Vacancy Abounds

Despite the NAR and Real Estate cheerleaders out in force declaring the housing market has bottomed, Bloomberg reported vacancies are at generational highs.

"More than 18.7 million homes stood empty in the U.S. during the second quarter as the steepest recession in 50 years sapped demand for real estate and banks seized properties from delinquent borrowers.The number of vacant properties, including foreclosures, residences for sale and vacation homes, was little changed from 18.6 million a year earlier, the U.S. Census Bureau said in a report today. The quarterly homeownership rate was 67.3 percent, seasonally adjusted.More than 14 percent of homes were vacant in the period, the Census said."

"Home values dropped 33 percent since 2006, according to the S&P/Case-Shiller index, and the unemployment rate in June rose to the highest in almost 26 years. Tumbling home prices and rising job losses have thwarted government efforts to reverse the housing decline at the heart of the longest U.S. recession since the 1930s.There were 130.8 million homes in the U.S. in the second quarter, the Census Bureau said. In addition to the 1.9 million empty properties for sale, the report counted 4.4 million vacant homes for rent and 4.6 million seasonal properties that are only used for part of the year."

I've been telling people that there will come a time when people simply decide to walk away from their houses, and it's happening in force now. Banks don't want them back and lenders refuse to foreclose. There is a massive "shadow inventory" of these vacant or foreclosed homes that have yet to hit the market.

If you are still thinking of buying a house, make you know the risks involved and conduct the proper due diligence. The landscape is littered with knife catchers who thought they were buying the bottom for the last year.

Why Throw Good Money After Bad?

That is the question of the day, as many underwater home owners are deciding to walk away rather than continue to pay their mortgages.

Case in point, Richard ''Rick'' Rochon's Boca Raton estate is scheduled to go on the auction block next month after failing to sell for $21.9 million. A lender started foreclosure proceedings in December on the 25,000-square-foot estate in Boca Raton's Royal Palm Yacht & Country Club community. The mansion features six bedrooms, seven bathrooms and three half-baths.

In an interview with The Miami Herald in April, Rochon conceded he stopped paying on the mortgage loan because the house is worth less than the loan. The lender claims it's owed about $12.5 million. Rochon insisted the foreclosure action was not a sign of personal financial problems.

''My position is, you know what, why throw good money after bad?'' he said. ''I'm treating this as an investment. This is not my house.''

Miami Proves Again It's a Banana Republic

A Miami-Dade Circuit Court judge discovered more than 15,000 foreclosure cases filed this year haven’t been served.

You read that right- 15,000.

The reason this is so alarming (other than the obvious) is that cases where homeowners haven’t been served within four months are subject to dismissal.

Civil Division Administrative Judge Jennifer D. Bailey made the discovery last month as she was taking stock of the circuit’s foreclosure load. She noticed 15,219 cases with no letters of correspondence, no answers and no motions to dismiss. “In other words, no service,” she said.

The circuit is scrambling to find the root of the problem, which could jeopardize most of this year’s 17,000 foreclosure filings. Most of the cases still fall within the four-month window, but no program is in place to speed things up. If a foreclosure proceeds to a default judgment with no service on the defendants, it could lead to a title dispute down the road.

For now, the Court is in full panic mode. "Let’s assume a third of these are subject to dismissal. In my spare time, I’ve got to figure out ways to generate orders in 5,000 cases and pay for 5,000 stamps and serve everyone,” Bailey said. “Are we going to do that? Yes. Am I trying to figure it out? Yes.” “It all starts with service. If people don’t get served, all we’re doing is buying ourselves a bunch of title cases in six years,” the judge said.

The system is beginning to break down under the sheer case load and cutbacks due to the economy and loss of revenue.

A Picture is Worth a Thousand Words.........

Any questions?

Baghdad Bob Makes a Comeback

Back in 2006, I suggested to a fellow blogger that the then Chief Economist of the NAR was akin to "Baghdad Bob", would say anything to perpetuate the real estate bubble regardless of the facts. We both made some posts on our blog about the similarity, and the name caught like wildfire. We know know by his own admission, that David Lereah didn't believe what he was telling the public. But he was paid by the NAR and he had to talk their book to the public. In essence, he was a company shill. A charlatan. For those of you that might not know Mr. Lereah, he authored the following two books.



This book on the left written in February 2005, right before the bubble burst. The one on the right (hard to tell the difference, isn't it?) was written in February 2006. Right at the top of the bubble. Lereah was famous for calling us non believers as "Chicken Littles".



