American Dream: Overbought & Overbuilt

They say that owning your own home is the American dream. That dream was overbought, overbuilt (continues to be overbuilt), and is increasingly being foreclosed upon.

• Massachusetts: The number foreclosure filings in Massachusetts increased by 32 percent from May 2006 to May 2007, according to ForeclosuresMass.com.
• Florida: The Sunshine State reported 23 percent more foreclosures in the second quarter than the first.
• Arizona: Arizona reported 37 percent more foreclosures in the second quarter than the first.
• Texas: Texas reported 14 percent more foreclosures in the second quarter than the first.
• California: California reported a 7% fewer foreclosures in the second quarter as compared to the first. [Mish Note - This anomaly will soon correct itself. Given rising inventories and a sinking economy]
• California: Home sales in Riverside County declined 47.2 percent in June, compared to the same month a year ago, as sales across the Southern California hit their slowest pace in 14 years. Last month's sales in the six-county Southern California region were the slowest for any June since 1993, when 19,947 homes were sold.
• California: California foreclosure activity increased more than 350 percent from May 2006, boosting the state’s foreclosure rate to third highest in the country. California documented one foreclosure filing for every 308 households, more than twice the national average.
• Oregon: Foreclosures in Oregon are up 23 percent in the second quarter compared with the first quarter.
• Nevada: There was one foreclosure filing for every 166 households last month [May], nearly four times the national average and the highest rate in the country for the fifth month in a row, according to RealtyTrac.
• Colorado: Colorado documented the nation’s second highest state foreclosure rate, one foreclosure filing for every 290 households — 2.3 times the national average. The state reported 6,321 foreclosure filings, a nearly 9 percent increase from the previous month and an increase of more than 50 percent from May 2006. The state’s foreclosure total was eighth highest among the states.
• US: Foreclosure Filings Jump to Record in First Half. Almost 926,000 foreclosure notices were filed, 56 percent more than a year earlier. Foreclosures were the highest last month in California and Florida, where some home prices have fallen as much as 25 percent, and Ohio and Michigan, where the automotive industry fired more than 50,000 people in the past 10 years.

There were 926,000 first half foreclosures and the carnage is just starting. Amazingly enough an insane level of building still continues, the reasons will be explained below.

Whooping Cranes

The Whooping Crane was just declared to be the state bird of Florida. Did I say whooping crane? Excuse me, I meant building crane. Please consider Miami Condo Glut Pushes Florida's Economy to Brink of Recession.

In the middle of the biggest glut of condominiums in more than 30 years, Miami developers keep on building.

[Mish comment: A housing bubble in Florida proceeded the Great Depression. Is this the second coming?]

The oversupply will force prices down as much as 30 percent, the worst decline since the 1970s, and help push Florida's economy into recession as early as October, said Mark Zandi, chief economist at West Chester, Pennsylvania-based Moody's Economy.com, who owns a home in Vero Beach, Florida.

[Mish comment: 30%? Zandi is an optimist]

"Florida is the epicenter for all the problems that exist in the housing industry," said Lewis Goodkin, president of Goodkin Consulting Corp. and a property adviser in Miami for the past 30 years, who also foresees a recession. "The problems we have now are unprecedented and a lot of people will get burnt."

Thirty-seven new high-rise condos and 20,000 new units are being built in Miami's 1,040-acre downtown, where sales fell almost 50 percent in May, according to the Florida Association of Realtors. The new units will join the 22,924 existing condos in Miami-Dade County that were for sale in April, according to Jack McCabe, chief executive officer of McCabe Research & Consulting LLC in Deerfield Beach, Florida.

[Mish comment: 42,924 units with virtually no demand is a hell of a lot of units isn't it?]

"Have you been to Miami lately?" Florida Governor Charlie Crist said at a homebuilders' conference last week in Orlando. "It's like we have a new state bird: the building crane."

[Mish comment: Wasn't Florida bragging about all of those birds a few years back as a sign of a robust economy?]

Florida's robust economy of 2001 to 2005 was driven by the thousands of well-paying jobs related to the real estate market and homeowners who used home-equity loans to pay for items such as boats and big-screen TVs, McCabe said.

"All those jobs are going away now, and we're seeing the trickle-down effect in declining sales in big-box retailers and home-furnishing manufacturers," McCabe said. "Florida is headed to a recession."

[Florida is headed for a recession or the US is? Perhaps some real estate agents want to tell us that recessions are local. Perhaps they are, except when they are national.]

A Florida recession could be averted and the state housing industry's "serious problems'' solved by an influx of American retirees and foreign buyers, said David Denslow, a University of Florida economist in Gainesville.

"The wave of baby boomer retirees is gathering momentum, and the weaker dollar makes Florida seem like a bargain to Europeans," Denslow said. "With any luck at all that will sustain us."

[Mish comment: Denslow is delusional. He's not asking for luck, he asking for something akin to winning Powerball twice in a row. Besides, Denslow should check his facts. There is a net exodus of boomer retirees from Florida now. They have had enough. Who can blame them?]

Florida banks posted a 43 percent jump in the first quarter in loans no longer paying interest compared with the last three months of 2006, while the number for banks nationwide rose 13 percent, according to the FDIC.

[Mish comment: This is going to get worse, much worse. A look at all those cranes with no buyers for what is being constructed tells the story.]

Loan payments that were one to three months overdue to Florida banks increased 30 percent in the first three months of 2007 from the fourth quarter of last year. The same number for banks nationwide fell 1.8 percent, the FDIC said.

Chicago-based Corus Bankshares Inc. Corus has lent a total of $1.07 billion to eight condo developments in downtown Miami, according to the company's Web site. Corus's net income in the first three months of 2007 was $26.4 million, a 39 percent drop from a year earlier, according to a company regulatory filing.

