It's Different This Time. (really)

If you are not familiar with Mish's blog, I suggest you add it to your favorites. Mish offers up some of the best macro analysis out there with a unique, witty style. In his latest post mish covers our new Federal Reserve Chairman's speech before the Economic Club of New York on March 20, 2006.

Not to bore you with the details but here is Mish's take on helicopter Ben's speech which I found on target and quite funny:

"Paraphrasing Bernanke in 8 points:

The slowdown in housing, even though it contributed 50% of the jobs during this recovery is irrelevant.

There will be no lagging effect due to 15 consecutive rates hikes (counting March).

Unlike Spring of 2000, complacency, merger mania, and stock buybacks no longer matter. Instead they are a sign of strength.

Rising foreclosures and bankruptcies are not really a sign of stress.

The trade deficit is really a sign of a global savings glut. Everyone, everywhere should spend more than they make. We can, so can everyone else. It's the proverbial "free lunch".

Because of the brilliancy of the Fed, the natural interest rate has declined.

The Fed is omnipotent against any and all financial obstacles. There is no problem the Fed can not print its way out of.

The yield curve and the action of the long bond are simply wrong.

Paraphrasing Bernanke in a single sentence:It's different this time!"

Over the last 30 years we have heard this phrase no less than 7 times; 1972, 1976-1980, 1986-1987, 1990, 1994, and 2001. Fast forward to 2005-2006 and once again it is "different this time." As if we as a nation or even as individuals are smarter, or less greedy than the last time. Once again our "leaders" assure us that prevailing conditions are "different", or that they have the expertise or ability to save us all. Hogwash. These are the same people that caused the problems in the first place!

Sometimes People Need Just a Little Motivation..

The Bubble has burst in South Florida. Sellers have crossed the denial stage and are firmly in the fear mode. Imagine dropping the price on your home $76,000 and you still have to throw in other perks to get some interest. As outlined in this sun-sentinel story , local sellers are pulling out all the stops in order to sell their homes.

"How do you lure home buyers in a slowing real estate market? Try a five-day cruise, $2,500 for furniture and even a one-year buyback guarantee as perks to make properties more appealing than the rest flooding South Florida."

"The couple made the necessary repairs and thought they had the house sold in January. But the contract fell through. Interest has been tepid since then as the real estate market softened. After knocking $76,000 off the $975,000 listing price, the Flynns also decided to give the eventual buyer and the broker one year with a personal trainer at the fitness club they own.A trainer for two twice a week is worth about $9,000, said Maria Flynn, a 32-year-old mother of two."

"In a cooling housing market, builders routinely offer cabinet upgrades and other freebies to new-home buyers and bonuses to their agents. And while sellers of existing homes have previously paid buyers' closing costs and broker bonuses to drum up interest, they're taking the incentives game to another level now that South Florida's five-year housing boom has ended."

"February's used-home sales -- the most recent available -- were down by more than 20 percent in Palm Beach, Broward and Miami-Dade counties, and median price increases are leveling off, the Florida Association of Realtors said last week. With the number of listings skyrocketing across the region, sellers simply can't stick for-sale signs in their front yards and expect the homes to attract interest, agents say."

"Although the perks are getting attention, some agents think they are unnecessary, even in a slow market. They say the best incentive to buying is a fair price."

"Wes Spicer, an investor/developer in Delray Beach, was tailgating before a Miami Dolphins game last fall, but he couldn't stop wondering how to attract buyers in a real estate market that already was starting to slow down.He finally decided on a novel approach: a buyback guarantee.If buyers are unhappy for any reason, he'll take back the property within a year at the price they paid, assuming the home is in at least the same condition. The guarantee is written as an addendum to the sales contract."People are looking for the gimmick, but there is no gimmick," Spicer said. "It's very stale right now. I'm trying to offer a spark."Spicer, 35, has yet to sell any of his 25 homes under the program, but he does have two contracts pending."

"Holly Schiller, an investor in Weston, has tried to sell a three-bedroom townhouse under construction near Fort Lauderdale beach for about six months. Schiller first dropped the price by $41,000 to $599,000, then decided about two weeks ago to make it even more interesting.Not only does the selling agent receive a $2,500 bonus on top of the commission, but the buyer gets a $2,500 credit toward furniture at Robb & Stucky in Boca Raton. The buyer also gets a free design consultation and free setup and delivery.Schiller, 51, said she doesn't mind forfeiting more than $5,000 in profit, if it results in a sale."There are a lot of listings right now," she said. "I want my property to stand out from the masses.""

