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Sunday, April 01, 2007 10:37 PM

No Spillover - No Contagion - Not

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The following post is an update from Mike Morgan. Since he has now has paid clients, updates from Mike will be somewhat more sporadic. I am not able not post everything he sends me. There are also a few details from our conversation today that I can not release. But here goes with his latest weekly update that he calls No Spillover - No Contagion - Not.

Quote of the Week – “The Homebuilders are Toxic – Boo Yaa” – Jim Cramer - I wonder if he hurt his back on this flip-flop. Maybe he sprained his jaw. This is the only scary news on housing for the shorts. When the mouth goes south, the stocks might just go the other way. This is the same guy that not only told me I was NUTS, but then went on his show and read parts of one of my emails to him, and ridiculed my comments. Needless to say he’s on my email block list now.

Back-Up Quote of the Week from Someone That Matters – “This is just horrific.” Ian Shepherdson, chief U.S. economist at High Frequency Economics in response to the numbers this week.

Market Conditions – Easter comes early this year, so the snowbirds in Florida are leaving early . . . cutting our “selling season” short. I’m still not sure I saw the selling season. I guess I blinked. I’m hearing the same things from California, Arizona, Nevada, Northern Virginia, and unlikely spots like New Jersey, Pennsylvania, and South Carolina

Beazer – The law firm that filed this lawsuit was one of the four firms on my original legal team representing me against Lennar. The Jackson Law Group also has a 6000 home class action moving forward against Ryland. Very sharp guy, and he spent the last few days in Nevada speaking with attorneys to form a national coalition of attorneys to address construction defects and predatory lending practices.

I have been in touch with several of these firms, and I am now gathering information for mortgage problems regarding Lennar’s UAMC mortgage division. We have Sponsored Links up on Google. You can see them by doing a Google search for UAMC or any combination of UAMC, Lennar etc.

I spoke with a law firm on Friday that has been investigating Lennar for RESPA violations. I will be meeting with them this coming week. The most interesting response we have received to date, is from a former UAMC employee that basically spelled out exactly what the problems are. Consider Beazer built about 18,000 homes at its peak, and Lennar built 49,000. It’s easy to see which direction the sharks will be swimming. And Beazer did not own a mortgage division like Lennar’s UAMC. Stay tuned.

WCI – Still the most frequently asked question I receive. NO, there is no hidden value. YES, there are problems with the closings of Singer Island and Lesina. Not as much at Singer Island, because buyers think Startwood’s Luxury Collection hotel is going to make them as wealthy as Barry Sternlicht. I worked for Starwood. I can tell you, you don’t get rich owning condo/hotels or vacation ownership interests. After the fees and the fees and the fees, and the short season at Singer Island, the owners will be scrambling for the door in a year. But WCI should have a decent closing rate there. The only question will be the flippers that bought other units in Mosaic, etc. and they are still stuck. So they will not be able to close at Singer Island. Moreover, mortgage requirements are getting tougher, so some of those buyers will not be able to close.

Still no word on hard numbers at Singer Island or Lesina. Not sure why anyone would close at Lesina, when you can buy a comparable unit for significantly less on the resale market. But there is a sucker born every minute, and some people have no idea what they have bought. They are relying on brokers trying to protect their commission when it comes to closing advice. As for Icahn, all I have heard are rumors that he is looking for the back door. In full disclosure, I own some short term puts on WCI.

TOA – Rumors again, but the word is they cannot continue as a going concern and they are going to sell what’s left. Unfortunately, I don’t think all of the damage control has been made public. We visited one local Engle office and it was closed. Another Engle office is struggling to control cans by selling the cans. Not working very well, and they are not making any new sales.

California – The poster child here is BHS. 65% entrenched in California. My advice to them is sell it all and put it on red. Much better odds. But the wild card is whether Ian’s brother bails him out. Ian’s brother is Brookfield Asset Management.

I’ve seen some of the high priced research reports from the guys that claim to have hundreds of people driving around counting lock boxes, for sale signs and watching traffic in and out of offices. These same guys rely on a lot of data direct from the builders. Well, NAR had David Liar (Lereah) and the mortgage industry has LIAR loans (no docs) and if you think we can trust the builders to tell us what is really going on, you need to move your business to Kim and Oppenheim, then drink some of Bob’s Kool-Aid.

