Customers For Life

For several months now I have been talking with Mike Morgan / Morgan Florida, a real estate broker serving the treasure coast area of Florida. In our most recent conversation Morgan tells me "prices have already fallen 10%, regardless of what median prices show. In addition transaction volumes have fallen off the cliff".

Unlike other brokers I have talked to, Morgan is expecting "further declines in the neighborhood of 20% or so, more on condos". He is advising his clients that "The market has changed and that sellers must accept that reality if they want to get their house sold". Realtors openly telling their clients to expect substantial further declines simply is not the norm.

Back in January and February Morgan said that "Centex was so desperate to close deals before their March 31 fiscal year end they were offering $60,000 select home sites that were not selling well. But that is just the start of it. Centex was also offering 6% commissions to the agency booking the sale plus an additional $10,000 selling bonus to top it off."

Obviously Centex was under extreme pressure to unload some properties ahead of their fiscal year end. A year or so ago builders were offering 1-2% at most to outside agents. Some homebuilders would not work with outside agents at all. On a $400,000 home that is an extra $24,000 in lost profit as compared to six months or a year ago. Factor in the $60,000 off then add in a $10,000 bonus and Centex made a whopping $94,000 less on those home sales than expected.

Those deals are now gone, but I suspect Centex and others will be forced to put them back on. The reason median prices have not come down that much is that builders are booking the full value of the sale, before these discounts were granted and calling that the sale. Discounts are attributed to advertising. Prices are now biased on the high side just as they were biased on the low side on the way up. Morgan assures me that "comparable prices have fallen 10% or so" regardless of stats that show otherwise.

Rising inventories are going to continue to add downward pressure on prices. Sentiment was steadily falling from August through December, but a sudden steep falloff in January and February (peak season in Florida), seems to have caught nearly everyone by surprise. Morgan was ahead of the curve by advising his clients to "take a little less" in November and December to "get the deal done". It seems that was sound advice.

How does a Realtor Survive?

So "how does a Realtor get business in this type of environment?" I asked Morgan. He explained there are three kinds of Realtors:

1. Those that tell a customer what he wants to hear just to get the listing
2. Those that tell their clients the simple hard truth
3. Those that prey on the insecure hoping to profit from it by a quick sale

Morgan himself is losing business because he will not list houses for what the prospective client "needs to get out of it".

Now that's a scary thought: Clients "need a price" that the market simply will not bear. With all the cash out refis used to support consumption, more and more people are going to be trapped, upside down in their home, unable to sell it.

Is there any point taking a listing in this environment if the house is over priced? "It is a waste of time and energy" for the seller and the agent both, says Morgan. "Why bother?" At best there will be a loss of time, but the real risk is "walking the market down". Here is a typical example: A customer asks for $380,000 when he could only get $350,000. The house sits for two months and the customer now is willing to take $350,000. Opps, it's too late. The market price now is $335,000 but the customer wants $350,000, a price he could have received two months ago but can not get now. This process continues until the house is priced correctly or the seller needs to get more out of it than the market will bear and the listing is pulled.

Still, Morgan tells me that he is doing deals when others are not. I asked him how. He gave me an example using Centex. Centex offered $60,000 but that still was not enough to entice buyers so in several cases he gave his clients half of his $24,000 commission and half of that $10,000 selling bonus too. Those clients got houses for $22,000 cheaper than the discount offered by Centex. In effect, Morgan cushioned his clients against an extra 6-7% price decline. Who else is doing that, I wonder?

Like all brokers Morgan goes over recent sales and active listings. One thing he is doing that others are not is showing clients pending sales. Recent sales of even one or two months ago can be hopelessly out of date in a fast market. Pending sales are more likely to give a buyer or seller a better idea of what something is going for now.

When it comes to listing houses for his clients, he is recommending selling bonuses and very competitive initial asking prices to make sure the house gets shown. He is willing to give up his split of that selling bonus to get a deal closed. "With skyrocketing inventories, one must do something to stand out", he said.

I thought about this for a while and it became obvious to me that Morgan is attempting to create "Customers for Life" by treating them more fairly than necessary to get their business. Will they remember that? You bet.

How many places truly understand the value of a customer anymore? Service is now a buzzword. It hardly exists in practice. Proof of that is easy to come by. Call the customer service of any company and it is likely you will go through two minutes of automated voice transfers just to get to the wrong department.

In the short term it might seem that Morgan is losing $10's of thousands of dollars commission per sale. But is he really? By sharing his commission with buyers he might be closing a deal that otherwise might still be sitting on the table. Short term, half a loaf is better than none. Long term he is building up a client list for repeat business and referrals down the road. How many word of mouth customer referrals is he going to get by doing business the way he is?