One his more famous quotes was, "With sales stabilizing, we should go back to positive price growth early next year" —Lereah, NAR August 2006 existing home sales press release, September 25, 2006 .

Not to be outdone by his predecessor, current National Association of Realtors Chief Economist Lawrence Yun addressed his fellow Realtors in Coral Gables at the 2009 Real Estate Congress last week. Much like Lereah, Yun's predictions have been also completely wrong. Yet that doesn't seem to deter him from telling the faithful followers of the NAR what they want to hear. Good times are ahead! Yun, who never saw a housing market he didn't like, made the following observations.

On the current residential housing market, Yun continues to dispense with the Kool-Aid: “It looks like we’re now in a recovery process, particularly in boom-and-bust markets.” Sound familiar to Lereah in 2006?

How he can come up with that conclusion given the following statement he made at the same conference is any one's guess: “Unfortunately, foreclosures will continue to increase.”

Asked about his predictions of the past, Yun replied:“I didn’t think there could be a housing bubble. In hindsight, I was clearly wrong.”

So, Mr. Yun, you admit to not seeing the housing bubble despite the obvious warning signs, despite a number of other highly respected economists, bloggers, and media personalities warning about it? But now we should believe you because?

When a man has been dead wrong as much as Yun has been yet continues to talk the same nonsense, he earns the name "Baghdad Bob".

Congratulations Mr. Yun, you've earned it!

Build it and they will come.......

Used to be the mantra during the housing bubble. Thousands of unsold, unoccupied and often unneeded condos were built or proposed to be built. I remember seeing a report that there were some 50,000 condos either under construction or planned. That is about the same amount built over the past decade. Frequent visitors to Miami have witnessed the skyline littered with cranes and scaffolds. If you take a drive up A1A at night, you will see the thousands of empty, dark condos and unfinished projects.

What will happen to all of these?


An indication might be this example.

"A year after taking over a struggling condo project from Boca Developers, mezzanine lender Momentis Property Group is walking away from The Oaks I at Biscayne Landing in North Miami. Momentis, which seized the 373-unit property from Boca Developers in July after the developer defaulted on a construction loan, has agreed to hand the project over to iStar Financial, the senior lender."

According to the developers, the project had become “uneconomical” for it to own, meaning they can't turn a profit. iStar, acquired Fremont Investment & Loan in 2007, which loaned $123 million to Boca Developers in October 2005. Madeleine then lent an additional $275 million to cover Phase 1 of Biscayne Landing and other projects.

The Oaks is the first phase of Biscayne Landing. It was approved at the peak of the housing bubble in 2007. The developer planned 6,000 residential units, 180,000 square feet of office space, a 200-room hotel, 300,000 square feet of retail space and an Olympic training facility. In reality, Boca Developers built two towers with 373 condos.

Now, with the project a bust, iStar will take back 160 unsold condos at The Oaks. It will has to begin construction on the pool and other amenities promised in 2007, but they face the challenge of having to negotiate with the city and Boca Developers to acquire more space for those facilities. Plus, they are are responsible for paying down the construction loan and paying the condo assessments, taxes and insurance on the unsold units.

Building like these are common in Miami and other major metropolitan areas. They are a testament to the absurdity of the speculation that ran rampant during the last decade.These nightmares are now half empty, and will add to the foreclosure problem. The values have dropped more than 50%, and a high percentage of buyers never closed.

Much like the Tech bubble of 2000, the 'build it and they will come' scenario never came to be.

Leading by Example

Treasury Secretary Timothy Geithner bought this house on the left in 2004 for just over $1.6 million dollars. Now that he's living in D.C., he put the house up for sale. Bad timing Mr. Secretary. After reducing the price on his house to less than he paid for it, Geithner still couldn't find the next greater fool to buy it. Originally listed at $1.635 million in February of 2009, Geithner dropped the price to a mere $1.575 million. Unable to sell the house- even at a loss- the Secretary of the Treasury is reported to have rented out the house, for $7,500 a month.


But it gets better. Mr. Geithner has two mortgages on the property, totalling $1.25 million, plus a $27,000 annual property tax bill, plus home owner's insurance. I highly suspect he is cash flow negative.


Now I would have hoped that the person in charge of the Treasury, and a key figure in solving the housing crisis, would not become part of the problem himself. Unable to sell with two mortgages, cash flow negative, and an absentee landlord. What's going to happen when he owes more on the mortgages than it's worth?


Did I forget to mention Zillow.com estimates the house is worth $1.366 million and AOL Real Estate values it at ............$1.185 million?


Can he apply for a bailout?