With that said, here are some numbers. Inland Empire sales down 50%+ with a 15%+ increase in the number of projects. San Diego sales down almost 40% with a staggering 45% increase in the number of projects. These are horrible numbers, but ground zero reports are much worse.
On the ground, from speaking with real estate agents and brokers, I am hearing a different story than the bedtime stories Kim is reading.

1 – Too much inventory.
2 – Not enough buyers.
3 – Buyers that can’t qualify.
4 – Desperate sellers dropping prices.
5 - #4 adds to #1
6 – Sellers that can’t sell existing homes.
7 - #6 adds to #3
8 – Did I already say, too much inventory.
9 – Buyers waiting for the bottom.
10 – Rising foreclosures hitting the market.
11 - #10 adds to #1
12 – Flipper inventory coming on the market.
13 - #12 adds to #1

That’s the Baker’s Dozen, although some of the expensive research reports I have seen paint a rosy picture. Since that data comes from builders and is purchased by builders, I’m not sure it is the kind of color you want.

Mortgage Financing – One word – Ugly.

I hope you all know how ugly the residential end is, and how ugly it is going to get. But maybe a few of you have not seen this FDCI graphic for construction and development loans.

“And that’s all I have to say about that.” Forrest Gump

Well, maybe one more comment. The FDIC does not break out residential and commercial. So the numbers you are looking at are much worse for the residential guys, because the commercial guys are not in trouble yet.

I love graphics. Maybe someone made a mistake with the tail on this one. NOT. It’s from the Fed and as you can see, even when all of us at ground zero knew we were in trouble, the Fed loosened lending standards in late 05. It was not until these issues hit the media, that the Fed decided to do something. Better late than never? In this case . . . way too late.

So now we are overdoing it and people that should qualify, can no longer qualify. The FED is not done. Last week we had a residential client that qualified. This week they don’t.

Liar Loans – These are no doc loans with stated income. That means you can tell them anything you want. Case on point from The Economist: “In 2006 the 24 year old web designer from Sacremento bought seven (not a misprint – 7) houses in five months. He lied about his income on “no document” loans and was not asked for anything so old fashioned as a deposit. Today Mr. Serin has debts of $2.2M (that’s million). Three of his houses have been repossessed; others could (read – will) share the same fate.” Parenthetical (pathetic) commentary added.

If you think this is isolated, call me. I’ll put you in touch with as many people you want to talk to that are in the same boat. Not Ara Hovnanian’s boat with a slow rising keel, but one of those boats you see fishing for crab in the Bering Sea being crushed by ice as it sinks and all hands die.

ARMS Resetting – 60% of all adjustable rate loans made since 2004 will reset this year with payments 25% higher. So the guy paying $1,800 a month for his mortgage will now be paying $2,250+. And 20% of these loans will reset at payments 50% higher - $1,800 becomes $2,700+. I’m not an economist, but that tells me a lot of money is going to be sucked out of the general economy. The sucking sound from Mexico will sound like a whisper a year from now.

Inventory and Sales – Inventory UP – Sales DOWN – I’m trying to keep this report tuned into simple colors – Black and White. I know you all want lots of color, but trust me, you don’t need it.

Okay, so this graph is in color. Once again, forget about the 7 months number. There are some new dynamics today. One, many builders and MLS boards have decided NOT to report numbers because the numbers are so bad. Example – Naples, Florida. Two, we have a ton of flipper inventory that is NEW but either not on the market or is rented out in hopes of things “turning on a dime.”

This NEW home inventory that was simply moved from the builders book to the flippers. Future Color – Add to these numbers the huge inventory of spec homes the builders are NOT building.

Inventory of unsold homes rose to 8.1 months, the largest number in 16 years . . . at the tail end of the recession. Are you still with me? We’re just entering out recession. Here’s another tidbit from Rex Nutting at MarketWatch – “Inventories are probably understated, however, because they don’t include homes thrown back on the market due to buyer cancellations.”
Backlogs (Supply Side) are up almost 50% from a year ago to more than 180,000 homes, while sales (Demand Side) were just revised down to an 848,000 annual rate. Moreover, January and February were “revised” downward. Liar Loans, David Liar and Liar Liar – Alan Greenspan, who cut down the cherry tree and didn’t tell Ben.