Revised splits, selling bonuses, splitting commissions with clients, insistence on realistic pricing, and willingness to take half a loaf are what it is going to take to survive the bust. Those flexible enough to do that will be building customers for life.

The Mortgage Business

As long as we are on the subject of treating customers fairly I may as well address one of the questions that people send me time to time regarding a link to No Bull Mortgage on my blog. The typical question goes something like this: "Mish why are you sponsoring a mortgage company on your blog when you think an enormous real estate bust is coming?"

The answer is simple I have known Dave Donhoff, the owner of No Bull Mortgage for years and I know he treats his customers fairly. Regardless of what I think is about to happen to home prices, some people simply want to buy a home. Unlike other places, Donhoff does not steer his clients to pay option arms to make an extra % for himself. If a client is stretching too much for a house Donhoff will come out and say so, and if Donhoff does not believe a "stated income" he will point out the consequences of stretching the truth: potential bankruptcy as well as a possible fraud conviction. Like Morgan, Donhoff is attempting to build customers for life by watching out for their best interest. In the end both Donhoff and Morgan have both aligned their best interests with their customer’s best interests. There is simply no better way to build a business.

Compare and contrast those examples with a letter I just received from "WeDoLend". A clear window on the envelope was big and bold "RE: Merrill Lynch Credit Corp". It appeared I was getting some sort of update from Merrill Lynch about my mortgage. It was anything but. The letter itself started of with: "I have good news. ..... in addition to the mortgage obtained from Merrill Lynch Credit Corp you qualify for a fantastic opportunity...... Guess what? A new loan enables you to skip a mortgage and have no out of pocket closing costs". The bolding was theirs not mine.

Only in the fine print was it disclosed that what is being offered is a pay option arm, and only in the fine print was it disclosed that the offer was not from Merrill Lynch at all. I did call Merrill Lynch and they had already received several calls from customers but I was the only one that got to the fine print disclosing the details. Apparently this kind of nonsense is perfectly legal but what word better describes this kind of attempt to build customers than "sleazy"? It is all too typical of the anything for a buck crowd, and there are probably going to be a lot of suckers taken in by this ruse. I really do not know how some of these lenders can sleep with themselves at night. If I can do my part to steer people away from places like that, I consider it time well spent.

In the interest of full disclosure, I do not get a thing from Mike Morgan should any customers find him as a result of this article. However I may make a token amount if someone clicks on the link from my blog to No Bull Mortgage and takes out a loan through them.

I need to point out two things about this arrangement:

1) My relationship with No Bull Mortgage is in full compliance with the Real Estate Settlement Procedures Act (RESPA).
2) To date, I have not earned a single dime from it and I am not sure I ever. I simply do not expect many people reading about economic bust theories to be clicking on ads for a mortgage lender.

As long as we are in full disclosure mode, I have not made over $350 combined total in over a year's time off of the ads on my blog. It certainly is not a get rich quick scheme. For those that think there are lucrative advertising revenues to be had from blogging, rest assured that is not the case, at least not in my experience.

Customers For Life

In the end, this post is not about real estate or mortgages. It is about sales and customers and what it is going to take to get them regardless what business one is in. Those in sales might benefit by reading the book Customers For Life: How To Turn That One Time Buyer Into A Lifelong Customer, by Carl Sewell.

Looking at Amazon.Com I also see a listing for How to Win Customers and Keep Them for Life by Michael LeBoeuf. I have not read that book so I can not make a recommendation on it.

I did read Customers For Life in 1990. The author, Carl Sewell, is a luxury car dealer from Texas. The book details his experiences in selling cars. However, his book is no more about cars than this post is about houses. Sewell's advice is as true today as it was then.

Sewell's Ten Commandments of Customer Service

1. Bring 'em back alive.
2. Systems, not smiles.
3. Underpromise, overdeliver.
4. When the customer asks, the answer is always yes.
5. Fire your inspectors and consumer relations department.
6. No complaints? Something's wrong.
7. Measure everything.
8. Salaries are unfair.
9. Your mother was right.
10. Japanese them.

Sewell asks the question: "Are we going to make an extra effort for someone who might buy twenty cars from us? You bet." If you are in mortgages ask yourself what you are going to do for someone that might buy 2-3 houses from you over the course of their life in addition to recommending you to ten other people that might do the same. Are you doing anything special for them?

Let's compare those ideas to the real estate market today. A real estate agent can no longer just stick a sign on a lawn and expect to get a sale, nor can a builder just put up a tower and be flooded with condo buyers. Competition for customers of all kinds is increasing, and that goes well beyond the housing slowdown. Look no further than GM taking it on the chin from Toyota. I expect increased competition for dwindling customers will quickly extend beyond real estate and auto dealerships to nail parlors, upscale beauty salons, and even lawn care services.

