Tuesday, October 17, 2006

The Real Estate Ripple...

Yesterday I came across some surprisingly frank comments from a realtor in Florida. Florida as a Real Estate market is deflating remarkably fast. I hope you didn't buy a condo in Naples or Miami last year.... I'll let Mr. Morgan's comments speak for themselves.

"Since my recent article in Barron's, I have received dozens of calls from builders, bankers, buyers and investment groups perched like vultures. Let me give you a sampling of a few calls.

Public Builder - Called me to find them bulk buyers with the ability to buy out all remaining units in developments they cannot sell. They are willing to sell at cost. I told them they were about 10% over the current distress market, and they didn’t even hesitate. They said, fine. Drop the price 10% and we’ll pay a 5% commission to you. Just help us get rid of this inventory.

Condo Developer - They have a 600 unit project that is 100% up for resale. This means no one is going to close when the building is completed in January. Every single buyer will walk from their 20% deposits. The developer will simply going to turn the keys over to the bank. And the bank will take a massive hit that will have the Feds on top of them in the blink of an eye.

Townhome Developer - Asked me to resell 132 units that they had sold a year ago for an average of $400,000 a unit. All of their buyers have notified them that they will not close. Unfortunately, even a year ago in the heated market these units were only worth about $250,000. Now, the units will not command more than $175,000 . . . if they’re lucky.

Real Estate Agent - She sold 10 of the 132 units I just mentioned to her friends, family, banker and co-workers (FORMER friends, family and co-workers). They’re all going to walk away from their $40,000 deposits, so they don’t lose $250,000. The developer will be stuck with 132 units that are not worth what it cost to build them.

Homeowner - This one really hurts, and this is the next wave of the massive tidal wave hitting this industry. As surfers know, the third set is the biggest. This homeowner purchased her home for $390,000 plus $15,000 in closing costs. It is now worth maybe $300,000. Their interest only ARM is scheduled for refinancing. The bank told them they need to come up with additional cash to cover the drop in equity. But they don’t have the $75,000 the bank wants. And even if they sell for $300,000 and clear $280,000, they can’t pay off their $390,000 mortgage balance. You see, their mortgage was 100% and it was interest only. They are going to walk away from the house and give it to the bank. The bank, if they are lucky, will sell the house for $300,000 less commissions and expenses. Maybe they will net out at $280,000. The math is simple. The bank, at best, will lose at least $110,000 on a $390,000 mortgage. That’s a 28% loss . . . IF they can sell at $300,000.

If you look at 1998, the total exposure to mortgage and home equity loans was about 25 percent. In the last quarter, the third quarter, it had risen to 37 percent.” I sold three homes last week for one public builder. Each of these homes sold for 40% less than the same homes sold a year ago. How about all of those neighbors when it comes time to refinance? The appraiser is going to look at current sales prices, and the bank is going to ask for additional funds to meet the equity requirements."

That is some ugly, ugly stuff. So the next time you hear someone say "We're only looking for a 5-10% adjustment in prices" remember this post.

On the flip side there will be some tremendous values in condos in Florida in 5 yrs :)

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