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Sunday, May 07, 2006 1:17 PM

Abandon Ship

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The Washington Post is writing Sold or Not: When Home Buyers Walk.

Some Will Give Up Thousands to Get Out of This Market.

As the housing market cools, builders are reporting that more people are walking away from contracts and from tens of thousands of dollars in deposits.

Wall Street analysts say the Washington market is among those seeing the highest percentages of buyers abandoning ship -- more than double last year's rate, according to one research firm, and perhaps as high as one in three new-home buyers in some places. And nationally, some big builders are beginning to report cancellation rates upward of 25 percent.

Typically, buyers of new homes pay upfront deposits calculated either as flat amounts as low as $1,000 or as a percentage of the price, generally about 5 percent of the home price. In recent years, some builders increased deposits to discourage speculators and get more upfront cash from desperate buyers. Some require deposits of 7.5 to 10 percent.

Despite the pain of giving up that much money, some buyers are canceling to cut their losses because builders are pricing the same houses for so much less, Alexandria lawyer James C. "Beau" Brincefield Jr. said.

"I have seen people literally walk away from $125,000 deposits rather than go forward with the closing because the value of a house identical to their own was being sold by the builder for $100,000 less," said Brincefield, who is preparing litigation for buyers who want to sue builders to get their deposits back.

And builders are trying to make it harder for people to split, lawyers and real estate agents said. While contracts "always favor the builder" and are always hard to contest, now that it is harder to resell, "builders are fighting attempts to get the deposit back tooth and nail," Washington lawyer John Gerardo said.

"It's getting really kind of scary right now because builders are waving their sabers," said Christine Cormack, owner of brokerage Keller Williams Realty in Ashburn and a real estate investor. "They're holding people to contracts." That can include going to court to force closings.

Credit Suisse First Boston stock analyst Ivy Zelman this week said big builders nationally are reporting cancellation percentage rates in the mid- to high 20s, compared with the mid- to high teens of a year ago. Executives from Pulte Homes, for example, said in an April 27 conference call with analysts that cancellations reached 27 percent in the most recent quarter, vs. 18 percent a year ago.
Now that speculators are abandoning ship, the question to ask is "are there enough lifeboats for ebveryone to fit into"? I think not. The lucky ones bailed at the first sign of trouble. Others are still stuck on a sinking Titanic. While cancellation rates are soaring to 20-30% home builders are still building. That is why in spite of what appears to be rock bottom PE ratios, these stocks remain a sell. We have seen a couple of bankruptcies already. More are coming.

Mike Morgan at MorganFlorida had this to say.
I have 43 clients walking away from deposits that range from $35,000 to $80,000. That’s 43 out of 43, and we were very careful to buy the very lowest price per square foot and the best amenities. None of these buyers are in condos or even in areas where there are condos. You’re not seeing the real story in the press. Agents don’t want to talk about it.

In one local project built by Lennar there are 184 units. About 120 of them are pre-sold with deliveries starting this summer. They have been unable to sell the remaining 64 units, even though they have lowered prices by 10-20%. They are spending a great deal more on marketing and advertising, as well as double commissions. Lower prices and higher selling costs, not to mention increasing cost of raw materials.

Of the 120 units that have been sold, at least 110 are speculators. Within a couple of miles there are other projects under construction or recently built with more than 400 similar units on the market . . . all speculators that can’t sell. For our market, that represents at least a three year supply.

Just 10 miles North of this market is Port St. Lucie, which was one of the fastest growing cities in the country. There are thousands of new homes for sale in Port St. Lucie that are now selling for less than initial sales prices. The smaller non-public builders are seeing sales off by 75-100%. The public builders’ sales are off 75%, and most of their current sales are of homes that they are reselling for buyers that have walked away from contracts. With current cancellations increasing, all of these builders are seeing negative sales. We will see a dramatic increase in cancellations as homes purchased 10-24 months ago are finally being finished and ready to close. So you have not seen the peak of cancellations yet. That will come in the next 6-10 months. Toll Brothers was being honest with their cancellation rate, but you can expect it to skyrocket for Toll and all of the other builders as they attempt to close. Their only option is costly litigation. Even if they win, they still have to execute their Judgment. That cost more time and money while the builders try to chase assets of speculators. Many of these speculators have multiple spec homes, so there is not enough assets to cover the builders’ Judgments, even if they win in court.

The Street numbers and reality are at odds. If more analysts and reporters were out in the field, they would be asking tougher questions and reporting a dramatically different story. There are still many real estate agents that think this market will “turn on a dime.” Unfortunately, these are the agents that are completely clueless to market dynamics. In Florida we have one licensed real estate agents for every 57 residents. Most of these agents do not understand the most very basic fundamentals. In fact, agents are still promoting “investments.” Marshall Reddick, a national figure that puts on seminars for speculators is still pushing Port St. Lucie as a hot investment market. I received several calls this week from out of State investors that were researching Reddick claims before they plunked down money. The saddest part is this. Guys like Reddick are out of town promoters. They do not understand local markets and they are motivated by huge commissions from builders stuck with inventory they cannot sell. Much of what Reddick promotes was built by low quality builders and builders that built on the fringes . . . alongside busy roads and other areas that primary homeowners don’t want at any price.