First: DON'T PANIC!

That is advice #1 of the top Do's & Dont's in this Yahoo story titled "On the bubble? Heed these dos and don'ts".

"The real estate bubble: It sounds like something out of a second-rate horror movie. And it's some homeowners' worst nightmare. "

"You buy the biggest home you can afford and use every dime to do it. Now, instead of increasing in value, the worth of your home, sweet home takes a nose dive. The bubble has burst, leaving you in a financial mess."

Here are the TOP TEN THINGS ( hit it Paul) to do now that the bubble has burst:

1. DON'T PANIC- "One of the biggest fears with a bubble is that the homeowner will owe more than the house is actually worth. But that's usually only a factor if you're selling, need to tap your home equity, or have an adjustable-rate mortgage (or some funky option where you're skipping or delaying paying the equity) and interest rates start to rise"

2. STAY PUT-"This could be a good time to trade your current adjustable-rate (or interest-only or a negative-amortization) loan for a fixed-rate version."

3. STAY INFORMED-"
Are long-term interest rates going up?
Are existing houses sitting on the market longer? And how does that trend compare to months and years past?
Is it much cheaper to rent?"

4. ELIMINATE UNCERTAINTY- " If you suspect rates are going to rise and values are going down, and you have an adjustable-rate home equity line of credit or home equity loan, this might be a good time to step up the payments"

5. DON'T BORROW MORE MONEY ( I found this one particularly amusing, isn't that how they got this way in the first place?)- " The temptation often is to tap it now with an equity loan. Bad idea. Depending on the drop, you could end up owing more than the home is actually worth, or close to it (Figure an extra 10 percent for closing and moving cost.) So if you have less than 15 percent equity in your house, you're in the danger zone. "

6. REANALYZE YOUR INVESTMENT PROPERTIES- "It's one thing to hang onto a house because rent will cost you just as much each month and you know that your house will (eventually) appreciate. But if you're talking about an investment property and you see signs of home depreciation in the area, then you may want to take another look at the numbers."

7. DON'T GET CARRIED AWAY WITH UNNECESSARY IMPROVEMENTS-"If you're making improvements, make improvements that will sustain its value," says Retsinas. "Nothing frivolous"

You Have Been Warned.......

It's official. You are on your own. There is no "Greenpan Put." Read this story. Federal Reserve board governor Donald Kohn today declared that the Fed "has no intention of preserving all of the recent gains in home price values."

" If real estate prices begin to erode, homeowners should not expect to see all the gains of recent years preserved by monetary policy actions,' Kohn said in a speech prepared for delivery to a European Central Bank forum in Frankfurt, Germany. In his remarks, Kohn attacked the popular 'Greenspan put' theory that Fed policy would always protect investors from sharp asset market drops while doing nothing to restrain these markets when prices. "This argument strikes me as a misreading of history," Kohn said. "Conventional policy as practiced by the Federal Reserve has not insulated investors from downside risk," he said. "

Mr. Kohn is also "wary" of further rate hikes by the Fed in order to "combat" asset bubbles. Did he say "bubbles?" But there is no bubble....

The bell has officially been rung folks.

Everything But The Kitchen Sink

We've all heard the phrase before and it certainly appears to be fitting the current level of desperation in the local condo market. A news story in the Palm Beach Post details the lengths to which some developments have gone to prop up sales given the sudden shift in the market.

"More on the cool-down in condos: One of downtown West Palm's better-known apartment-to-condo conversions is tapping the brake on sales, if only for the next month or so.
Less than a year into The Strand's conversion, existing renters are being offered 90-day extensions on their leases.
More business news"

"Why allow rentals? A spokesman for Strand's Atlanta-based owner, Primegro Strand, explains it this way: "We are comfortable with our inventory" available for sale, he said."

"Inventory is plentiful: Since the 15-story luxury apartment building at the corner of Evernia Street and Narcissus Avenue was declared a condo in April of last year, approximately 200 of the 275 units remain owned by Primegro Strand, according to Palm Beach County property records."

