“Walking Away From Deals Completely” In Florida
The Herald Tribune reports from Florida. “Ripping up a contract, abandoning a deposit and running away from a new home is a painful and expensive exercise, but it is one that more people are doing today than ever before. Jerry Starkey, CEO of Bonita Springs-based WCI Communities, told investors this week that ‘home cancellations were about twice our historical rate” during the third quarter.’”
“Economist Patrick Newport figures that is about the average nationally, though precise figures are difficult to pin down because ‘they are not tracked by anyone.’”
“He did an analysis recently that concluded ‘if cancellations were being counted, sales would be lower and inventory higher than currently estimated. How big of a problem are cancellations? No one knows for sure.’”
“Most vulnerable are the ‘national builders, who sold homes for as little as 5 to 10 percent down,’ said Lee Wetherington. Some builders made offers for $1,000 down or less and now are experiencing cancellations because the buyer has less at stake and sees new home prices falling below his or her own contract price.”
“‘A lot of people are afraid of the fall off of pricing,’ Wetherington said. ‘Almost any builder now is pricing at 10 to 15 percent less than during the summer of 2005,’ including Wetherington’s company.”
“‘It’s those people who signed contracts in the summer of 2005 who are the most likely to walk away,’ he said. ‘They bought at the peak,’ and are faced with closing now at a price that may be underwater for three years.”
“In Southwest Florida, Lennar, with about 1,000 housing starts in the region each year, is experiencing a 10 percent cancellation rate in this region so far in 2006, said Rob Allegra, the company’s Sarasota division president. He thinks many of the home buyers who walked away from their homes were investors.”
“‘We’ve found that a lot of them were flippers who may have had two or three houses under contract,’ he said. Walking away from a contract is typically very expensive: from $30,000 to $40,000, Allegra said.”
“Even without cancellations, the slowdown in demand for new homes is going to take a big bite out of the bottom line for most Southwest Florida builders, Wetherington said. His sales have dropped 35 to 40 percent, and Wetherington. ‘Most people ain’t going to make any money next year,’ he said.”
“New homes must be moved and will be discounted until they do. ‘We have to move these homes,” Allegra said.”
From TC Palm. “The fastest growing portion of the county also recorded the highest number of foreclosures during the recent quarter. Vero Beach was second on the Treasure Coast with 179 during the same three-month period, part of a 259 percent increase in foreclosures in Indian River County from the second to the third quarter.”
“Bill Glynn, a Realtor in Vero Beach, attributed the higher foreclosures to investors walking away from contracts on the mainland because of a slump in sales. ‘Unfortunately the market is depressed and sellers decided that the idea that you could flip for a nice profit is not a logical possibility anymore,’ Glynn said. ‘Some people are just walking away from deals completely.’”
“Jennifer Atkisson-Lovett, president of the Realtors Association of Martin County, faulted creative financing and exotic loans offered by some banks during the peak of the market last year. She also theorized that some buyers over stretched their finances with large mortgage payments because home prices were skyrocketing in 2005. When their property tax bills arrived, budgets collapsed.”
“‘Unfortunately, interest rates are adjusting and it’s catching up to some people,’ Atkisson-Lovett said.”
The Sun Sentinel. “Broward County had the second-highest mortgage foreclosure rate among the nation’s top 100 metropolitan areas during the third quarter, according to a report. Broward had 8,431 foreclosures in the July-to-September quarter.”
“Miami-Dade County had the fourth-highest foreclosure rate, with 9,380 in the quarter. Palm Beach County was ranked 13th, with 3,643 foreclosures.”
“Speculators couldn’t find buyers as the housing market slowed and were stuck making the mortgage payments. ‘They’re the people who don’t have an attachment to the home and are the quickest to give up on a property if the profit motive isn’t there anymore,’ said Mike Larson, an analyst in Jupiter.”
“Louis Spagnuolo, a mortgage banker in Boca Raton, said his office has received a spate of calls recently from novice speculators looking to refinance their loans. They can’t afford huge increases in their insurance premiums and property-tax bills. ‘They were blindsided,’ Spagnuolo said. ‘We’re in for a bumpy road for the next nine months,’ Spagnuolo said.”
From Tampa Bay Online. “Deutsche Bank Trust Company America, the U.S. arm of one of the world’s largest banks, wants its money back from the parent company of a home builder active in the Tampa Bay area.”