Broken Arms

Adjustable-rate mortgages, or ARMs, the vehicle of choice during the housing boom, are now turning into a nightmare for those home owners that took them. ARMs have dominated mortgage delinquencies and home foreclosures. Nationally, 48 percent of subprime ARM loans were at least one payment past due in the MBA's latest report. In Florida, the subprime ARM delinquency rate was more than 60 percent. And, in the second quarter of 2008, Florida and California accounted for 58 percent of the nation's prime ARM foreclosure starts.


With home values dropping anywhere from 20 to 50%, returning values back to 2003 prices, most South Floridians with option ARMs are unable to refinance because their loan is upside-down, meaning they owe more than the house is worth.



Adding to the problem were all of the toxic ARMs that were developled during the bubble, to put people in houses they couldn't afford, and to pay higher commissions to the salesmen pushing them. Often called ''liar's loans'', these were often given to the borower without any income verfication (anyone remember Casey Serin?) , interest-only loans that often balloon when adjusting and ''option'' ARMs in which the homeowner initially may choose from a variety of payments, including one incredibly insane option that doesn't even cover the monthly interest amount, adding to the principal of the loan (so-called negative amortization).



Adding to the problem, rates are rising. Despite Bernanke and the Obama administration printing up hundreds of billions of dollars, and buying up hundreds of billions in Treasuries and MBS's, yields are higher than at the beginning of the year. The average rate for a 30-year loan jumped from 4.82 percent a week ago to 5,45 percent by the end of the week. Every 100bp increase means the borrower has about 10% less buying power, based on payment.



It doesn't really matter where rates are if you are in a negative equity situation, or if you lost your job. How many people have or want to write a check for $50,000 to refinance a house? Most people are stuck in these loans, and have to make the decision to either keep paying or walk way. As evidenced by the massive increase in foreclosures, it appears people are choosing the latter.


To get an idea of how large this problem is, for the next two years we are going to see about 50 billion dollars a month in resets or recasts. That is a ridiculous amount. If we are running at 40 to 60% delinquency rates now, what is going to happen when this next wave of inventory floods the market, depressing prices further?

I've Fallen and I Can't Catch Up

I commented yesterday that one in eight home borrowers in the US are behind on their mortgage payment. It's far worse in Florida, as about one in four borrowers was late on their mortgage or in foreclosure in the first three months of the year.

Remember when I told you to go outside and count the number of houses on your block? SURPRISE! Double the number of your neighbors from last night that are either delinquent or in foreclosure. If you have 20 houses on your street and they have a mortgage, 5 of your neighbors are in trouble. Which means you are in trouble.


An additional 99,000 Florida borrowers went into foreclosure in the first three months of the year, bringing the total number of home loans in some stage of the foreclosure process to 374,134. With 11 percent of its home loans in foreclosure, Florida ranked first in the country for defaults and was the only state in double digits. The rate was up roughly 2 percent from the previous quarter. To put it in perspective, the national rate was 3.85 percent, up about half a percent from the previous quarter, a record high. Almost half of all sub prime ARMs are past due or in foreclosure. In Florida, New Jersey and New York the number is above 55 percent.


At the end of March, about 71 percent of owners who bought in Miami-Dade and Broward counties in the past five years were underwater, according to Zillow.com. Just like I said yesterday, we are back to 2003 prices, on our way back to 1999 prices

Notice you have not heard a peep this year from either the FAR or NAR about the "Spring Buying Season", because we haven't had one. With the Summer here, potential families moving have already done so, if they could have.


Take a walk around your neighborhood this weekend. Go to Zillow or South Florida Block Shopper and look up the home sales for the past few years. When the prices were going up 20% a year, no one cared about affordability and how these people could afford the homes or how they financed them. We now know up to 75% were ARMs or other toxic loans.

And what about these government programs that threw hundreds of billions at this? Studies show between 65% and 75% of modified sub prime loans will fall delinquent by 60 days or more within 12 months of having been modified to keep the borrowers in their homes. Even loans whose principal was reduced by as much as 20% were still redefaulting in a range of 30% to 40% after 12 months.

This is not complicated folks. Houses are still too pricey. Those people that bought houses and either tried to flip them and got caught or simply couldn't afford them when they bought them, are not going to continue to pay regardless of any modification if they are 20,30, 0r 50% underwater! How difficult is this to understand?

Until we return to 1999 prices ( perhaps 1994 if this keeps up), purge the system of excess inventory, and sound lending practices, I do not see any "bottom" in sight. For those of you that like to see things in pictures, this chart by Robert Shiller is one of my favorites.