggle from Florida.  Lehman Brothers is trying to convince Florida to lease the Florida Lottery to a private company.  I kid you not.  Critics have already come down hard, pointing out the obvious.  Lehman Brothers will make huge fees and their client will make huge profits.  Why in the world would Florida want to lease out their lottery?  Maybe Lehman saw the “I’m A Sucker” sign hanging on Governor Crist’s back.

Homeowners Insurance – Despite Governor Crist’s threats to control the insurance industry and all of the other homeowner insurance nonsense coming out of his office, Nationwide Insurance is one step closer to leaving the State of Florida.  They just announced dropping another 20% of policies coming up for renewal.  Last month State Farm said it would drop 50,000 policies.  All of these policies get shifted to the Florida’s state run Citizens Insurance.  How would you like to be the business that gets the riskiest customers at the lowest rates?  We all know where this is going . . . except our Governor and our elected officials.  And as if this was not bad enough news for Governor Crist, USAA, Companion Property and Fireman’s Fund all asked for rate increases this week, even though Crist is calling on the industry to drop rates . . . and lose more money.

More Insurance Woes – Florida hospitals are laying off employees at an alarming rate because of the impending cuts in Medicare and Medicaid and the end of no-fault auto insurance in Florida. 

Florida’s Sunny Side – Bioscience has received a great deal of attention in Florida over the last few years.  Scripps, Torrey Pines and Burnham are just three of the new ventures announced.  If Florida’s politicians and local officials can get their hands out of their own pockets, Florida has a chance at a very bright future in biotech.  The competition in North Carolina, South Carolina and Georgia is tough, but Florida now has a strong foundation for building on their early successes.  BioFlorida’s Annual Conference is taking place on October 15-17.  If you are interested in future opportunities to partner with these companies, I would recommend a couple of days at the conference.

          Max Planck Society – Germany’s largest research institution wants to join Florida’s bioscience boom near the Scripps Florida campus.  The catch . . . and there always is one.  They want Florida to finance a $190 million package.  After shelling out piles of cash for Scripps, only to have Scripps back down on many of their promises, you’ve got to question the incentives our politicians are giving away.  But for real estate investors in these markets, this is another shot in the arm. 

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

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

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