Whether or not you are in sales, everyone has "customers" to take care of. I was in the banking industry for over 15 years but never sold a thing. My "customers" were end users in the credit card business. If you have not done so already, it's time to figure out who your customers are, what new customers you want (if any) and make sure you take care of them better than your competition does. Your economic survival may depend on it.

Mish Addendum:
I wrote the above about 14 days ago (April 2).
Whiskey and Gunpowder had first use right to it but did not use it April 14th (and it may not be on their archives until later this week). Since I wrote the above, the Florida market has gotten even tougher to deal with as I reported in Shoot the Messenger. More from Mike Morgan will undoubtedly be coming up.

As for now it seems that Florida is at the epicenter of the bubble busting with hurricane season rapidly approaching. I will have more comments on that later this week.

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

Subprime Lender Acoustic Goes Under

As of 4/14/2006 Acoustic Home Loans is no longer in business.

Acoustic will not accept new loan submissions after 4/13/2006; however, we will continue to process loans that are in approved status or better. Applications received after 4/13/2006 and loans that are not in approved status or better will be returned to the broker. If you are a broker with a loan in process, a borrower who has a loan with Acoustic, or the media please call our main number at 866.226.8784 and you will be directed to the appropriate person.

Hmmm. It seems the industry's first and only "Guaranteed Broker Contract" is no longer guaranteed. Acoustic was the 27th-largest nonprime wholesale originator in the nation.

Rest assured many more "guarantees" will be broken in the upcoming months.

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

Shoot the Messenger

Mike Morgan is telling me that his email basket is filled up with responses from the Wall Street Journal article Hot Homes Get Cold In Once-Booming Markets Such as the Florida Coast, Housing Sales Languish. April 12, 2006; Page B1

I was pleased to beat the WSJ to that story by several days in The dreaded "D" word surfaces Sunday, April 09, 2006.

Here is the latest report from Mike Morgan:

I’ve received a variety of emails and voice mails from people all over the United States today in response to a very minor mention of my name in the WSJ. 75% of the communications are people that think I am a sleaze for selling junk to my clients. Little did they know, my clients are fine. We warned about this more than a year ago.
Anyway, take a look at the email I received below. If that doesn’t drive home the seriousness of what is just only beginning to unravel, I will send you a dozen more emails I received . . . like the email I received from the Dad of a young wife that is getting a divorce because the husband lost it all at the craps table in Vegas – strike that – I meant to say the husband lost it all buying flip properties in Vegas. By the way. She has 2 young babies and is moving back home with Mom and Dad. Or the email from the couple (68 and 70) that were getting ready to retire to Florida in 3 years. Guess what? They’ll retire, but the husband lost so much money buying straddled foreign exchange derivatives on Italian lira – strike that – I mean to say five spec condos in Naples (Florida) to make some extra money to buy a special retirement home, that they are not going to retire in the style they thought. They still haven’t sold the condos, so they are in for a big surprise. As he put it in the email, the 40 years of trust built up in that marriage has been wiped out. He wanted to know what I could do to help him. I’m not the Easter Bunny.

I bought an $850,000 a year ago on a little less than a quarter acre of land and with barely 2000 sq ft. under air. I made the "wise" choice to purchase it with no money down! This home was just on the threshold of my affordability...even with the wife working. Oh did I mention I have an ARM mortgagte...so now my payments are going up up up! S@@@...we are paying more for the same house...but not building any more equity! This sucks! Then the wife comes home after just sending the daughter to the orthodontist to get her teeth fixed, and declares ..."Tom, did you see that the Klevelands just put their house up for sale?" "No, I din't, I thought they really loved the area"...so with a little digging, I find that they are asking $800,000 for their home...and it is just about the equivalent to ours. Then your mind races...what is going on? Then you realize 3 months latter that their house is still up for sale, with a neon lights above the realtor sign, that says REDUCED (to $750,000)...not only that, but there are now 20 other for sale signs up in your neighborhood...THAT IS WHEN THE SHOCKING REALITY SETS IN...you will never get that $850,000 out of your house, and all the interest you have been paying is just that...a fart in the wind...and sallys orthodontist bills are pilling up, and our credit card is maxed from all the new furnishings we decorated our $850K home with...not to mention that there are rumors at work, that the company is sending more jobs to India, to save a buck, and you panic. Now I am staring aimlessly into my newly adjusted mortgage bill thinking, "HOW THE F@@@ DID I GET MYSELF INTO THIS". So I will sell my useless home at a loss..upside down and all, move to a region with cheaper homes, maybe a "fixer upper" take a lower paying job with a commute and sell the sports car and the boat, so I can with a clear conscience look at little Sally with a mouth full of wires and crooked teeth and smile, all the while thinking, ok, now how the f@@@ am I going to pay for her college! I was one f@@@@@@@ idiot...I hope no one besides my wife ever finds out. This has just about destroyed my marriage. Oh, one more thing. Did I mention I bought another home in here as an investment flip that we closed on four months ago. I can’t sell it for what I paid. I can’t even find a renter. I haven’t had a showing in more than 2 weeks.

