March 24, 2006

Forbes: The Last Speculators. The perfect article illuminating the Housing Ponzi scheme

Important article, so here's the whole thing. Take the time to read it. Everything we've talked and joked about:

Strip club managers becoming flippers, Miami being ground zero, and this massive game of musical chairs ending, yet some didn't hear the music stop

Condo flippers in south Florida will tell you that they are sure, real sure, that they will sell out at a profit.

Robert Jenkins, 30, found religion, quit his job as a disc jockey at a strip club and, in 2003, began speculating on real estate in hot-hot south Florida. He borrowed heavily and flipped 19 houses in Fort Lauderdale, reaping profits of $750 to $71,000 on each property and plowing two-thirds of his $300,000 in profits into still more homes. He now owns seven, worth $2.5 million and doubts a crash will happen. He vows to keep flipping, even if it does.

Donna Franklin, a 52-year-old former direct-mail publisher, owns five homes. Last year she and a partner borrowed against a Miami apartment they own and rent out to make down payments on three $400,000-plus “preconstruction” condos in Fort Lauderdale. They are confident they can flip the three condos at a nice markup soon--well before construction ends, at which point they must take mortgages for the $1 million they owe developers.

That could be wishful thinking. The number of unsold condos for sale in and near Miami has more than doubled from a year ago to 2,232, says Miami Realtor David Dweck. Foreclosures nationally are up 45% in a year and in Miami now occur at twice the national rate of one per 1,117 homes, according to RealtyTrac. Some 25,000 condos are under construction in the Miami-Dade area--more than the total number of purchases in the last nine years combined.

Three-fourths of those are in the hands of speculators, says Jack F. McCabe, a Deerfield Beach, Fla. consultant to developers. “The demand is artificial. Most south Florida speculators have been selling to other speculators,” he says. “It works fine--until you’re the greater fool and nobody else comes along to pay that higher price.”

Neither Jenkins nor Franklin paid much attention when the Commerce Department, on Feb. 27, said the supply of unsold, newly constructed homes across the country had ballooned to 528,000 in January, up 60% from the average from 1995 to 2004.

Brisk sales of new homes have helped prices stay aloft, for now; sales are running at 1.2 million houses a year, 40% more than normal. But if rising mortgage rates cause sales to tumble to a normal pace, the effect on prices would be shattering. And in some parts of the country the last speculators--people like Jenkins and Franklin--would be in deep quicksand.

A correction may already be under way. The number of half-million-dollar-plus condos up for sale in Miami is twice the number in Los Angeles, whose population is four times as large. In New York prices reportedly slipped 13% last summer. In Las Vegas several developers have canceled projects amid soaring construction costs, spurring suits.

Condo prices in Florida have gone up 63% since 2002, and most speculators credit the state’s population growth--a thousand newcomers per day. Others credit the speculators themselves: Encino, Calif. real estate firm Marcus & Millichap says more than half the mortgages in Florida are high-spec in nature. The firm compared price appreciation to income growth in markets across the U.S. and fingered West Palm Beach, Fort Lauderdale and Miami as three of the five most vulnerable to a price correction.

Terrance and Jennifer Trott, both 26, describe themselves as “regular folks” who happen to own two homes. They grew up in New York’s Hudson River Valley and moved to Florida after Terrance finished active service in the U.S. Marine Corps in 2004. Last July they borrowed on their four-bedroom house near Tampa to pay $200,000 for a two-story condo in a development near downtown Tampa. They listed it at $235,000 in December. Two months later they dropped the price to $217,000 and are getting some bites.

The Trotts together earn about $85,000 a year, and the extra $22,000 a year it costs to carry their condo is a severe drain. “I drive a Kia that I’ve had since 1999 and it’s paid off, and we only go out to eat on the weekends, and it’s not every weekend,” Terrance Trott says. If the condo doesn’t sell, they may try to rent it out--just like everyone else; but even at $1,000 a month they would be pouring cash into the property.

In the aftermath of every crash come a few fearless souls, intent on making money on the misery of others. Jack McCabe, the Miami consultant, is raising a $250 million vulture fund to buy condos. He aims to pick up $1 billion of south Florida apartments on the cheap. Lenders are already offering him blocks of condos repossessed from distressed homeowners. “We’ll focus on buying million-dollar properties at 2003 prices-- at 70 cents on the dollar,” he says.

59 comments:

new 200 Mbps BROADBAND over POWER LINES said...

CNBC TV Commentator said that as HOUSING MARKET continues to cool down... more investors/speculators returning to buying stocks in the STOCK MARKET again... which means huge money flowing to Wallstreet again as shown by the surge in volume of shares traded lately !!!

ocrenter said...

