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.
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.
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.
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.