If you want to either buy or sell in Florida and want to know what is really happening, give Morgan Florida a call.

Stories like those are just starting. There will be more and more of them, and more than likely those affected will blame the media and messengers like Morgan. I have proof of that already. Here is a snip from the WSJ article above:

Some Floridians blame the media and even Wall Street for scaring people away. Mr. Linsley recalled a headline in a local paper declaring that the local housing market was overvalued. The headline type was so bold that it looked as if the nation had just declared war. "The media is killing the investors," Mr. Linsley says.

To Mr. Linsley I have some questions for you.

• Where were your complaints when the media was reporting about people like yourself snapping up 2 and 3 units at a time after a multi year boom in which prices had already doubled?
• Where were your complaints when the media reported that some people were camping out all night just to get in line to buy a condo?
• Was the media not reporting on that too?
• Shouldn't that have been some sort of sign of a top?

Perhaps Mr. Linsley if you want to know who is to blame for the crash, then I have four answers for you, one in the form of a question:

1. The Fed by slashing interest rates too far.
2. Fannie Mae and loose lending standards everywhere.
3. Congressional policies to make housing affordable. Those programs are now backfiring.
   
4. I suggest you look in a mirror and ask yourself "What the heck was I doing fueling a bubble like that by buying three houses at the peak of insanity?'

The Fed and Fannie Mae and lending standards provided the money, but you Mr. Linsley pulled the trigger. I have no doubt that sometime down the road when bankruptcies start soaring, there will be a Congressional investigation that ends up blaming everyone but those responsible.

To everyone: On behalf of the Easter Bunny, enjoy the holidays.

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

GMAC sale, the Good, the Bad, and the Ugly

Jim Jubak is writing Bad for GM, bad for America

General Motors has launched a time bomb that could push the company into Chapter 11 and take down the financial markets with it.

Leave it to the guys who are driving General Motors off a cliff to make things worse. Thanks to their most recent "solution" -- selling off a 51% stake in the company's profitable General Motors Acceptance Corp. financial arm -- CEO Rick Wagoner and his team have actually raised the odds that General Motors will have to seek bankruptcy protection. And made sure, as an added bonus, that they can do nothing to stop what they’ve set in motion.

So how does a CEO manage to put his company and the entire financial market at risk with a single deal?

By making it contingent on the whims of the not-so-rational combatants at Delphi and the United Auto Workers, who have locked horns over wages and benefits in Delphi's bankruptcy proceedings.

General Motors did this by "selling" 51% of GMAC to a private investment group including Citigroup and headed by hedge fund Cerberus Capital Management for $14 billion. Of course, GM won't get that $14 billion all at once. When the deal closes, Cerberus and its partners will pay General Motors $7.4 billion. GM will collect another $2.7 billion in cash from GMAC as a return of the higher taxes that GM paid on GMAC's income when it owned the financial company. GM will receive another $4 billion over three years from GMAC as income on $20 billion in leases and retail assets that GM will retain after the deal.

This isn't exactly a great deal for General Motors. GMAC is the company's most profitable unit, earning $2.8 billion in 2005, and GM has been able to tap GMAC for capital during what has become a perennial rough patch. The investor group is paying about five times net income for its 51% stake in GMAC -- and part of that price is cash from GMAC itself. If you look just at actual cash from the investor group and subtract the cash from GMAC, the price is closer to two times income.

The no-sale sale
But price isn't the real, company-crushing bad news in this sale. I'd save that moniker for this oddity: The sale isn't a sale at all. Cerberus and the rest of the group can walk away from this deal before it closes some time in the fourth quarter of 2006 if the credit rating on General Motor's unsecured long-term sinks to less than a triple-C rating from Standard & Poor's. A rating like that would be two notches deeper into junk-bond territory than General Motors' current rating of single-B. (The deal is also off if GMAC's own credit rating slips below its current double-B rating, just two notches below investment grade.)

What could drive General Motors bond ratings down another two notches just about overnight? A strike set off by supplier Delphi’s efforts to break its contracts with its unions in bankruptcy court. The company has filed a reorganization plan that includes closing or selling all but eight to 12 of its 33 North American plants and cutting as many as 30,000 jobs. For U.S. workers who keep their jobs, Delphi has proposed an immediate wage cut of $5 an hour (or 18%) to $22 an hour for production workers and another cut to $16.50 an hour -- for a package of cuts totaling $10.50 an hour -- in 2007.