"Meanwhile, Ken Prosper at Century 21 Richards Realty advertises on Craigslist that the developer behind the condo-conversion of Boynton Beach's St. Andrews apartments is offering to make the first year's mortgage payments for new buyers."

"Buyers also have the option of deducting that first year's worth of payments from the cost of the property, or putting the money toward closing costs. The very few strings attached: The lender must be mortgage giant Countrywide, and buyers have to put 10 percent down."

"All of which helps explain why Craig King's phone started ringing about last June. The president of J.P. King Auction Co. in Gadsden, Ala., has not done much work in South Florida, or with condos, for that matter. The 91-year-old company's bread and butter tends toward lush estates, seven-figure townhouses and the occasional big toy: The firm auctioned off a $5 million yacht in Fort Lauderdale. That was last year. This year, "What we are seeing in the industry now is not just high-end sellers but developers, who are saying, 'Hey, how does this auction thing work?' And now frankly, we are getting calls from your market."

"King said he's had two phone calls in the past two weeks from condo converters whose sales have turned unexpectedly sluggish. Of course, there are still those luxury parcels available: Okeechobee's Sundance Trails Ranch and its dozen or so equestrian home sites go on the block March 18."

Builders Remorse

First it was the buyers backing out. Then came the lenders no longer approving exotic loans. Now, according to this Sun-Sentinel article today, the builders are simply refusing to finish completion of existing homes under contract unless the buyer pays them additional money.
In the case mentioned, we are talking another $150,000!

Yet another example of how this bubble is out of control. When the builders are trying to cancel because they cannot make money, be warned.


"Most everything was in boxes as Dottie and Gary Sahadeo prepared to move out of their Coconut Creek home to a more spacious, custom-built house west of Boynton Beach.But with construction almost complete, the Sahadeos received an unwelcome call: Their developer was canceling their contract, requesting $150,000 more to finish the work."

"Instead, the Sahadeos are locked in a legal battle to force completion of the five-bedroom house, which was under contract for $590,000 in 2003 but could sell for around $1 million today. Their case illustrates an emerging problem between developers and homebuyers now landing in court to settle contract disputes."

"From the home buyers' viewpoint, developers have been breaking contracts to sell the home at a higher market value. Some developers, though, cite the rising cost of building materials as having forced them to back out. Speculative buyers in the condominium market likewise have been pulling out as interest rates and other costs rise, making their investments less profitable.Experts expect the trend to continue despite the recent slowdown in the real estate market."

""There is a phenomenon going on in South Florida with the skyrocketing in real estate," said Robert Pasin, the Sahadeo's attorney, of Coral Springs. "The time span to build could be two years, and in that span the price goes up. ... In any circumstance, you have a contract and you think you have a deal.""

"Pat and Martin Lenzer have a similar case against Boynton Waters, where they already live. In July 2003, the Lenzers signed a contract for a $736,000 house a few lots down from the their current home.Two years later, they got a call from the developer. Contract canceled"

"Miami attorney Richard Wolfe said his firm, Wolfe and Goldstein, has about 15 contract cancellation cases pending in Miami-Dade, Broward and Palm Beach counties. And it's getting "more cases every day," he said."

"In the next couple of years, McCabe, the real estate analyst, anticipates a "tremendous amount of litigation" -- speculators suing brokers and lenders, developers suing speculators to get them to close and homebuyers suing developers. "It's been a rose garden the last four to five years," he said. "Everyone's been happy because everyone's making money.""

"NO MORE POLICIES"

Home owners in South Florida have been through alot over the past few two years. Along with the meteoric rise in values came fourteen hurricanes and the damage that came with them, not to mention the almost doubling of taxes and insurance costs.

Not totally unaware of the fourteen hurricanes are the insurance companies that cover our homes against damage. They have amassed substantial losses and it has come to the point that many are simply calling it quits- miami herald story .

For those of you that are not familiar with the situation in South Florida, since 1992 and Hurricane Andrew, ( which wiped out multiple insurance companies and), if you wanted to insure a home and were not already covered you most lkely had one choice- the state run pool. This was the sole insurer writing new polices for years. Over the years the state run pool sold off some policies to private companies and some private insurers started to write new policies but for the most part it was the state assuming all of the risk.


