Housing Rolling Along 2

the "soft landing" continues....lol

DOW JONES NEWSWIRES
July 20, 2006 12:37 p.m.

By Janet Morrissey
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)–D.R. Horton Inc. (DHI) Chief Executive Don Tomnitz predicts the housing sector will continue to struggle with high inventories and incentives....

During a conference call Thursday, Tomnitz said his company is cutting back on land purchases, housing starts and the number of speculative homes it builds in an effort to bring its production more in line with the depressed demand. Currently, he said speculative homes, which refers to homes that have been built without a confirmed buyer, represent about 40% of the company’s 40,000 unit inventory. He said he expects to reduce this to between 30% and 35% of inventory by the end of its fiscal year, which wraps up Sept. 30.

Tomnitz said sales had been stable through May - before suddenly “falling off the Richter scale” in June. This prompted him to ratchet down the company’s guidance for the remainder of the fiscal year.

D.R. Horton slashed its fiscal 2006 guidance...... we have significantly higher cancellation rates - which all builders are experiencing.

“The market is constantly changing on a day to day basis, and California continues to get softer and incentives continue to increase in Florida,” he said. “We’re looking at the future market with very, very clear vision with no rose-colored glasses on….and if we’re going to get punished and we’re going to get pummeled because of the fact that we’re being more accurate than some people think we need to be, then so be it.”

 

If you guys were as good at predicting the market going up as you think you are at predicting it going down, you could have made some serious money in the past 5 years.

Oh well, maybe you'll have another chance in a few years. Or maybe you'll get your wish, and housing will go down 80% with massive depression and unemployement in the entire country.

Maybe at that point you'll be able afford something, assuming your not too busy waiting in line for some free meals... Who knows. Remember, what you wish on others usually comes back and hits you straight between the eyes. Good 'ol karma.

 

Thursday, July 20, 2006
Ghost Housing Market
Following is an update from Mike Morgan at Morgan Florida.


Mike Morgan:

We recently had two more of Wall Street’s finest out on a tour of Florida real estate markets. After the first day, these guys needed diapers. They’ve been listening to the garbage from home building company management teams and what dribble they hear on the conference calls. I showed them reality, and it hit them like a ton of bricks. Here’s a review of reality.

Inventory - Our current levels are all time highs. We’ve never seen anything like this. If you want to believe the NAR numbers, so be it. In the previously hot markets, inventory levels are well beyond a year, and in some markets 2-4 years. You have hundreds of thousands of homes in the hands of flippers, not to mention all of the unsold inventory the builders are sitting on, and you still have the normal market of people selling for reasons like death, new job, etc..

Ghost Market - Why so much inventory? The Ghost Market of so called “investors.” These people were not investors. Maybe speculators, but even that is too kind. They were uninformed gamblers. For the last two years, you had better odds at the Big Six Wheel in Vegas. And the builders knew it. The builders saw buyers flipping contracts before closing a few years back. There response was to include a contract provision that you could not assign the contract, and you must close with the builder. They told the Street they were doing this to control investors. Well, that’s pure nonsense. If they wanted to keep investors out, they could have demanded sworn affidavits. They could have put deed restrictions in regarding sale and rental of the home. But there logic was not to eliminate investors from the market, but rather to capitalize on them. So with assignments prohibited, the new wave of lemmings had to buy from the builders. And away we go! So now we have a market flooded with people that had no intention of living in the home. When, in the history of the world, have you seen millions of people buying multiple homes like a box of donuts? Like donuts, the value of these homes is dropping as they sit on the market.

Quality - Builders have been selling the vast majority of their homes to flippers. Flippers don’t care about quality. Rarely does a flipper order a competent home inspection. Rarely does a flipper even do a walk through. They are only concerned with flipping the contract as soon as they close. The builders did not let this opportunity go unnoticed. They built lower and lower quality homes, often ignoring building codes. How? In many markets the pace of construction has outpaced the ability of the local authorities to inspect homes, so these markets allow the builder to hire their very own private inspectors. Now if you hired an inspector that flagged your homes, how long do you think you would keep that inspector? So the builders find inspectors that are willing to look the other way. Many of the homes on the market today do not meet building codes. We are seeing an escalation of defective roofs, defective trusses, defective stucco and the list goes on. We actually set up a website to help home buyers with information. I’d like to report on all of the home builders, but for now our site is focused on just one builder www.Lennar-Homes.info. We’ll be adding new sites over the next few months.

Location - Once again, builders realized they could sell anything as long as they pegged it as “pre-construction.” Building next to dumps, rail lines and depressed areas became the norm. Flippers never bothered to visit the sites. Let’s look at Miami. Out of area flippers just hear two things. “Miami” and “pre-construction.” Our trips through Miami reveal that many of the construction zones are in depressed areas full of crack houses, empty warehouses and worse. The flippers didn’t care, and neither did the builders. But the “real” buyers that might live in these condos and homes care. And they are not going to buy these projects.