The United Auto Workers, as you might imagine, has branded the proposal unacceptable and threatened a strike. Delphi has responded by asking the bankruptcy judge for a ruling that would allow the company to unilaterally break its union contracts with the company's 34,000 union workers and its 12,000 union retirees. The first hearing in this game of chicken is scheduled in U.S. Bankruptcy Court in New York on May 9-10. A ruling on the labor contract is unlikely until June.

It's hard to know where to begin.
Let me start by saying that Jubak is one of the better writers that MSN Money has. Forget the overhyped Cramer (a service you have to pay for) and take Jubak for free. That is my "No Brainer Pick of the Day".

That said, let's take a look at the Good, the Bad, and the Ugly of this sale.

The Good

The good is that GM got rid of it. I disagree with Jubak that this was some sort of crown jewel. If it was a "crown jewel" GM would have gotten a better deal for it. About a year ago on the Motley FOOL and Silicon Investor I recommended that GM dump this financing unit while they could get something for it. At the time I heard all sorts of absurd claims that it might fetch $50 billion or so. You know what? It MIGHT have. Who knows? What we do know is that GM delayed doing this transaction until not only was it clear that GM car sales sucked but it was clear that the economy was headed into a slowdown as well. Still, GM got the deal done, well sort of (and more on that later). That is the good. It is good because in an economic slowdown the value of its receivables are going to take a hit. Perhaps a huge hit.

The Bad

GM is getting a lousy $14 billion for this deal of which a mere $7.4 billion is up front. If that seems like a far cry from the $50 billion figures that were tossed around less than a year ago, well it seems that way because it is that way. Still I contend that GM was right to dump GMAC. Any car company that makes more on financing car loans and mortgages should either decide to become a loan company or a car company. Hmmm Perhaps this is a good. Well yes it is except that GM delayed too long and that makes it bad. Except of course that the transaction is far uglier than it is either good or bad.

The Ugly

I was wondering why GM sold off on the news of this completed deal. I had been puzzled by this for days. Well, Jubak enlightened me today of "The Ugly". The sale isn't a sale at all. Cerberus and the rest of the group can walk away from this deal before it closes some time in the fourth quarter of 2006 if the credit rating on General Motor's unsecured long-term sinks to less than a triple-C rating from Standard & Poor's.

I am surprised that Jubak did not comment on this but GM did not sell GMAC, GM sold an option on GMAC. If Jim is correct (and I have no reason to believe that he is not correct), GM sold a "No Cost" call on GMAC. IF, in the timeframe specified GMAC is worth the agreed upon price, then the call will be executed, if not the buyers will walk away.

Not only is that ugly, that is desperate on behalf of GM. If Delphi strikes, the buyers walk away. If GMAC credit ratings tank the buyers walk away. If and a big if, everything looks ok, the buyers just bought GMAC for a fraction of what it was worth.

There is only one word for this and that is ugly.
This chart shows the ugliness of it all.



The Market did not think too much of the sale and neither do I. Interestingly enough, the chart showed the weakness long before either Jubak or I noted the details. A tip of the hat to Jubak must be given for explaining what happened.

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

US vs. Japan Land Prices Pictorial Update

In Spring of 2005 I announced It's a Totally New Paradigm

At that time the chart looked like this.



In June I announced It's time to shift the arrow on the basis of Time Magazine going gaga over real estate.



In December I wrote that It's Too Late.

When you see stuff like this, not only is it too late, it's way too late.



I am pleased to announce that we have moved the arrow once again.
The current picture looks something like this.



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

The dreaded "D" word surfaces

No, I do not mean deflation, not yet anyway. I mean discounts. Builders have been offering free upgrades such as granite countertops, better cabinets, and landscaping. They have been also offering free closing costs, increased lot sizes, and low mortgage rates. One is even offering free cruises. Today DR Horton is finally using the word "discount". They are the first builder to do so. They are still trying to disguise the amount of the discount, as they are giving a discount AND they are giving buyers a free lot and upgrades. Others will no doubt follow suit.



Mike Morgan of Morgan Florida is keeping me posted on what is happening in Florida and it's not pretty. Mike is doing everything he can too, to drum up customers. I will tell you more about that next week. For now, here are some updates from Mike Morgan.

I hope you’re all sitting down. These numbers were just released by our Board for February – Martin County, Florida. These numbers do NOT include builder inventory, so the numbers are much worse than what you see below.
2005 Inventory 1148
2006 Inventory 3594
Increase – 213%

2005 Absorption Rate = 0.19 months
2006 Absorption Rate = 21.8 months

This is not an error and the condo rate is even higher!

