During my travels last week in Florida I had a chance to see the housing collapse first hand. The stories that I heard from some retirees I talked to down there about real estate are catastrophic.
I wanted to focus on one story that I heard from a older retired fellow from Orlando. I will finish with another story that a broker told me about a housing developement in Arizona.
One of my fears post collapse was figuring out how the HOA's(Home Owners Associations) of various 1/2 empty condo complexes would survive without nailing their tenants with massive increases in HOA fees.
HOA fees are set assuming that the building will be fully occupied. At the peak of the bubble the HOA fees were relatively low based on this assumption.
The problem here of course is the cost of maintaining the building does not drop.
So just do the math if the complexes remain say 50% empty: If you have a 100 unit condo complex that has only 50 occupants the HOA fees eventually must double in oreder to pay the bills.
From what I heard in Florida the rising fees were actually worse. The retiree that I spoke to generously explained his dire situation to me:
This gentleman bought 2 condo units at the peak of the bubble for $300,000 each. The HOA fees at the time of purchase were paid quarterly and the cost in 2006 was $600 per unit.
My how things have changed:
He went on to explain to me that the value of each unit in 2010 has now dropped from $300,000 down to $120,000.
If this isn't bad enough wait until you hear his 2010 HOA fees. They have now risen from $600 per unit per quarter up to a whopping $1600 per quarter.
He is now in a panic because he can't afford to take the loss on the properties and the $13,000 in HOA fees are starting to cripple him.
I asked him if he had spoke to an attorney and he said that he hadn't but was getting ready to do so.
He also explained that there are actually laws in Florida that are more strict than other states when it comes to regualting HOA's. The problem is(according to this guy) they can easily be bypassed with a few accounting gimmicks.
Bottom Line:
If you own a condo in a building that is not filled please be aware that your HOA will eventually rise. The electric bill has to be paid and the builder has no desire or ability to cover the costs.
They are all bankrupt as a result of holding onto homes/condos that they cannot sell. It will be up to the tenants to carry the costs of the building.
Also:
I went over to Disney during my stay and it was a total ghost town. The locals say things are only busy now when a convention is in town.
Arizona
Believe it or not this story is WORSE then the one above. I spoke to a mortgage broker friend of mine who just did a loan for a school principal that moved to the Northeast from Arizona.
The broker was almost unable to get the deal done even though the persons salary was 130k per year.
I of course asked him why and he explained that the guy had taken a huge hit on his house in Arizona. He then gave me the details and folks they were flat out shocking.
The development where this principal moved from contained 300 housing units. At the peak they were selling from $500,000-700,000.
The broker's client of course bought at the peak. I then asked "well what are they worth now?"
His client explained to him that his house is now worth about $150,000. I don't know what he actually paid but it was somewhere between the range above.
Now get this:
The client also explained that 180 of the 300 units in the development in Arizona are now in foreclosure. There were an additional 90 units that were pending and about to head into foreclosure.
When this guy left Arizona there were only 2 people left living in the homes on his street.
So essentially 270 of of the 300 units will be in foreclosure within the next few months. People apparently started walking away in droves as the value of the houses dropped over 70% in value.
The broker then asked his client what he could now rent his home for. His client was told by a Realtor that he could get about $850 a month.
I said to my friend..." $850 dollars!!!!!!! Are you frickin kidding me? 4 years ago these joints were selling at 700k." He said "Yup that's right....Those are the numbers."
I am amazed my broker friend was able to get the guys loan done. With a six figure salary I guess you can make it work.
The Bottom Line
Folks, anyone telling you we are now in a recovery are smoking crack. I talk to people all the time in the housing industry and the bubble areas are getting slaughtered and nothing is coming back in value.
I did a little math on the housing developement above. Let's be conservative and assume that the bank has to take a $200,000 loss on the 270 units above. The total loss using these numbers is a whopping $54 million and this is only 1 housing developement!
Imagine how many others that are out there that we don't know about.
The take home message here folks is stay the hell away from housing. Don't buy one for several more years.
Once all of this inventory hits the MLS houses will be selling a fraction of where they are today.
The last housing inventory data was 12.5 months which is more than double the historical norms of 6 months. The problem here is this does not include the shadow inventory which has to be mind boggling high when you hear stories like the ones I just shared with you.
I don't know how the banks are ever going to be able to afford to take these losses.
Needless to say: The housing market from everything I have gathered is going to completely meltdown in the very near future.
The Fed might be able to hide this mess more a few more months. Maybe a year at the most.
The problem is the word is getting out about how bad it is. This is why you are seeing the lowest home sales on record despite the lowest interest rates in history.
Have a great night and stay the hell away from real estate.
16 comments:
So this moron loses $600k on a house and the first thing he wants to do is buy another house?
And he is responsible for the education of the children of Arizona?
Sheesh!
Thankfully the new underwriters are a tad smarter than this highly educated idiot.
Herb
Actually the guy moved to a very rural non bubble area where home prices never really rose.
200k gets you a palace in the area he moved to. Can't say where because I don't want to give out too much info.
Anything he looks at will be affordable with the money he makes.
American real estate owners going down. Funny!
I spent part of my weekend partying with some of the members of my ski club, a few of which are realtors who were making a great living out of real estate during the boom years at the Gold Coast.
It is interesting to note that each and every one of these people now has a different primary source of income now that is not as lucrative as their "bubble" income was from being realtors.
Interesting, but true.
"Jeff said...Once all of this inventory hits the MLS houses will be selling a fraction of where they are today."