Fast forward to 2004-2005. Florida suffers numuerous category 3,4, & 5 hurricanes causing billions in damage and millions in losses for the insurance companies that cover the homes hit by these storms. Now the 2nd largest insurer in Florida has thrown in the towel.

"Losses from the 2004 and 2005 hurricanes have depleted the financial resources for Poe Financial Group, the second-largest insurer in South Florida. Its companies will not be writing new policies in the state."

"Poe's exit leaves consumers few options, said Alex Soto, president of InSource, a Dadeland insurance agency. Insurers' unwillingness to take on new policies in the state will force yet more homeowners into Citizens Property Insurance, the state-run pool of last resort that is already South Florida's largest insurer."

"Poe Financial said the move was necessary because it is facing more than $2 billion in losses and more than 125,000 claims from the 2004 and 2005 hurricane seasons."

"Two of Poe's units, Atlantic Preferred and Florida Preferred, don't plan to cancel existing policies. Poe, based in Tampa, also said both companies will continue paying claims."

It gets worse, "A third company, called Southern Family, will cancel homeowners and business policies as they come up for renewal. This is bad news for condo associations -- Southern Family was just one of three companies writing association policies since the 2004 storms. Those policies typically cover building structures."

"Without these three companies providing coverage, it's likely many South Floridians will end up finding coverage only from Citizens, which is required to charge the highest rates in the state."

"Bob Poe Jr., the parent company's vice chairman and president of Southern Family, told The Palm Beach Post that the hurricane losses put the companies below the state's minimum capital requirements."

People have had their insurance premiums almost double over the past three years. Now some may find that they have no choice but to be covered by an underfunded state run pool at the highest rates allowed, which will again increase their premiums. Imagine being a new buyer, with an I/O loan about to reset, paying double the taxes and now a huge increase to insure the property. Reality is about to set in and set in hard for alot of home owners.

I Hate to Burst Your Bubble

Another great article concerning the current housing bubble on safehaven.com "According to Leonhardt, homeowners ought not to be as concerned about a potential 2006- 2007 housing bust as real estate agents should. But this is partial-equilibrium thinking on the part of Leonhardt. As many of you know by now, Asha Bangalore, my colleague, has documented that about 40% of the feeble job growth in this current recovery/expansion has been housing related.

"But if we do have a housing bust - and we likely will if Bernanke does not soon declare a ceasefire - then a lot more than a rounding error of workers could be lining up for unemployment insurance. The cutback in spending by these unemployed would have a, excuse the Keynesian expression, multiplier effect on total spending in the economy - adding some homeowners not associated with the residential real estate industry to the length of the unemployment lines."


"Today housing is indirectly playing a much larger role in funding expenditures on consumer goods and services than it did in the late 1980s. As shown in Chart 1, in the third quarter of last year, households extracted equity at an annual rate of $633 billion, representing 7.0% of their after-tax income, from their houses. In 1989, home-equity extraction totaled only $82 billion, or 2.0% of after-tax income"



"In recent years, increases in household net worth have been significantly boosted by the appreciation in residential real estate values. For example, in the first three quarters of 2005, the appreciation in the value of residential real estate accounted for 58% of the increase in household net worth."



"Housing today is more highly leveraged than it was in 1989, just before the last bicoastal housing bust occurred. As shown in chart 3, today the housing leverage ratio is about 43%. In 1989, the leverage was about 35%. So what?


"So, as shown in Chart 4, between 40% and 50% of new mortgage debt applied for in the past two years has had an adjustable-rate element to it. Back in 1990, only about 10% of new mortgage debt was of an adjustable rate nature. A lot of these adjustable-rate borrowers in the past two years are in the "sub-prime" category or are speculators. In either case, they probably have little equity in their homes. It has been estimated approximately $600 billion of sub-prime adjustable rate mortgages will reprice over the next two years. Chances are they will reprice at higher interest rates, not lower ones. Chances are mortgage defaults will be on the rise with these repricings. This will put "repos" on the market, which will depress home prices. Speculators, with negative cash flows and slower or no appreciation in their investment properties, also will add to the glut of homes for sale. "


"Again, so what if mortgage defaults are on the rise? No biggie except that, as shown in Chart 5, U.S. commercial banks have a record exposure to the mortgage market. About 62% of bank earning assets are mortgage-related.'

