Wednesday, September 26, 2007

South Florida Fire Sale....

First, I know it's been a while since my last post. The reason? I grew tired of being the only sane person in South Florida telling people that the housing market was a time bomb, and that the resulting explosion would be long, hard, ugly, and very painful.

For those of you not native or residing in South Florida, it is ground zero for the national Housing Bubble. Almost every aspect of the economy is somehow tied to it. There are more Realtors, mortgage brokers, appraisers, bankers, lenders, construction, roofing, inspection, lawyers, and other real estate dependent jobs than just about anything except doctors or stockbrokers. ( Which could fill an entire blog of its own with horror stories.) For more than two years, I have been reporting of the insanity that took place here and how crazy prices and people had become here. Yet, no one listened. People laughed. They ridiculed people like myself, and other Floridians like Mike Morgan and a fellow over in Tampa that started a similar blog in 2006. Now, some two years later, the laughter has been replaced with reports of decade low housing starts, record foreclosures, three year inventories, the first national price declines since the Great Depression, and on and on. I watched while out of state retirees bought houses sight unseen with their life savings as an investment, where teachers, firefighters, nurses, policeman, and other good people have been forced to move out of the area because house prices were artificially driven sky high by flippers and speculators, where entire neighborhoods are ruined by half empty houses and uncut lawns and squatters, where corrupt individuals and government officials profited off of scamming poor people into bad loans and over appraised houses, and how people that can't scrape two dimes together bought millions in real estate, only to have their properties go to foreclosure.

So, after months of this lunacy, I have a few months to catch up. Please indulge me for a few moments as I comment.

The current state of affairs in the Real Estate market is no less than abysmal, and make no bones about it, going to get worse. WHY?

Simple, really. There is too much supply and too little demand. There are no more greater fools left. Builders are dumping their existing inventory at fire sale prices, trying to mitigate their losses to stay alive. FB's that either were to foolish or greedy and are now upside down are walking away from their houses in record numbers. Over 160 lenders have gone belly up in less than a year. The Federal Reserve, after causing the stock market bubble of 2000, and the housing bubble of 2002-2005, has set in place the mother of all time bombs in another attempt to bail out their Wall Street buddies. The recent 50 basis point cut in rates will do nothing to save the housing market. In fact, mortgage rates are higher now than before the cut. What the Fed did was to ignite an inflation spiral. The dollar has sunk to record lows against most major currencies, ( I mean the flippin Canadian dollar is higher than the US dollar-the first time in 30 years!)and has dumped billions more into the system to bail out the likes of Morgan Stanley, Countrywide, Goldman Sachs, and to get the US taxpayer to be on the hook for the billions in shady loans these people sold and made millions on. This also has triggered gold, silver, oil, and a number of commodities to record high prices. Like I said, we are looking at an upcoming period of hyper inflation.

Back to the main point folks, and it's very easy to understand. There is no more funny money to be loaned. Gone are the neg ams, the 2/28's. the 3/27's, the no docs, the Alt-A's, gone are LIAR LOANS. Gone are the flippers, the speculators, the 2nd,3rd, or 4th investment property buyers. We are back to the days of 20% down and full doc loans.

Want to see where we are heading?

Take a look at this graph from the NY Times:

It doesn't take a Harvard graduate to figure it out. You don't go up over 100% in price and only go down 15% and then proclaim we have "hit bottom." Remember your statistics class? Reversion to the mean? Folks, if this bubble were a baseball game we just finished signing the national anthem. We have nine, long innings of pain ahead. No, make that a double header. It is inconceivable not to believe that a 5-7 year run up where prices have gone up to record levels will not take an equal amount of time and decline in prices to complete the cycle. Furthermore, just like prices overshot to excess on the upside, they most likely will overshoot to the downside before eventually bottoming out. When will that happen? Ah , yes, that is the $64,000 question. The fact is, no one really knows, but my guess is somewhere around 2009-2010 when prices go back to around 1999-2000 prices. About 2-3 x median income. Back to 120 x rent.

Ok, so that is pure theory, right? Well, ever hear of the futures market? Only a few trillion dollars. Now, earlier this week, the Chicago Mercantile Exchange (CME) extended the futures market on the S&P Case-Shiller Home Prices Indexes from one to five years. Now, futures investors can make bets on where home prices will be as far out as 2011. Anyone want to take a guess where the futures are placing millions of dollars as to the direction of housing prices for 10 major metropolitan cities? ( No peeking now...)

Ok, you looked already. This is not pretty. Miami is looking at another 8% loss next year, and a 25% haircut in the next 4 years. In my opinion, that is being kind. Factoring in the new hyper inflation of at least 3-5% per year, condo owners, hotel conversions, half occupied developments, and over supply will shave some 50% in inflation adjusted prices off some neighborhoods. Yes, I said 50%. You heard it hear first.