Is this just a Florida thing?
Nope.

NEWPORT BEACH, Calif. - Homebuilder William Lyon Homes said on Wednesday new home orders during the first quarter fell 26 percent from a year ago, while its cancellation rate for the quarter more than doubled.

LOS ANGELES, April 5 - Homebuilder Brookfield Homes Corp. on Wednesday said net orders for the first quarter fell to 227 units from 517 units a year ago, saying the decline was primarily in the San Diego/Riverside and Washington D.C. markets.

Morgan had this to say about those releases:

I think those two releases say it all. If you think this is isolated to these two builders or a region, think again. All of the big boys will have similar releases in the coming weeks. On the latest KB conference call, Ivy Zelman tried to pepper the KB execs with hard questions. Karatz’s response when he cut her off was very interesting: "do the math Ivy." Well, if the Street was doing the math, it would be clear these guys will miss their new home numbers by 15-20% this year with lower margins to boot. The incentives and commission bonuses are increasing daily.

KB reps have called me twice this week with "inventory" homes. These are homes deeply discounted because buyers (flippers) walked away from their contracts. By the way, the math for Brookfield is a 56.09% drop. I’ll bet you a dozen donuts KB, PHM, LEN and CTX report double digit drops in order this year approaching, and maybe exceeding 30%. If the Florida market is any indication, the numbers will be north of 50%.

Here is an ad from LEN that Morgan sent me.
Great Incentive on The Millbridge
April Move In!!!!!
Special 4% Realtor Commission
Was $486,365…Weekend Special……..NOW $396,365



Weekend Special? $90,000 off!
Poof. Anyone that paid full price a few months ago is now 18.5% and $90,000 in the hole, and that does not count real estate commissions either. Is Lennar using the dreaded "D" word? No, not yet. How long they can go on selling houses at full price but offering $90,000 in weekend incentives is anyone's guess.

I could not find Millbridge on any of Lennar's Florida listings but by calling a phone number on the ad I found what I was looking for: It is in Port St Lucie, Florida - The Treasure Coast. Interestingly enough there are only 3 units left, and apparently there was a closing breakdown of some kind or other. So... to get rid of those last 3 units, Lennar just repriced that entire subdivision down by close to 20%. Is that desperation by Lennar? If not, exactly what is it?

Let's finish up with more comments from Morgan.

This was our worst week yet. We went three days this week with not a single showing. That’s incredible. I have 35 listings. We usually get 2-6 showings a day. I noted a few months back that once the snowbirds left Florida in March, that we would be in deep trouble going into the Florida shoulder season of April and May. It is here and the buyers are gone. We will see a small surge in buyers for June and July as buyers jockey for school systems, but then it is a decline from August through December. January picks up with the return of the snowbirds.

Not only did we see three days without a single showing, but I received more desperate calls from sellers than ever. One lady broke down into tears. Her husband bought two investment properties, and they are now going to lose their "life savings" if they sell the homes in today’s market. Her only option is to lose her life savings trying to carry this through the next 12-24 months. I received calls from Utah, California, South Carolina, Vermont, etc. etc. All the same. "We bought a house or a couple of houses for a flip, but we can’t sell them. What do we do, Mike?" I can only tell them that the $400,000 house they bought is now only worth $325,000 - $340,000. Their 10% deposit is gone. Their $3,000 a month in carrying costs is killing them. A year from now these homes MAY be worth $350,000 - $375000 IF we have a strong market. So even a best case scenario means $36,000 in carrying costs to recoup $25,000 - $35,000. That means another $1,000 - $11,000 in losses if they wait . . . and IF the market rallies strong.

I am hoping that if prices fall far enough, the investors will step back into the market, but mortgages and insurance on investment homes is now very difficult to procure in this market. Moreover, rents are down by 20-40%, so the numbers don’t work for investors that cannot afford the 5-10% negative cash flow. The other side of that is, we will need a minimum of a 5-10% increase just to cover the negative, not to mention another 4-8% to cover the commissions. Will we see a 9-18% increase in prices? Hardly likely.

Next January we will see a surge in buying with the return of the snowbirds. They will return not as snowbirds, but as vultures, looking for the bargains at the expense of the flippers.

Don’t forget the ripple effect. Building has come to a screeching halt. Thousands of construction workers are out of work. They are forced to sell their homes, adding to the inventory. Foreclosure filings are on the rise and will hit record highs this year. Banks will suffer as well.

These issues are not isolated to Florida. I hear the same story from friends in Arizona, California, and Washington DC Metro.