"What I'm driving at here is the potential for a bust in housing to cripple the banking system. History tells us that a crippled banking system renders central banks less potent in combating economic downturns and promoting robust recoveries. In other words, if a housing bust led to large credit losses to the banking system, Chairman Bernanke could cut the fed funds rate to 1% and be surprised that a low interest rate did not have the same magic for him as it had for his predecessor."

As I have to outline in prior posts, the majority of the 'recovery' since the stock market crash in 2000 has been a massive infusion of money into the system by the Federal Reserve, which has simply transferred the bubble from equities to real estate. The entire financial system- banking, Wall Street, NAR, the GSE's, the government, are all responsible for creating this monster. They are now wondering how to push up a rope so to speak, trying to stop the unstoppable forces of economics. It simply won't work. As in prior monetary and business cycles, it is going to 'play itself out.' I would encourage everyone to study the last major real estate decline in the late 1980's- early 1990's as a reference for what lies ahead.

Breaking The "Cult' Feeling of Ownership

A story in today's Financial Times reads "John, a chiropractor in Los Altos, California, has just committed the financial equivalent of heresy. To the surprise of many of his friends, he has defied the cult of home ownership, selling his historic five-bedroom house in favour of renting. ""We pay about 40 per cent less in rent than our mortgage and don't have to spend a cent on repairs.""

"John's decision may fly in the face of conventional wisdom but in many US property hotspots the financial logic of renting is becoming increasingly compelling. For those unlucky enough to have missed the stunning appreciation of house prices over the past few years, the rationale to buy now is shaky at best. "

An exhaustive survey of the US housing market by HSBC - "A froth-finding mission" - has highlighted the appeal of renting in many parts of the US.

"It's fairly common to say that renting is like throwing money down the drain, but people forget that there is a lot of that in owning too," says Ian Morris, an economist at HSBC. "There is not a lot of difference between paying rent to a landlord or interest to a bank." Even taking account of the generous tax subsidy that allows Americans to deduct their mortgage interest payments from taxable earnings, new homeowners are paying an increasingly hefty premium over renters. The annual cost of home ownership in Los Angeles, for example, is now more than double the cost of renting. "

"HSBC's research shows that even removing capital repayments from mortgages, new homeowners in many areas will still be left paying a large premium. In San Francisco or Honolulu, annual ownership costs are 68 and 73 per cent greater even on an interest-only mortgage - a riskier mode of borrowing that has become popular in richly valued property markets. To make property ownership in many of these markets worthwhile, owners would need to see extremely strong house price rises over the next seven years. "

"To make property ownership in many of these markets worthwhile, owners would need to see extremely strong house price rises over the next seven years. Taking into account the added risks of home ownership, HSBC has calculated that prices would need to rise by 10 per cent a year in Palm Bay Florida, 8.5 per cent in Washington DC and 8.2 per cent in Denver - far more than the 20-year averages.The chance of falling real home prices is less outlandish than most assume. Those buying a house in Washington DC in 1989, when prices started to slide in real terms, would have had to wait until 2001 to see a capital gain. "

"There is even a chance that such calculations are slightly skewed in favour of home ownership. These figures assume that home owners are deducting mortgage interest payments from their taxes and that they pay a marginal rate of 30 per cent. However, only a third of Americans itemise their tax deductions and thus fail to take advantage of the tax break. In addition, many living in California or New York are caught by the Alternative Minimum Tax - a parallel tax system for high earners. This tax system eats into the tax deduction for housing, further chipping away at the benefits of home ownership."

"The benefits of home ownership do eventually reassert themselves if you hold on to houses for long enough, even in the most highly priced markets, says Mr Morris. Assuming house prices remain steady, you would need to hold a house in LA for 11 years before the costs equalled those of renting. In Washington DC it would take 12 years to break even."

"The number of Americans coming to a similar conclusion has been on the rise. According to the confidence survey from the University of Michigan, close to 30 per cent of Americans now think it is a bad time to buy - higher than at any point since the early 1980s. Even so, housing experts say the temptations of home ownership will remain irresistible. "Home ownership remains a potent symbol of success in America," says Nic Retsinas, director of the Joint Center for Housing Studies at Harvard University. "Renters tend to have lower social status in the eyes of many Americans."