“The bank is demanding Technical Olympic USA, based in Hollywood, Fla., repay money it borrowed last year to buy Transeastern Homes, the home builder involved in a handful of local developments, including Live Oak Preserve and the Hammocks in Tampa, and Tampa Bay Golf & Country Club in San Antonio. The total purchase price was $857 million.”
“The poor real estate market conditions have hit Live Oak especially hard. Karyn Glubis, a real estate agent who lives there, said Transeastern stopped offering lots in its phase two areas this year.”
“People don’t know what’s going on with Transeastern, but they’re concerned about how it might affect them, she said. A few weeks ago, TOUSA told investors that Transeastern was performing poorly and the home builder laid off 130 workers in September.”
‘The soaring cost of homeowner’s insurance may be starting a new retirement trend in the United States, the chief economist for the National Association of Realtors said Friday. ‘There will be a whole new set of destinations because of the hurricanes and the rise in the cost of insurance,’ David Lereah said. ‘People are going to think twice about wanting to live on the water.’
‘A decade of severe hurricanes that have pounded Florida, the Gulf Coast, Louisiana, Texas and places up the Eastern coastline, has increased the price of homeowner policies and the difficulty in obtaining them, Lereah said. ‘If we could sift out all the other problems (hurting home sales), the problem that will remain is the availability and affordability of insurance,’ he said. ‘Start in southern Florida and work your way up to Maine.’
‘In Florida, which has had 12 hurricanes since 1995, the cost on insurance has risen ‘tenfold,’ Lereah said. It’s causing some families to leave the state, he said, looking for protection from the storms and the insurance costs.’ We’re talking people who lived there 20, 30 years,’ Lereah said. ‘A lot of them are moving to the Smoky Mountains.’
‘Agents say prices have shot up from $1,000 annually to $3,000 or $4,000 annually, putting a damper on home sales. ‘I think we need for the federal government to get involved and create some sort of backstop,’ Lereah said. ‘If you’re a private insurance carrier you think twice about getting involved in an area where there is not a backstop.’
“Nothing can be finer than to be in (western) Carolina in the morrrrrning.”
Didn’t that $40 million dollar NAR advertising campaign jump start sales? You mean people didn’t believe what Learah and the NAR were spinning? I guess we will just have to buckle down thru super bowl weekend, when all the pent up demand will reignite the market . NOT!!!
I live in Sarasota Florida. All the recent talk here by people in their 40’s and 50’s is how they are going to move to North Carolina and Tennessee.
Many people I know who I worked with have retired and done just that. Allmost all have moved to North Carolina or Tennessee. With the bubble prices going up from 2000- 2005 they decided that they were priced out of Florida.
With Tax assessments going up and all the new hurricane insurance raises it has cemented the deal for a lot of folks here.
Bill in Carolina you are spot on exactly. lots of people from here have in fact moved to the smoky mountains.
We lived in Sarasota until mid-2005. Compared to Sarasota…
Equivalent home prices here are 40% lower. Taking into consideration the fact that you could live in a 40% cheaper house, property taxes are probably 60% lower, and insurance is at least 80% lower. Electric rates are lower also.
The joy you get not having to worry about hurricanes? Priceless.
Go to realtor.com and check out what you can buy in your price range in places like Greensboro, NC or Greenville, SC. Then pack your bags.
I can also echo what Captain Jack is saying about people leaving FL for the mid-atlantic. I’m also in Sarasota and we’ve had 2 people at work resign very good jobs in the past few months in order to get out of here. I’ve also had many clients this year move out of Florida to Georgia, Virginia and the Carolinas. Anyone that thinks this is a myth (Realtor’s) is wrong. Unfortunately several moved without first selling their house and I know a few of them haven’t had anyone even look at their house. One just came back for a few days and took the house off the market and said they were going to try renting it out. Well, they’ll be competing with a lot of other vacant rentals but I decided not to bring that up….
What area of FL?
The window for escape from Florida is now closed. If you have not sold by now, you’re stuck here. Unless of course , you’re willing to cut your price by 50%.
Wow! It only means that the FED will have to print much more money and create much more credit just to bail out the banks from their bad loans. Minus 50%? Who is on the hook for these loans? The stupid Japaneese insurance companies ?
Berkshire Hathaway reported blowout earnings last weekend on cranking up reinsurance costs to the moon for coverage that no other insurance carrier wished to cover and they had no storms so their earnings were great. But they don’t expect this to continue.
The falling prices of real estate may help with lowering insurance costs but they are already at a high place so a small drop probably won’t mean that much.