"The demand is artificial. Most south Florida speculators have been selling to other speculators,”

substitute "south Florida" with "Las Vegas" and you get this...

6xx9 SWEET PECAN ST
Las Vegas - Lone Mountain, NV 89149
Listing Date: 1/4/06
Listing Price: $295,000
Last Sales Date: 11/2004
Last Sales Price: $305,000
"This home is being sold short and we will entertain all qualified offers, this offer will need to be acceptable to the lender. Make us an offer???????"
(Update 1/18/06: first reduced to $290,000, now the price is back up to $318,000... which proves the motto: if you can't sell it, raise the price!!!)
(Update 2/15/06: no longer on the MLS, however, we do see it as a pre-foreclosure on RealtyTrac. Check out the pure stupidity: our flipper in trouble purchased this gem for $305,000, guess how much the prior owner bought it for? $190,000 in 7/2004!!! This is a good example of a flipper screwing another flipper for a $100,000 profit in 4 month!)

Bubble Tracking: Flipper in Trouble

Bake McBride said...

I don't know the Vegas market but I'm in Florida frequently for business....and that market is just going to get destroyed.

I was in Naples, Fl 2 weeks ago and a buddy of mine is a RE "Investor"...He has a condo that's about to be complete and has it on the market....ALONG WITH 45 OTHERS IN THE BUILDING!!! To top it off..their are 2 more buildings about to be complete in the same complex in the next 12 months.

Robert Coté said...

Jack McCabe, the Miami consultant, is raising a $250 million vulture fund to buy condos. He aims to pick up $1 billion of south Florida apartments on the cheap. Lenders are already offering him blocks of condos repossessed from distressed homeowners. “We’ll focus on buying million-dollar properties at 2003 prices-- at 70 cents on the dollar,” he says.

Can't this idiot do the math either?!? If the market says $1b now then he needs 75% off not 30% off. It's worse than that however. 30% off is clearly still overpriced as the banks are already offering that on "blocks." This block business means there are some real dogs in the litter that wouldn't sell at any price. So much for his strategy of careful picking.

Here's how his math deficient mind is working; $250m is enough to "control" $1000m worth of real estate by putting 20% down plus costs which used to be enough to make the banks happy. Problem is the rents on these condos, excuse me, "can't dos" is still half the carrying costs. Floriduh's biggest problem is yet to come; massive brand new supply. It isn't the supply but that the builders are going to be unable to convert their construction funding (short term, rising rates) into longer term. Banks are going to own entire new structures with no demand, a very bad combination to be competing against.

Proteus said...

"Jack McCabe...is raising a $250 million vulture fund to buy condos....
'We’ll focus on buying million-dollar properties at 2003 prices-- at 70 cents on the dollar,'"


This guy is waaaay early, and 70% of the bubble price is way too much for a vulture fund to pay. I think this will be a longer bear market than most anticipate since there seems to be no shortage of fools standing in line to catch falling knives.

Proteus said...

Ooops, Robert Coté beat me to it.

new 200 Mbps BROADBAND over POWER LINES said...

Best indicator of housing market--->


REUTERS: US February new home sales tumble, supply soars

WASHINGTON, March 24 (Reuters) - Sales of new U.S. homes plunged 10.5 percent in February, the biggest drop in nearly nine years, while prices fell and the number of homes on the market hit a record high, the government said on Friday in a report signaling significant slowing in the housing market.

The pace of new single-family home sales slowed to a 1.080 million unit annual rate in February from January's downwardly revised 1.207 million unit rate, the Commerce Department said.

Economists had expected new home sales to decline to a 1.200 million unit rate in February from January's originally reported 1.233 million unit pace.

While sales slowed, supply surged. The number of new homes available for sale climbed to a record 548,000 by the end of the month. At the current sales pace, that represents 6.3 months' supply -- the largest inventory of new homes since January 1996, the government report showed.

Median home prices declined for the fourth month in a row, hitting $230,400 in February, the lowest level since July 2005.

The slowdown was driven by weak buying in the U.S. West and South -- regions that have posted some of the biggest gains in home prices over the five-year rally in the housing sector. Sales fell 29.4 percent in the West, the sharpest decline in more than 24 years. Sales in the South fell 6.4 percent, the report said.

Sales climbed 12.7 percent in the Northeast and 5.2 percent in the Midwest.

As mortgage rates started to climb last year, the U.S. housing market began to slow, ending a five-year run that shattered sales and construction records and sent prices up more than 55 percent on average across the country. The data have been uneven, showing occasional pauses in the cool-off.

For example, trade group data on Thursday showed a surprising pickup in the pace of home resales in February, but the National Association of Realtors called it "an aberration" due to warm weather that spurred buying.

Economists, however, widely expect the housing market to weaken throughout 2006.