Cancellations - If you think the cancellation rate is less than 50%, I’ve got a bridge for sale. Flippers are dumb, but they are not going to wipe themselves out. If they bought a property for $500,000 and it is now selling for $400,000, why would they close? They will simply walk away from their contract, leaving the builder with more unsold inventory. Here’s one example to drive this point home. An investor client of ours was recently released from his contract price of $490,000. The builder just resold it for $315,000. That’s a “real life” example. That’s a 36% haircut for the builder. Margins? There are none at these prices. P/E ratio low? How about no P/E ratios? One final note: The flippers have about 3% in closing costs with the builder. Then they have about 10% with the new buyer. So they need a 13% increase in price to break even. What would you do if prices have already fallen by 20%? Lose another 7% or walk away from the contract?

Affordability - Prices skyrocketed artificially because flippers did not care about price. They only cared about one thing . . . We’re they getting pre-construction pricing? Now we have a flood of inventory on the market that buyers cannot afford. First time buyers generally need homes under $300,000. Even in previously hot markets like Port St. Lucie, we saw average home prices rise above $300,000 for pre-construction homes. And the high end market is not immune to this problem either. Buyers that purchase million dollar plus homes are far more astute then the first time buyer. The high end buyers read the Wall Street Journal and follow the numbers. They see the massive build up of inventory, and they all tell me the same thing. “We’re looking, but we’re going to wait till prices come down.” And with that kind of logic, prices will continue to drop.

Interest Rates - Compounding the affordability problem are interest rates. A little over a year ago a buyer could secure a $300,000 mortgage for $1,250 a month (less if they used an ARM). Now the same buyer is looking at a $1,750 mortgage or $6,000 a year more in mortgage payments. If they could only afford $1,250, they can now only afford $215,000 mortgage. That represents a 28% drop in affordability. Margins? Not with 28% affordability drops.

ARMS - Ouch. What more can you say. With a trillion dollars in debt a year coming due for refinancing, what’s going to happen to people when their mortgaged go up 40%? They’re going to put their homes on the market. The same market that is already flooded with inventory from flippers, builders and the normal sellers. The result will be more inventory and prices dropping further as sellers scramble to sell.

 

ATM - Add to the problems, all of those home owners that used their homes like ATM machines to buy cars, boats, skiddos and vacations. The counted on ever increasing home prices and low interest rates to keep them afloat. What do they do now? Put their homes on the market in hopes of cashing in and downsizing. More inventory!

Costs/Margins - Take a look at the main components in a home - copper, cement and lumber. Now look at how high these prices have skyrocketed during the last three years. Once again, ask yourself where the margins are.

Jobs - Now we’re getting to the heart of the problem moving forward. The housing boom has accounted for more jobs during the last few years, than any other sector. Think about this: real estate agents, builders’ sales agents, mortgage brokers, title companies, subcontractors, suppliers, vendors, attorneys, insurance agents, and the list goes on and on. We’re going to see a dramatic drop in jobs, an increase in unemployment and fewer people able to buy the homes that are flooding the market. By the way, as these people lose their jobs, they lose their homes! More inventory.

Foreign Investors - Here’s something we’ve heard about but could not verify until this last trip. Builders are targeting oversees investors. We visited a couple of developments that are targeting investors from South America and Puerto Rico. There are companies that put on road shows overseas targeting these investors. They require larger deposits, so the builders can pay the commissions up front. These sales teams don’t care about closings, since they get most, if not all, of their commissions up front. The builders get to book a sale, even if it doesn’t close a year from now. The angle used by these teams is that the flipper can either flip the home, or rent it out. I’ve got news for you. Drive through any of these communities and you’ll see dozens of For Sale and For Rent signs. These unwitting flippers can’t sell and they can’t rent. They have massive carrying costs and prices on the homes are dropping fast. Eventually, these homes go back to the banks.

“We Don’t Sell to Investors” - I wish I had a dollar for every time I’ve heard this line. We visited one national builder that proclaims they don’t want investors, but the sales agent told us they just sold a block of 30 town homes to one investor and another block of 8 to another investor.

“We Don’t Use Incentives” - Another line we’ve heard for the last six months. Incentives are rampant. We did not find a single builder that did not offer an incentive. And these incentives are getting larger and more creative. Some builders simply told us to make an offer! One national builder told us to make an offer, and then knock another $100,000 off of a $1.8M condo that has been on the market for more than a year, and originally had a price tag of $2.4M. How does this effect margins? What margins?

“We Don’t Build Spec Homes” - Yeah, right. On this trip we saw the worst of the worst. We saw entire developments under construction on spec. No buyers. “Make us an offer.” The logic the builders use for building spec homes is simple. Component prices or homes are going up, so if we don’t build now, it will cost us more a year from now. The problem with this logic is just as simple. If no one is going to buy these homes, the builders have two choices. One, slash prices. Two, carry the homes and pay the taxes, insurance and maintenance. Neither option is sound business. The other thing we hear from builders is this. “If we don’t build spec homes, we have nothing to sell, and our competitors will have inventory to sell.” Once again, bad logic. The builders would be better off with no inventory, versus inventory they will be forced to sell at a loss or carry at a loss. But the titans of the home building industry realize they need to produce numbers now, even if it means a lot of pain a year from now. Their only concern is near term so they can capitalize on their bonuses.

