Eye of the Housing Hurricane - Mike Morgan Update

Mike Morgan has another long awaited update on the Florida housing situation called In the Eye of the Housing Hurricane.

Here’s a lesson many Floridians have learned the hard way: All hurricanes have three parts—the front half, the eye and the back half. The eye is a deceiving quiet period at the center of the hurricane. The eye lulls you into believing the storm has passed and all is well.

In fact, the back half of a hurricane can be far more devastating than the front half. The front half of a hurricane does a lot of damage and weakens many structures. Then, when the back half hits, houses, buildings and personal property teetering on the brink of failure are utterly destroyed. Moreover, since the wind is coming from the opposite direction, anything strong enough to resist the first half is tested again by the back half.

This is exactly what’s happening in Florida’s housing and financial markets. We are in the eye of the hurricane, and the back half will hit us twice as hard as the front.

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Recently, however, there has been a lull in the windstorm. Would-be buyers are returning to the market. Over the past few weeks, we’ve been seeing 300% increases in traffic at our open houses from a year ago. Builders and real-estate agents report that offers are up, along with traffic.

But this is not the end of the hurricane; it’s still the eye. What the builders and agents neglect to report is that most of the traffic couldn’t qualify to buy a moped. Nor do they report rising rates of pending contracts that fail to close.

Almost nobody is reporting on how the inventory problem of 2006 has moved from builders to lenders, and how the lenders have no clue about what to do with the surge of defaults and foreclosures.

The reason the back half of the hurricane will be such a devastating wipeout: The failure of the lenders to address their issues with defaults is compounding the inventory problem to the point where we will see a tidal wave of inventory hit the market.

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“short sales” should be the easiest way for lenders to move inventory at market prices—but the lenders have not faced reality. And now, most buyers who have had experience with short sales no longer want to look at short-sale properties because of the long and convoluted process. Instead of using this tool to realize market values, the lenders are dumping property into below-market foreclosure auctions, which then creates another new downward spiral for prices.

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Lenders may be telling Wall Street and Capitol Hill that they are developing plans to keep owners in their homes, but we are seeing the exact opposite in the world of reality.

Commercial and retail property are also becoming casualties in the back half of the hurricane. Drive through just about any Florida market to see all the For Lease signs on commercial property. Real-estate agents, lawyers, builders, contractors, mortgage brokers, insurance companies, furniture stores and all the rest are going out of business and leaving a flood of office and commercial inventory vacant.

The condo market? Do you really want to hear anything about the devastation that the lenders and local municipalities are facing over the collapse of the condo market? That’s like adding a Class 5 tornado to the Category 5 hurricane over Florida.

Florida may stand alone in condo stupidity, but what Morgan is describing in the commercial real estate market is going to be widespread.

Morgan's update offers quite the look as to why the Shopping Center Economic Model Is History.

Regarding short sales, I was challenged the other day in response to Misinformation From Fannie and Freddie On Walking Away and Walking Away: The Next Mortgage Crisis as to why I was promoting walking away and not short sales. My response was "a short sale requires two things: 1) a buyer in hand 2) a lender willing to go along."

Morgan shows that not only is there are a lack of qualified buyers, but even when a buyer does step up to the plate, lenders retain lofty ideas as to what houses should sell for. "Instead of using this tool to realize market values, the lenders are dumping property into below-market foreclosure auctions, which then creates another new downward spiral for prices."

California To Catch Florida

Florida may be ground zero, but California is going to quickly catch up. It all starts with wages and jobs. With that in mind, please consider California unemployment rate hits 6.2% in March.

California's unemployment rate hit 6.2% in March, the highest level in almost four years, spurred by a continuing downturn in construction and financial activities.

The Employment Development Department reported Friday that 1.13 million people were out of work last month, marking the state's weakest economic performance since July 2004, when the jobless rate also stood at 6.2%. Unemployment is up 1.2 percentage points from a year earlier, with 229,000 more Californians looking for work than in March 2007.

March's rise in unemployment, though not surprising, provides further evidence that California is "tipping into" a possibly prolonged recession, said Christopher Thornberg, the principal at Beacon Economics, a Los Angeles consulting and analysis firm.

"We are going to have a good old-fashioned consumer spending recession in 2008," he said. "We only began to see a pullback in consumer spending the fourth quarter of last year. So, from that perspective, we have a long way to go."

My Comment: A long way to go is right. Walk aways leads to reduced willingness to lend, reduced lending leads to fewer jobs.

The uptick in people losing their jobs "means more bad news ahead for state and local [government] budgets," said Stephen Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto.

My Comment: The spiral continues with cutbacks in state services which means still more people lose jobs.

Next month, Gov. Arnold Schwarzenegger and state lawmakers must grapple with plunging tax revenue and a projected $8-billion-plus budget deficit as they prepare the state's spending plan for the fiscal year beginning July 1.

My Comment: By the time July rolls around that budget deficit might double.

Levy noted that California's unemployment rate is the third-highest in the country, trailing Michigan with 7.2% and Alaska with 6.7%. California is doing worse than Pennsylvania and Ohio, Levy said, two Rust Belt states that have figured prominently in the presidential primary elections because of their manufacturing job losses.

The news about California's economy is not all bad, the Schwarzenegger administration said. "Today's numbers show that the downturn in the residential construction and financial activities sectors continues to be a drag on the economy, but seven of California's 11 major industry sectors continue to show job growth," said Victoria Bradshaw, secretary of the Labor and Workforce Development Agency.

My Comment. Schwarzenegger is looking at an apple with a dozen worm holes yet deciding the apple is not all bad.

"We're focusing our resources on helping people affected by the national housing slump move into jobs in industries that are growing."

The governor's efforts could help save construction jobs by shifting carpenters and other journeymen from residential developments to public works projects, said Michael Bernick, a former Employment Development Department director and research fellow with the Milken Institute in Los Angeles.

"The more than $40 billion in infrastructure bonds, approved by voters in November 2006, are beginning to come on line," he said.

My Comment: Schwarzenegger wants to spend the state to prosperity while cutting back department spending across the board by 10% and likely to soon be 15%.

Inquiring minds may wish to review More Budget Cuts in California, New Jersey, and Florida.

Would someone please offer Schwarzenegger remedial math lessons? He desperately needs tutoring. And while Florida is in the eye of the hurricane, California is coming up.

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