"In the US, the cult of ownership is such that John's gamble of selling his house and waiting for prices to fall is unlikely to become a popular punt. But it may pay off. "

Ding.... Ding.. Ding... the bell has been rung folks. Watch the rush towards the exits over the next few months accelerate as sellers realize the top of the market is behind them.

You've Got Mail!

Here are the 5 most emailed news stories in today's Sun-Sentinel. (last 24 hours)
1.The boom is gone: Home sales fall 36% in Broward
2.Study warns 'American dream is fading' in Broward as affordable housing disappears
3.New paint slaps a coat of silence on cell phone calls
4.The boom is gone as home sales drop 39% in Palm Beach County
5.Sellers be patient; buyer's market returnsSee the complete list ...

The daily drumbeating continues.....

NEAR BREAK-EVEN CASHFLOW WITH 10% DOWN!!!

Definition of insanity-buy this place because you will lose money. I came across this wonderful investment opportunity with the headline of "near break-even cashflow with 10% down" on craiglist. This self proclaimed real estate "investor" and agent wants you to flush your money down the toilet along with him. No one can be this insane to actually believe this poor sales pitch.

P.T. Barnum is alive and well living in sunny South Florida.


" I would like to make you aware of a fantastic investment opportunity in Boca Raton. In fact, I will be picking up a unit for myself as an investment property because the numbers work. Units are only available through brokers at this time. Sales will open to the public around March 25 at a higher price."

"The 2 bedroom Tower units have a total negative cash-flow of only $183.15 per month. I based these calculations on very conservative numbers. For example, property taxes in Boca Raton are 1.75%-2.0%. I used 2 percent. I also used the average price of a unit and not the cheapest. I based this on a rental rate of $1,600, for the Tower units, which is very conservative based on what I have seen for comps in the area. The 1 bedroom units will have a negative cash-flow of $321.23. The 2 bedroom Villa units will have a negative cash-flow of $285.67. I, myself, will be getting a 2 bedroom Villa unit even though the negative cash-flow is slightly higher. I prefer the Villas over the Tower units because the building is newer and because of the lake view. Time is a concern because of the sales center opening about 3 weeks from now and prices going up. If you have an interest in acquiring one of these units please contact me immediately. Also, I have more pictures of the property and rental comps that I can email to you. "

Here are some pictures of this fantastic time-sensitive opportunity.

Notice the lovely 35 year old cabinets. This place has all of the flipper signs- Stainless steel fridge, appliances, fresh paint.

















Here is the living/dining room. Thrilling isn't it?
Better keep those verticals open or you won't be
able to see in there. Looks like an apartment..
Oh wait, it is.







Here we have a view of the...er.. parking lot. No garage. Looks like just another apartment complex to me.. oh wait, it is.

But don't forget the negative cash flow.






I have NO clue where this person gets a $1600 monthly rent for a 2 bedroom in Boca Raton. Look in the paper and there are rentals from $1100 to $1500 all day long for much nicer places. There are HOUSES that can be rented for $1600 a month. We are talking about 35 year old condos.

I have owned and rented real estate. I have NEVER had a negative cash flow on rentals. That is simply nuts. The fact that this person is going to do it himself speaks volumes. Prices are dropping like rocks for condos in Palm Beach and he wants you to buy a condo conversion knowing it is a loser from day one.

For those of you that do purchase one of these, I have some beanie babies, a few cabbage patch dolls, a couple of boxes of baseball cards, and a pet rock I will sell you real cheap. But hurry as the prices go up March 25.

Oh, I forgot to add.. here is the information from State of Florida License Information on the "investor"/agent.

Licensee Details
Licensee Information

Name:
LECHUGA, LUCAS THADEO PA (Primary Name)

License Type:
Real Estate Broker or Sales

Rank:
Sales Associate

License Number:
SL3127881

Status:
Current,Active

Licensure Date:
06/27/2005

Expires:
03/31/2007

Special Qualifications
Qualification Effective

Professional Association
10/19/2005

Nice to know he has been a seasoned "investor"/agent since October 2005, right at the top of the bubble.

SOUND OFF!!!

I want to hear your comments concerning the current 'bubble' in South Florida. Does one exist? Are prices going to stabilize? Will we have a "soft landing", or a "crash'?

Feel free to post your observations and stories.

Also, take a second and participate in the poll to the right.


Thanks!