[Mish comment: Hey. Look at the bright side of things like I always do. Corus Bank is frequently near the top of the list in CD rates guaranteed by the US government. Corus bank is willing to roll the dice on insane condo action in Florida and the average Joe can participate basically risk free up to the FDIC limit at the expense of everyone else if and when a government bailout occurs. Seriously, short term CDs are a very decent play right here right now. But if you'd rather bet on equities after this runup with subprime contagion spreading to Alt-A, be my guest. If you buy CDs make sure you do not go over the FDIC limits]

Miami condo sales fell to 599 in May, a drop of 46 percent from a year earlier, according to the state realtors association. Condo sales in Orlando, home of Walt Disney World, have plummeted 80 percent, said Zandi of Moody's Economy.com.

"The statistics are scary," said Michael Wohl, a partner in the Pinnacle Housing Group, a Miami developer that has stayed out of the condo market. "There's going to be a lot of blood in the water in the next 18 months."

Lenders typically require enough advance sales to cover the cost of a construction loan. Customers' deposits, however, don't always mean the sales will close, said Ian Bruce Eichner, a developer whose latest Miami Beach condo tower is scheduled to open in November.

"The market is as close to a depression as Miami has seen in 30 years," Eichner said. "There's a gargantuan supply of homes and the overwhelming preponderance were built for speculators, not for people who are living there."With sale prices falling, McCabe said he expects up to 50 percent of them to walk away from their deposits in the next 18 months rather than complete the sales.

"What's going to happen to all those units?" Eichner asked. "God only knows. You couldn't give me a piece of property in Miami for nothing. I like sleeping at night."

[Mish comment: This is quite interesting. Ian Bruce Eichner, developer of Miami Beach condos is saying "You couldn't give me a piece of property in Miami for nothing. I like sleeping at night." Isn't this like an enormous warning to potential customers to not buy his properties?]

In the 1970s, when condos were a new product, Florida developers built 500,000 units and prices fell 50 percent, said Brad Hunter of MetroStudy, a research firm in West Palm Beach.

"The difference is, back then they were two-story condo buildings that had $50,000 units," Hunter said. "Nowadays they are $700,000 units in 20-story buildings. Instead of building too much stuff that people could afford like we did then, this time we built too much stuff that people can't afford."

The skyline of Miami is visible from Key Biscayne, the barrier island where John Rosser lives. Some nights the real estate broker scans the new buildings and sees more dark windows than lighted.

"This is dumbfounding to me," Rosser said. "It's a building boom in the middle of a housing bust."

[Mish comment: Correction - It's a building boom at the beginning of a housing bust. The sheer amount of oversupply relative to demand insures that.]

Telepathic Question Line

The inquiring mind no doubt has questions. The Mish telepathic question line is once again open for questions . I am being flooded with telepathic questions. Fortunately most are similar.

Q: Why do builders keep building smack in the face of a bust?
A: Builders build because that's what they do. They build until they go bust or as long as they can get funding (which is typically the same thing). Insiders profit as long as they can keep building.

Q: Didn't the homebuilders see this coming?
A: Judging from public comments at the peak of the boom with Robert Toll declaring he would crush the shorts, the answer would appear to be no. Judging from insider sales with literally all of the homebuilder insiders cashing out as fast as they could, the answer would appear to be yes. That said, the depth of this slowdown probably has astounded them. It shouldn't have and it isn't over either. Still, they all keep building, each hoping the other builders stop. While the process continues the amount of money that will be eventually written off because of this will keep on rising.

Q: Why should anyone invest in a homebuilder?
A: Except to play the greater fool theory they shouldn't. The basic fact of the matter is that homebuilders pay no dividends and sink every penny every cycle into ever escalating land prices until they blow up. In the meantime the CEOs of the corporations and other insiders grant themselves options and cash out on those options as close to the top as they can. Investors ride the wave up and then down. From a practical standpoint it makes no sense. But lucrative fees and commissions are made all the way up and all the way down by the brokerage houses and insiders. By the way, the same theory applies to more than just homebuilders if you think about it. After the next major market blowup I fully expect to see a return to companies that return solid dividends as opposed to companies chasing growth for growth's sake.

Q: Which homebuilders are going to go bankrupt?
A: All I can say is that several likely will. Probably some major ones. It happens every cycle. Those with the lowest stock prices are the likely candidates. Unfortunately I can't address the critical question as to when.

Q: Aren't some of the homebuilders trading close to book value? Does that make them a possible buy?
A: Book value is a mirage. For some, book value can (and will) go to zero.

Q: Why do banks keep funding all of those towers?
A: Banks financing condo towers in Florida are basically stuck. Those over leveraged to real estate are really stuck. If they write off those loans (which is what they would have to do if they stopped funding these condo towers half-way up), they might go under. At a minimum they would have to take a serious hit to earnings. Instead they hope on a wing and a prayer that these condo towers get completed, that the developers can sell the units, and that they can get their money back. It is a race against time and price and quite possibly a losing battle. But the lenders have nothing to lose by trying. As long as the lenders have a means to fund the condo developments they can continue to finance the projects (as well as pay themselves lucrative salaries). In the meantime it is highly unlikely that those loans are remotely close to being marked to market.

Q: Where are banks getting the money to finance all this construction?
A: One way of attracting money is by offering above market rates on CDs. Such rates ought not be be government guaranteed but they are. If they were not, we might see more responsible lending. Perhaps not. But at least there would not be a government bailout at taxpayer expense when some of the lenders go under. The moral hazard of bailouts should of course be obvious. And if the projects fail, the taxpayer is left holding the bag on the FDIC bailout of the guarantee. Does this ring a bell? It should.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/