The new home sales data is subject to revision as the statistics are estimated from sample surveys.

ecobuilder said...

NEW HOME SALES DOWN 10.5% !!!

http://money.cnn.com/2006/03/24/
news/economy/newhome_sales/
index.htm

Dan said...

Sigh...

Regarding "new" article "The Last Speculators" by Stephane Fitch 03.27.06 (Forbes)

I posted it on HP on Wednesday, March 15, 2006 1:17:35 AM.

Look in the March 12 archive for:

Tuesday, March 14, 2006
"Open thread for HP'ers: Make your boldest prediction here"

And see it in the "Comments"

I thought Keith read the comments...

Anonymous said...

I really don't blame people for trying their luck at the RE casino. Our economy is structured to make 1% winners and 99% losers. Just working for a paycheck that typically increases 3% a year while inflation eats 8% or so is the road to a lower standard of living. Leveraging an appreciating asset is the only way to get ahead. Unfortunately, every class of U.S. investment asset (stocks, bonds, real estate) is so freaking high these days the odds are stacked against you. But people will keep reaching for that brass ring and the RE casino has been the only game in town (besides energy, commidities, & metals)for the last few years in our inflate-or-die finance & services economy.

Anonymous said...

Hey no politics so far. Good job kiddos. Let's keep it that way

keith said...

bush sucks. greenspan sucks. clinton sucks.

Anonymous said...

Best photo ever.

Anonymous said...

"Leveraging an appreciating asset is the only way to get ahead. Unfortunately, every class of U.S. investment asset (stocks, bonds, real estate) is so freaking high these days the odds are stacked against you."

TOTALLY AGREE.

I took out a 200K HELOC towards the 400K equity (700K MV, 300K loan at 3.5% 5-YR ARM) I have in my 2003-purchased home to short the homebuilders.

What a great financial hedge. Access to interest-only, tax-deductible capital to short stocks that will be cut in half in a year.

Good way to monetize my inflated equity without having to move.

Anonymous said...

To Anonymous directly above "shorting the homebuilders", you are as foolish as the RE flippers everyone is bashing. Borrowed money is still borrowed money...regardless of where you invest.

Good luck. Hope you don't have kids.

Rob A.

Anonymous said...

Rob A.,

Tell me how its foolish. Enlighten me.

The interest I'm paying on the borrowed money is partially offset by the interest my broker is paying me on the borrowed shares.

My HELOC has a 30-year term.

My HB shorts are all in the black, even with the rally the past two weeks.

I have left significant buffer to prevent margin calls or to short more.

I was short TOL last year when they warned in Nov, and rode it down from 50 to 34.

C'mon genius, facts not insults.

Anonymous said...

3 RE Agencies Later, a $14,000 price drop and Now...You've GOT TWO Mortgages ...and RENTERS!....Ha ha ha !

Grinch34 said...

Bake, I have relatives in Florida and they say overall, there are few paying good jobs. I talk to my friend about it (he works for a home-builder) and he claims the statistics say that that are a lot of good paying jobs. I did not want to argue with him since he is my good friend, but do you have any information on this??

Anonymous said...

my realtor says dont worry about the massive inventory here in Florida. I guess supply/demand doesn't apply here.

Anonymous said...

The high paying tech jobs in Fla used to be on the Space Coast. But NASA doesn't need the level of service it used to.

Jacksonville is a busy port city with some international presence and bank servicing centers. But it's no San Francisco or Boston and the slums spread for miles.

Anonymous said...

THERE IS NO SURGE IN STOCK TRADING VOLUME... THE MARKET IS FLOATING ON LIGHTER VOLUME, AND VOLITILITY IS AT A 5YR LOW.

moman said...

Florida experiences a property bubble approx. every 20 years. The largest is history was 1926.

Florida took off after WW2, 1960s', 1980s, and 2000s. Every time it has ended the same way with people stuck in houses they can't afford and swampland they can't sell.

I'm bullish long term on Florida housing yet at the same time skeptical that the sunbelt will continue to grow much faster than the rustbelt. There have been migrational patterns all throught history and as people contine to populate an area it suffers from overcrowding such that people flee to less crowded areas.

In Florida all it will take is another Andrew sized hurricane to barrel through Miami, Tampa, or Orlando to set the state back 5 years. If two hurricanes hit two of the major city centers Florida will go back 10-20 years overnight.

20 years ago Atlanta and Dallas were backwater cities. Today they are two of the fastest growing areas. how much longer can this continue?

dotherobot said...

hmmm, a flipper and not a stripper. Jack McCabe may be the sensible one here.

"I started a joke, which started the whole world crying...but I didn't see that the joke was on me... oh no."

"I started to cry, which started the whole world laughing,oh, ..if I'd only seen that the joke was on me." The Bee Gees

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