Foreclosures – Forget about the “S” word. The “F” word will be far worse. I’ve heard all the same numbers you have, like 2.2M homes facing foreclosure, and the Princess of Housing forecasting a 20% increase in the inventory numbers NAR reports attributable to foreclosures. Personally, from what I am seeing and hearing at ground zero, 20% will be a soft number. I think it will be North of 30% . . . as the housing industry slows and the job loss contagion reaches epidemic proportions. Don’t think this is just limited to the guys that build the houses. It hits the guys that work in the kitchens of restaurants. Clarence Otis, the CEO of Darden Restaurants said he already sees a slow down in traffic that he attributes to housing issues from loss of jobs to empty ATMs. How about the guys selling jet skis and other toys to the knuckleheads that used their homes as ATMS.

By the way, the top 5 states for foreclosures have a few surprises. California and Florida are no surprise, but how about Ohio, Michigan and Texas. But wait, I know you need more color. Here are the states with 20%+ changes YOY in foreclosures: Louisiana, Minnesota, Nevada, Missouri, Tennessee, Idaho, North Carolina, Oregon and New Mexico. Idaho? Oregon? New Mexico? = Spillover, Contagion or whatever you want to call it . . . but it is bad.
And take a look at just a few of the new websites popping up:

• The Colorado Foreclosure Prevention Hotline is 877-601-HOPE (4673).
• The homeownership preservation foundation has a national homeownership hotline at 1-888-995-HOPE (4673).
• The Florida Foreclosure Prevention Hotline is 1-877-532-HELP (4357).
• The New York City Foreclosure Prevention Hotline is 718-246-3279.
• The Boston Foreclosure Prevention Initiative phone number is 617-635-HOME (4663).

Inventory II – More on inventory. After reviewing a number of reports dating back to the October issue of Barrons, as well as analyst projections and liar numbers from the builders, here are a few interesting notes. The average inventory if 5+ years with an average of 40% optioned. At the top of the pile, is Toll Brother with 8 years. What makes matter worse, is that many of these projects have been started . . . roads are in, utilities are in and some spec homes have been built. Oops, strike that. They don’t build spec homes.

Jobs – We heard this month that builders have slashed jobs by 20%. Centex just issued pink slips to 120 people yesterday, and from what we are hearing, this includes some people above the administration level. I’ve talked about the spillover effect into other industries far too much, but here is a local piece from Port St. Lucie, FL, one of the hotbeds of construction for the last few years. They are seeing a 10% reduction in employment attributable to reductions at construction companies. Linda Cox, the executive director of the St. Lucie Chamber of Commerce said, “All the builders I’m talking with say there is nothing going on.”

Lawsuits – More and more and more. The sharks smell the blood. We are seeing more lawsuits against builders for failure to meet construction deadlines, failure to deliver what was promised in brochures and sales material, and a host of other menu items, only lawyers can dream up.

Bonus Quote – "This forecast is subject to a number of risks. To the downside, the correction in the housing market could turn out to be more severe than we currently expect, perhaps exacerbated by problems in the subprime sector. Moreover, we could yet see greater spillover from the weakness in housing to employment and consumer spending than has occurred thus far. "– Big Ben Bernanke speaking to Congress this week.

Noticeably Absent: I did not comment on the Lennar conference call because, as most of you know, I am in the middle of a lawsuit with them. I can tell you, Stuart and Bruce provided a lot of information. Read between the lines. Listen to what they said about what they were doing and what they will be doing. Think about Even-Flow and Everything Included. If you would like to discuss the call, feel free to call me.

Disclosure: I own puts on WCI, KBH, SSD, CORS and one share of LEN.
Note: I am moving over to a new machine with Vista. Here is a word of warning. Do not even begin to think about running early versions of Outlook on Vista. Anything other than Outlook 2007 is likely to be nothing but grief. I have some real horror stories over the last 4-5 days and that has cut down a bit on my blogging and posting in various places. I hope to be back up an stable on a new Vista box by Tuesday.

Mike Shedlock / Mish

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