Even Ivy Zelman, creater of the infamous "Alt A reset chart of doom" says this wont happen. From the WSJ:
Ivy Zelman, chief executive of Zelman & Associates, notes that “it’s not going to be a flood” of properties onto the market because banks don’t want to “undermine their own recoveries completely.”
http://blogs.wsj.com/developments/2010/09/16/wheres-the-foreclosure-flood/
Flood the market and the banks die. Continue to play extend and pretend and the banks stay in a coma from which they will not recover for years and years and years...
CT
Yeah when bubbles burst there isn't much money to be made from them when the game is over.
Anon
Yeah they have been playing the shadow inventory game for awhile now.
I don't disagree with this way of thinking in an attempt to prop up prices.
The problem is the longer you wait to clear inventory is you run the risk of running out of cash flows ala Enron style.
You also then run the risk of forcing prices to overshoot on the downside as foreclosures overwhelm demand if it stays low.
Sitting on a bunch of loans that give you zero cashflow could potentially put you at risk of not having the money to pay the electric bill.
I thought this was interesting this morning:
"Sept. 20 (Bloomberg) -- Ally Financial Inc.’s GMAC Mortgage
unit told brokers and agents to halt foreclosures on homeowners
in 23 states including Florida, Connecticut and New York.
GMAC Mortgage may “need to take corrective action in
connection with some foreclosures” in the affected states,
according to a two-page memo dated Sept. 17 and obtained by
Bloomberg News. Ally Financial spokesman James Olecki confirmed
the contents of the memo. Brokers were told to stop evictions,
cash-for-key transactions and lockouts, regardless of occupant
type, with immediate effect, according to the document,
addressed to GMAC preferred agents."
Sondering if some type of government program is about to be announced.
They may want to slow down foreclosures, but empty houses fall apart rather quickly.
Stocks and treasuries are both soaring today.
This is the polar opposite of what should be going on in a healthy market.
More later
"The problem is the longer you wait to clear inventory is you run the risk of running out of cash flows ala Enron style."
Actually, I think its the reverse Jeff. Back when MTM accounting was in effect, the banks books made them appear insolvent. Thus, they were dumping houses as quickly as possible (and undercutting the market in the process) in order to make their balance sheet look more healthy.
Now that MTM has been relaxed, the banks can take a more measured approach. Say a bank had a total portfolio of homes showing a loss of 100MM. Instead of trying to dump them all at once, the banks can meter them out bit by bit by offsetting the losses against incoming revenue.
So for example, if in one month the bank earns 6M from performing loans, it would then sell and write off just 5MM in losses, reporting its income as 1MM. The remaining 95MM in losses would still be written off in subsequent months as more revenue came in (i.e. earning their way out). Thus if they made 10MM one month, they would take a loss of 9MM, or if they made 1MM another month, they may not then recognize any loss at all. Continue as necessary until all losses are eventually recognized, but only when offset by gains.
Anon
Point taken.
If this was the case though then why are inventories at record highs?
Inventories are significantly higher then before the MTM were put in place when you say the banks were "dumping" all of these houses.
I think they have been playing the game you described all along.
The mortgage market is close to $20 trillion dollars.
As more people walk away as they realize their houses are worth half the losses have only begun.
Japan's banks still haven't dug out of their losses from 20 years ago.
I agree they are trying to do what you stated. The problem is I don't think there is a chance in hell it works.
Bank profits are also shrinking so you need to add that into the formula.
"If this was the case though then why are inventories at record highs?
Inventories are significantly higher then before the MTM were put in place when you say the banks were "dumping" all of these houses."
Months of inventory (which is dependent upon sales pace) is at an all time high, but total inventory is not.
http://calculatedriskimages.blogspot.com/2010/08/existing-home-inventory-july-2010.html
As you can see here, the peak total inventory was summer/fall 2008 - right around when MTM was suspended.
"I agree they are trying to do what you stated. The problem is I don't think there is a chance in hell it works."
But whats the alternative then? Recognize all losses now, admit you are insolvent, out of covenant, and be subject to seizure by the FDIC?
The reality is, MTM was suspended with the govts blessing and it isnt coming back anytime soon (2018 according to Ivy Zelman). If the banks have cleared enough of the toxic debt by then, they will reinstate it.
If not, they will not and continue extend and pretend - just as they have been sucessfully doing for the last 18 months.
Again, not saying its "right". However, given the alternative, it seems all too obvious.
"Again, not saying its "right". However, given the alternative, it seems all too obvious."
That's where we really disagree.
I would rather implode and clear the debt and suffer through 3-4 years of living hell versus a 25-30 years "lost generation" episode.
Let it all crash. To me that is the better alternative.
Also, one point on your previous comment: The real question is what do the shadow inventories look like.
Nobody knows and I bet it's a lot uglier than anyone thinks.
Let it all crash. To me that is the better alternative.
Actually I agree with you. One of the hallmarks of capitalism is creative destruction - the process of letting the inefficient areas of the market fail, such that the more effecient areas can rise up and take their place. Sure there are great rises and falls, but over the long term, its what keeps us well ahead of our first world bretheren in europe.
Still, just because I agree with you doesnt mean that anyone else (especially the guys calling the shots) agree with us.
"Also, one point on your previous comment: The real question is what do the shadow inventories look like.
Nobody knows and I bet it's a lot uglier than anyone thinks."
Again though, what does it matter? If its 4 years of inventory, then we have 4 years of stagnation before moving higher - if its 40 years of stagnation before moving higher. If its 400 years....
Correction, should have been:
If its 4 years of inventory, then we have 4 years of stagnation before moving higher - if its 40 years of inventory, then its 40 years of stagnation before moving higher. If its 400 years....
Either way, you get the point.
Anon
Yup
I agree. I have a feeling they are going to fight this to the bitter end.
The GMAC news tonight was interesting. If banks can't prove they own these houses due to the confusingtraunching of securities then they are in big trouble.
Curious to see how that plays out.
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