Our Economy - If all of this is not enough to drive the point home that the home building market is going to crush this economy, consider this. We are sending most of our manufacturing jobs to China. GM and Ford are near bankruptcy. We don’t even answer our own phones anymore with giant call centers in India. We hire nurses from all over the world and we even have an association called Visiting Nurse Association. Take a look at any of these new developments being built. Who do you see? Who’s cutting your lawn? The Florida orange juice association just announced that six million boxes of oranges are going to be left on the trees this year, because we don’t have the immigrant labor to pick the oranges. Many of those pickers are now building the homes for flippers. What kind of quality can we expect out of that? A recession is coming and lenders simply are not prepared for the defaults we are going to see. Banks are going to be flooded with REOs (Real Estate Owned) properties and that too is going to add to supply. It’s not pretty no matter how you look at it.

Mike Morgan, Broker-Owner, REALTOR®, J.D., GRI, e-PRO
Morgan Florida Real Estate Group

 

Most of the people here live in apartments and sell insurance, the idea of $50k per contract to short a "bubble" market is beyond their reach so they post articles.

 

It's funny but I have a pretty good pulse on Real Estate values throughout the United States. For some reason "pundits" seem to have a grudge against Florida. I live in both Chicago and SoFla and I don't think Florida valuations in comparison to the NorthEast or Chicago are particularly egregious. And while it's true that inventories in SoFla are high I don't see this as the traditional kind of locale where owners/sellers need be panicked into indiscriminantly hitting bids.

Sure there's flipper/specs who will be demolished. Always ends that way. But on the most part, Florida buyers are NOT first time home buyers. By and large the place is filled with folks who just sold a home or condo in New York or Jersey or Toronto, ect. For guy's who just sold a 2bd condo on the Upper East Side, I can't imagine spending 700k for an ocean view condo in an amenity building is a stretch buy. Not to mention this is a state with no income tax. A wealthy buyer can subsidize a bit of mortgage just by escaping Northern state taxes. Places further north in Martin and St.Lucie counties have plenty of NEWER single family homes in the 250-300k range.

With Americans growing older I don't see any shortages of migrants moving into the Sun belt. Perhaps Miami, Vegas and Phoenix are frothy and will see prices come in but I think the REAL risk of collapse is in Chicago, NYC and Boston.

 

Remember when I asked the question about whether the worst was over? Still food for thought. (see below)


Va. Foreclosures Fall / Numbers Drop 17 Percent From a Year Earlier; the State Ranks 42nd, RealtyTrac Says


Source: Richmond Times - Dispatch
Publication date: 2006-07-18


By CAROL HAZARD
Virginia's foreclosure rates in June were among the lowest in the country, according to research released yesterday.

Virginia ranked 42nd in foreclosures last month among all 50 states and the District of Columbia, according to RealtyTrac, an online marketplace for foreclosure information.

The state numbers dropped 17 percent in June from the year- earlier month, while the national numbers, by coincidence, rose 17 percent in the same period.

"Good to be in Virginia," said Rick Sharga, RealtyTrac's vice president of marketing.

Even better to be in the Richmond area, which recorded virtually no foreclosures, Sharga said.

"Housing is very strong in your region."

Virginia reported 230 properties entering some state of foreclosure in June, or one for every 12,549 households. Nationally, there was one new filing for every 1,311 U.S. households.

Even the national rate is below historic norms. Typically about 1 percent of all mortgages go into foreclosure.

"Everyone talks about the bubble. We try to stay away from the hype machines," Sharga said.

That said, foreclosures did spike in the first two months of the year, he said. Also, "We expect an increase in filings for the balance of this year. But we do not see a tidal wave."

Sharga said local market conditions typically drive spikes or reductions in the number of foreclosure filings.

One of the most reliable indicators is the unemployment rates, he said. "Almost invariably, we see lower foreclosures with lower unemployment rates."

Virginia's jobless rate was 2.9 percent in May, according to the latest available figures. The figure was well below the national rate of 4.4 percent.

States with highest foreclosure rates in June

-- Colorado: one out of every 495 households

-- Nevada: one out of every 697 households

-- Georgia: one out of every 705 households

Source: RealtyTrac

-- Contact staff writer Carol Hazard at chazard@timesdispatch.com or (804) 775-8023.

ILLUSTRATION: PHOTO

(c) 2006 Richmond Times - Dispatch. Provided by ProQuest Information and Learning. All rights Reserved.

 

Smells like Another Fucked Borrower....

RoughTrader

 

Guys, its gonna get really ugly, prolly worse than EVER before (not including the depression).

Why? Not because of flippers or specs in general, but because of all those ARM's/ interest only loans. Then folks who took out equity to buy cars, etc. Whether the next recession is led by a housing collapse, or leads to one, its gonna get really, really ugly.

Bye bye San Diego, Vegas, Phoenix, and even some places that were moderate in the run up.

Hello the midwest, and Texas in particular.

No, I don't live in Texas.

Jay

 

I agree with you, except I believe it will be a combo of all those factors, not just one. If you look historically at facts you will see that it is many factors, not just one that puts the wheels in motion.