By the way, I don’t even take calls from the builders anymore. They have their sales reps on the phones calling agents every day. These are the same guys that didn’t want to know us a year ago. At some point the real story will come out. Brookfield and Lyon are just two small companies that have come clean with the Street. The big boys will have no choice but to start revealing the real numbers. Incentives, free upgrades, free lots, free closing costs, credits, bonuses to agents, increased commissions all mean lower prices to the builders and lower margins. Moreover, we are now seeing a big problem getting homes to appraise for any of the higher prices that a seller might be able to snag. As prices come down, this will be come a major problem for buyers.

The totality of the circumstances paints a bleak picture.

Here's a tip of the hat to Mike Morgan for telling it like it is. Not many brokers are willing to tell people what is really going on. Morgan is one of them and I for one appreciate his honesty. I also appreciate some of the things he is doing for his clients, and I will have more to say about that later next week.

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

A Path of Devastation

The Rocky Mountain News is reporting Foreclosure shock.

Denver market sees 31.5% increase from first quarter of 2005

The 31.5 percent jump is the largest year-over-year percentage increase for a quarter in almost two years.

The jump to 4,764 foreclosures compared with 3,624 in the first three months of 2005 took some experts by surprise. Public trustee offices in Adams, Arapahoe, Boulder, Broomfield, Denver, Douglas and Jefferson counties estimated the number of foreclosures they expect to open this month.

"That is disturbing," said economist Patty Silverstein of the soaring number of foreclosures.

"We still expected to see increases in 2006, but this is larger than what I would have expected. At this point in our economic recovery, we would have expected to have seen a smaller increase in foreclosures," said Silverstein, principal of Development Research Partners.

She said that a main culprit appears to be interest-only and other variable-rate loans that homeowners have taken out in huge numbers in recent years to reduce their monthly mortgage payments.

"What I see is not pretty," said Healey, who also heads the Healey Group and hosts a radio talk show called The Real Estate Advocate on KKZN (AM-760).

He said the number of unsold homes on the market has been growing by an average of 2.5 percent a week. The increasing supply is putting downward pressure on sale prices, especially for the lower-priced homes most likely to go into foreclosure.

That's a vicious cycle because it forces more sellers to lower their prices, driving even more houses into foreclosure, Healey said.

"Primarily, I see a huge glut of homes priced under $300,000," Healey said. "Under $200,000, it is just a blood bath, a path of devastation. It is just ugly."

In some areas of Adams County, sellers of lower-priced homes are finding that the market value of their home is down 15 percent to 17 percent from what they paid a couple of years ago, Healey said.

Economist Tucker Hart Adams said that foreclosures are a lagging indicator and will continue to rise even as the economy gets back on its feet.

Quotable Quotes

1. "That is disturbing"
2. "What I see is not pretty"
3. "Under $200,000, it is just a blood bath, a path of devastation. It is just ugly."

Economist Tucker Hart Adams said that foreclosures are a lagging indicator and will continue to rise even as the economy gets back on its feet.

Exactly what kind of nonsense is this: "as the economy gets back on its feet"?

We have had 15 consecutive rates hikes (presumably showing economic strength), as well as low unemployment if you happen to believe the government numbers (I don't). We have also had record low interest rates for years, so I am tired of these cheerleaders making up excuses. The "lagging indicator" of foreclosures is just another feeble excuse .

That said, Tucker Hart Adams is correct in a way. Foreclosures are indeed a lagging indicator. Unfortunately his thought process is flawed. We are so deep into a recovery that foreclosures should be falling. We are also so deep into a recovery that wages should be rising. In fact we are so freaking deep into a recovery that the recovery is nearly over. Yet here we are, foreclosures rising in a recovery, real wages falling in a recovery, and in our Alice in Wonderland scenario virtually no one sees the recession that is staring us smack in the face.

Just as every peak produces new logic proposing that "It's different this time", this bubble peak is no different. Check out the latest New Math on Homes. I was staggered by the number of economists falling for such absurd assumptions.

Every week there is another story.

• Inventory rising.
• Sales falling.
• Builders slashing prices.
• Foreclosures rise.

The real estate bears certainly were early, but it is the bulls that have zero sense of reality right now.

Builder Sells Homes For Cost

This market turned on a dime. They always do. In July of 2005 people were camping out in Florida to get in line for buying a condo. Now you have projects being cancelled, not only in Florida but Los Vegas and Massachusetts. Want to buy a home in Florida? How about 40?

The Datona Beach News Journal is reporting Builder's sale aims to move 40 homes.

Skittish investors, leery of the air seeping out of the housing bubble, have left at least one area home builder awash with completed homes and no buyers in sight.

Holiday Builders, the 30th largest builder in the nation, is hoping to turn the situation around by selling homes at what the company says are "builder's cost" this weekend.