Don't believe me? Take a drive to Miami and see all of the unfinished condos. Travel to West Palm Beach and marvel at the numerous abandoned condo projects. Think these builders like Lennar, WCI, Toll, Centex, etc. are going to stop building and adding to the already bloated supply of inventory? Not a chance. They are like sharks that either swim or die- they either keep building or go bankrupt.

Finally, I present you with the last chart courtesy of
Robert Lacoursiere, an analyst with Bank of America, outlining the oncoming onslaught of ARM resets. Remember those good ole 1% teaser ARM's of 2004-2006? They are due to reset over the next year or so at significantly HIGHER rates. Over the next year, there is at least 30 billion dollars a month in resets, the vast majority in subprime loans. Some estimates are that about half of these subprime homeowners will lose their homes to foreclosure. Most of these ARM's are tied to LIBOR, which is much higher than the prime. One report I read a few weeks back told of some 15% delinquency rates on current subprime loans at one major lender.

So there you have it people. The party is over and the punch bowl has been taken away. We are left with the hangover and the cleanup that always follows an excessive binge. As I predicted, house prices have fallen and will continue to fall for some time. If you own a house and need to sell, price it aggressively. If you are thinking of buying, please be careful and do your own research. Unless you find an incredible bargain, and I mean incredible, you might consider waiting and renting for a while. Use the rent vs. buy calculator on this site. Visit the links I have and research, research, research. A house is the biggest purchase of your life in most cases. You cannot afford to screw up. In my opinion we are far, very far, away from a bottom. Put the numbers on paper and see if it makes sense for you. In the meantime, take care and I will try to post more frequently.

As always, nothing on this blog is to be construed as financial, legal, or any other kind of professional advice. You are all adults and need to base your decisions on your own. Consult your own attorney, accountant, financial advisor, priest, rabbi, or spouse before making any major purchase- especially your spouse!


At 11:31 AM, Anonymous Anonymous said...

I'm a real estate broker in Miami, I had all of my clients out of the Tri county area since 2004. You are sooooo right. Nobody is referring to rents are and will go down, due to over supply.

William C

At 9:00 AM, Anonymous 140 dollars per sq foot said...

Nice article, I like the futures and arm charts, I will probably plagiarize them for my comments on SS forums. LOL
I saw your comment on the sofl housing bubble blog which led me here.

At 8:43 PM, Anonymous Anonymous said...

So what effect will the playing out of housing debacle have on South Florida banks which didn't make subprime loans? I'm thinking the commercial real estate market is going to get hit along the way, and even banks without subrime exposure will feel a lot of pain.

I see from your profile that you are in banking, so I am wondering what your opinion is on this.

Thanks in advance.

At 1:23 PM, Blogger BigDaddy63 said...

If you have noticed, the largest banks in South Florida- SunTrust, WM, Chase, Citi, have all warned of substantial losses due to non performing loans. No banks will be immune to the massive write downs and foreclosures.

Commercial Real Estate has run about a year behind in the cycle. It usually lags the residential side. We are starting to see the commercial side roll over as the supply is at record levels.

Back to the banking side, a few local banks such as BankAtlantic and Coast Bank have announced large real estate losses. My concern is that the mountain of ARM resets has not yet begun. You need to be careful of any bank with an excess concentration of Florida exposure on the books.

We have only felt the first shock of the subprime mess. There will be a second, and third before it bottoms out.

At 8:46 PM, Anonymous barb in nc said...

We have had an explosion of new development, and double/triple home prices in the last 4 years. Western NC is Ground Zero for halfbacks(sell home in NE,buy 1 in NC and 1 in FL), and now they are bemoaning because they can't sell their Fl. overpriced condo. These crazies started this bubble in the south, by bidding them up or paying whatever, sight unseen. I am not kidding. No, absolutely NO, we should not bail these people out, because they will go out and commit folly again.

So now, the home prices are starting to come back down in this region of NC. Of course this makes the halfbacks furious also. Did they really think home prices would continually go up and up? Yes, because some real-estate agent told them so. People need to take a course in common sense 101 before they are allowed to buy overinflated houses, and mortgage them to boot.

At 11:36 PM, Anonymous Anonymous said...

How can there be hyper-inflation AND a decrease in home prices?
Wouldn't home prices continue to skyrocket as we see our purchasing power evaporate?
In your scenario savers will continue to be punished.
Flipper buyers will indeed abandon their mortgage because they have no income anyway.
So what will we have? Acres of abandoned, rotting houses, whose prices keep skyrocketing as our greenback dissolves in value?
Perhaps banks will hold onto the properties waiting for solvent Canadian dollar holders to buy them?

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