Mike Morgan is a Florida real estate professional with years of experience. He is often featured on Mike Shedlock’s site with his commentary of Florida real estate as ground zero in the housing bubble. He writes about his basic premise that we have been in the eye of the storm, but that there is more storm to come. I saw his article in Barron’s when it came out but it is now publicly available on Mike Morgan’s site. Now might be an opportune point to re-visit his themes.
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.
The front half of the Florida real-estate hurricane was fed by a bidding frenzy that drove prices to a peak far above real demand: Flippers were not buying homes for function, just for trading. And with the Fed’s free-money policy, flippers were leveraging themselves at the same 30-to-1 and 50-to-1 levels as the financial wizards on Wall Street.
This artificial demand created an inflated supply of homes. By 2006, the inventory of unsold real estate reached a crisis level (“Florida’s Housing Hurricane,” Other Voices, Oct. 2, 2006 – Click Here). The combination of rising inventory and prices, which had no relation to demand for housing that people wanted to live in, fed the front side of the hurricane.
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. And they don’t mention the damage being done by falling prices, which put more and more homeowners into negative-equity positions and make it more likely that more property gets pushed back to the lenders.
Nor do the builders dare to mention the bulk sales of inventory homes they are making to a new generation of giddy flippers with deeper pockets. This nonsense not only forces prices down further; it also creates a new competitor for the builders’ remaining inventories. The bulk buyers still have to sell these homes to end-users.
This twist is not all that new, but it is continuing to feed the overall problem of inventory glut. However, this is not what we should be focusing on as we enter the back half of this hurricane.
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.
As a real-estate broker in Florida, I have first-hand experience with homeowners defaulting on mortgages and lenders who appear to be far too confused to develop a clear plan for avoiding foreclosure auctions.
Buyers now realize lenders are going to take weeks or months to review and respond to offers that often reflect market value but fall short of covering the balance on the mortgage. Such “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.
Lenders’ failure to address these issues has forced more defaults, which lead to skyrocketing foreclosure rates. Defaults and foreclosures mean huge expenses for the lender, and significantly lower values. And it gets worse for lenders. In the most extreme examples, lenders cannot foreclose because the documents have not followed the mortgage.
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. Even when we try to work with lenders, most of the time there is no one at the helm with the authority to process a cup of coffee, let alone the sale of a property in default. The easy answer is to simply let the property flow through to the foreclosure auction, even when that means 30% to 50% less in sale price.
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.
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MIKE MORGAN is a real-estate broker in Stuart, Fla. and owner of Morgan Florida, which offers residential, commercial and investment real-estate services and research.