Jennifer Youngblood, a spokeswoman for the builder, said homes that were previously priced between $219,000 and $276,000 will be sold at rates ranging from $204,000 to $249,000.

"These homes are available on a first-come, first-served basis," Youngblood said, about the properties that are spread throughout the community.

The company is staging a special sales event between 10 a.m. and 6 p.m. today at their showcase home here on Eagle Harbor Trail in an attempt to sell about 40 new homes that had been ordered by investors. Consumers should be prepared to put down $5,000 and close on the property in 45 days.

Changes in the market, including rising interest rates and an abundance of inventory, apparently caused some buyers who hoped to profit from the boom in area housing prices to walk away from the idea.

"We found ourselves in a unique situation," Youngblood said. "This is the first time that we have done something like this."

Charles Rinek, president of the Flagler/Palm Coast Home Builders Association, said he has heard of similar situations in which buyers forfeited their deposits and walked away from contracts.

Selling homes at cost huh?
How desperate is that?
If true (and it is hard to say) this builder is in deep trouble.
If it is not true then the builder is a liar (but likely in deep trouble anyway).
My guess is that they may be going near cost, but the developer is hoping to escape with profits because of the forfeited deposits.

Cancellations in Las Vegas

The Miami Herald is reporting Las Vegas a rough ride for Miami builder.

Two years ago Miami developer Jorge Perez said the Las Vegas market was ripe for the high-rise condominiums he has built so successfully in Florida. But Sin City has not been kind to South Florida's ``Condo King.''

In January Perez canceled a twin-tower condo called ICON Las Vegas. Now he's weighing selling the 25 acres on which he, along with actor George Clooney, planned to build a massive -- and much-hyped -- 11-tower condo project, Las Ramblas.

The $3 billion project was to rise near the Las Vegas Strip, and full-page newspaper ads heralded the arrival of Perez, Clooney and team as the second coming of the Rat Pack. But now Perez says demand is lower than expected and construction costs much higher -- in fact, he says, Las Vegas' condo market has dropped off more sharply than any of his other markets.

"Did we misjudge the levels of demand and costs in Las Vegas?" said Perez. "The answer is yes."

Fortune International CEO Edgardo Defortuna considered a Las Vegas project but backed out.

"The reality is that there are such wonderful, gorgeous hotels at very reasonable prices," said Defortuna. "Why would you stay in a condo when you can stay in a hotel in the middle of the action and not pay that much price?"

But not everyone is ready to throw in the towel on condos in Las Vegas. WSG's Eric D. Sheppard said the condo market is real in Las Vegas, but too many builders rushed in and sold units before understanding their construction costs.

"We are very bullish," Sheppard said. "We plan to announce a two-tower, 1,600 unit condo, condo-hotel and spa project in the next 30 days."

It seems to me that Sheppard is begging for bankruptcy. Perez and Defortuna saw the warning signs and backed out in time. Perez in particular got very lucky. Once groundbreaking starts, it is very hard to back out of it. On a condo project that size (11 towers and $3 billion on the line), Perez was going to be in one nightmare of a problem.

"The reality is that there are such wonderful, gorgeous hotels at very reasonable prices," said Defortuna. "Why would you stay in a condo when you can stay in a hotel in the middle of the action and not pay that much price?"

That indeed is the reality of the matter. Let's add to that reality.
Why would you buy a house in California or Florida when you can rent it for half as much? Please add Boston and Las Vegas to that list. Also note that the Phoenix active listing count is now over 40,000 homes. That does not include for sale by owner.

I do not know how to even begin to describe what is happening in to one of the most affluent suburbs in the nation. Please read Down and Out in Bloomfield Hills.

Outside of a few still appreciating areas (One trusted source tells me that Atlanta is still one), housing has turned. But not only has housing turned, it has turned 180 degrees. Yet Bernanke keeps hiking. Why? Bernanke hikes because he has to. The stock market, the carry trade players, 5,000 hedge funds, and the mortgage loan sharks still have not gotten the message. The message is that the Fed no longer wants speculation.

Speculation was fine "nudge nudge wink wink" when the Fed was acting to contain "the deflation monster", but now it seems that perhaps they have unleashed something else indeed: a bubble credit blowout that they do not know how to contain.

Yet each hike in rates is another nail in the coffin of housing. Given that "Housing Is The Economy, Stupid" Bernanke better damn well be praying that the markets get the message before he turns a recession into a depression with these rate hikes. Right now he simply has no choice whether he likes it or not. Market speculation is forcing his hand. Laugh if you want, but it seems to me that housing says Bernanke has overshot already. It remains to be seen how long it will take before the market gets the message.

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