One client from England called me with a desperate plea to help him. Reddick sold him a home from a low end builder that was on a busy road. Reddick had never seen the property, and the builder had the audacity to tell this gentleman form England that the home was on a dead end street. That fraudulent statement was enough to get the client out of the contract . . . immediately. They bank on the fact that the speculators never see the homes or the area the homes are in. These guys are simply feeding on the frenzy with misleading claims, omissions and incomplete disclosure, and outright fraudulent statements.

A final thought on condo sales. Look for mind boggling cancellation numbers 6-18 months down the road. These projects take longer to build, so there is no reason for a speculator to walk away from a contract. They will wait until the builder demands a closing. Word on the street in our markets is scary. It appears more than half of the condo projects under development will either be cancelled, and half of those that do make it to completion will see vacancy rates of more than 50%. WCI has the most projects under development for any public builder. Their numbers will stun analysts. Moreover, they are carrying all of this inventory at inflated rates . . . not to mention the costs of carrying stalled and cancelled projects.

The saddest thing developing right now? I’m starting to get a lot of calls from speculators that think we’ve seen the worst. We will not see the worst of it till mid to end 2007.

WCI has a conference call on Tuesday. Hopefully, someone has done their homework and will ask the tough questions. It’s a shame Ivy Zelman has not been on the last few calls. Maybe she is so far ahead of the pack, that she doesn’t want to tip off the rest of the analysts. In listening to the last dozen or so conference calls, it sounds almost as though the analysts work for the builders. Do the math. In Miami alone there are 70,000 condos under development with a 2,500 a year absorbtion rate. Sounds ugly? Well we can’t even get hard numbers for Florida’s Gulf Coast, but that market is in far worse shape than Miami. Most of the WCI projects are on the West Coast of Florida, and these are unrealistic seven figure condos. This end of the market has not slowed . . . it has stopped, and is now going in reverse with more cancellations than orders.

Another problem is facing home builders. The labor shortage has been compounded by inexperienced labor, illegal immigrants with absolutely no experience, and contractors cutting corners. Of the 43 clients I have that are going to walk from deposits, I will most likely be able to get all of their deposits back due to code violations in the construction. I have a 10 for 10 batting average so far. The builders only have to hear my name, and they ask . . . what do you want in exchange for signing a confidentially agreement.

On my desk are two inspection reports. One is 33 pages and one is 36 pages packed with State, County and Federal violations. I have another report on the way. One of these homes has already had three inspections. The builder has ripped the entire roof off and the home is still not up to code!

WCI has another problem, as the three condo workers that were buried alive in concrete this week, were on a WCI project.

You can bet your last dollar this will stop this project and slow down all other projects.
The Miami Helarld is reporting 3 workers buried alive in construction accident.
Buried in drying concrete, three construction workers died when part of the roof of a condominium collapsed.

A macabre construction accident claimed three lives Saturday when the roof of a condominium project partially collapsed, burying and pinning workers in quick-drying concrete that ultimately crushed them, authorities said.

Hours after the accident, workers tethered above the victims swung pickaxes and hammers to chip away at three-foot-deep concrete so they could remove the bodies.

"These people were basically buried alive in concrete," Miami-Dade Fire-Rescue Lt. Eric Baum said as he stood at the 26-story construction site on Collins Avenue, just south of Haulover Inlet in Bal Harbour.

Public documents identified the construction company as Boran Craig Barber Engel Construction Inc. of Naples. The owner and developer of the site was identified as WCI Communities, Inc., based in Bonita Springs.

The site was the home of the Harbour House, which was razed a few years ago.

According to WCI's website, the project includes a 26-story building with luxury "tower estates and grand penthouses [that] will range from approximately 2,000 to 8,000 square feet and offer spectacular views of the ocean." Next to the tower the company is building a "five-star quality hotel," the Regent Bal Harbor, which will be managed by Regent International Hotels.

In a statement, officials of WCI said they "will work closely with local officials to determine the cause of today's event."
The Ocean City Dispatch is reporting Condo Glut Leads To Calls For More Tourism Spending.
Further evidence of a softening real estate market surfaced this week when business leaders discussed the glut of new condominium units for sale in Ocean City and the need to move forward with an aggressive tourism marketing campaign to remain competitive with the resort’s neighbors.

During the monthly meeting of the town’s Economic Development Committee (EDC) on Wednesday, resort business leaders learned the once-flourishing real estate market has cooled somewhat, due largely to the simple economic theory of supply and demand. Coastal Association of Realtor president Pat Terrill told EDC members the supply side of the equation was currently outdistancing the demand side.

"If we’re going to sell 3,500 units, we have to continue to find ways to get people here," said Berger. "There’s nothing worse than a bunch of empty condo buildings. That’s not going to help us at all."
In city after city the real estate rising tide kept workers employed and revenues pouring in. The tide is now going out and speculators are abandoning ship. In the wake will be an increasing numbers of lawsuits, a flood of bankruptcies, and bunch of half finished condo projects standing as a testimony to reckless over expansion.

Mike Shedlock / Mish

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