The Smokey Mountains does have storms as
well (I remember a pretty nasty storm that
came through a few years ago which caused
moderate damage including some heavy
damage to a heavily used bridge). But property prices there are pretty cheap.
I like the Ashland area as it has a lot of
services available but you do feel like you’re
in the middle of nowhere compared to the
northeast cities.
We self-insure so I don’t personally know
what homeowners insurance has been doing.
Ouch, my poor friend in Broward. But I tried and it caused a lot of really nasty arguments. Now he’s stuck big time.
These Floridians must be very happy about being Liberated just as our corrupt self righteous talk show host Rush Limbaugh. Also, our CUP Cake lady has been Liberated as well. I just saw her on abc last night and at the end commenntator said that since CKL has sold the house, $100K less than the initial asking price. Any one with more info on this.
How about an update on this guy! How many other units now for sale, did he drop his price, how long until he bk’s? You know, the regular fare.
36 units for sale. Over 10% of the complex.
I really care about this guy so the schaudenfraude is not too strong here. But he was an idiot.
A likable idiot, if you will.
“‘I think we need for the federal government to get involved and create some sort of backstop,’ Lereah said.”
Now were talking. Get those desert dwellers to pay for those living the life on the coast. Mr Lereah, you are a true loser!
The insurance industry’s been in Washington quietly trying to do this for thirty years - dump liability onto the taxpayers, that is. Even the Republican Congress rebuffed them. No chance now. Forget it.
It is called cheater capitalism.
Privatize the profits
Socialize the losses
I’m not sure I’d be totally against helping floridians out, but the fact that the potential costs are so high, no way. that’s crazy. it’s one thing if a river floods every one and awhile(some of those people should move) or there is a bad snowstorm. but bailing out an entire state or even a coast? sorry.
Yes, and even as a Floridian, I agree. I don’t want to bail out some dustbowl Middle America area with their constant slice and dice tornadoes, or California with their earthquakes, or the farmers with their rotting crops, or subsidize illegal immigrants for builders all over the entire country, etc.,etc. ad nauseum. I’m also tired of subsidzing invasions, foreign aid and interference abroad, fat white haired politicians who are suborned by corporations and international interests. Abolish the income tax and replace it with a national sales tax. That way, everybody gets to pay their fair share, including criminals and corporations who have to buy stuff.
Wow, Sunset, that’s one of the best posts I’ve seen on this blog. And that’s exactly what’s been happening for a long time.
With all the investors walking away and Kara’s bankruptcy a recent memory, who is left to buy from the builders? Or are the rest of them somehow immune from Kara’s untimely demise?
How many of the big HBs will slide into bankruptcy in 2007? My guess is that it will be more than one. WCI is a prime candidate and TOL is not far behind.
TOA first, then KBH. The BK’s will happen in order of leverage and margin. May the most conservativly financed win.
“‘Most people ain’t going to make any money next year,’ he said.”
No more cheerleading from the builders, IMO. More capitulation. Moreover, some builders are already losing money on a quarterly basis.
“While September’s foreclosure activity only saw a 10 percent decrease compared to the record breaking month of August, the 51 percent hike from a year ago is alarming. Both September’s figures, as well as the third quarter’s, showed that the foreclosure rate was one new property for every 1,222 U.S. households.”
“The top five states to represent 66 percent of the foreclosure activity were Florida, California, Michigan, Texas, and Colorado.”
“Florida’s foreclosure rate was four times the national average with one new foreclosure filing for every 254 households. Foreclosures in the Sunshine State totaled 28,000, accounting for 27 percent of the overall nationwide foreclosure activity.”
Good night folks.
Here’s a local (San Bernardino County) paper:
http://sbsun.com/business/ci_4640105
The way I read that; FL is leading the race to the bottom. Both FTL and Miami have the largest % jumps in foreclosure activity.
I would imagine that West Palm is too small to get listed there, but I know we are up right around the 100% mark from last year for foreclosure.
DAMN!
1 in 254 in foreclosure??? We are just seeing the tip of this thing. On a bell curve we are not a third of the way on the ramp up. At the bottom foreclosure numbers will be much MUCH larger.
My call is for total market capitulation after next summer. Betting when spring 08′ opens with a fart the market will see close to bottom pricing that will go sideways for 2-3 years.
All these ignorant MBS creditors will be awash in a costly depreciating assets (homes). In their futures will loom ever increasing numbers of these homes adding to their desperation to move what the have. Along with this the builders will be in a death race to the bottom to see what few companies make it through price cuts that lead them to break even and beyond.
“Jennifer Atkisson-Lovett, president of the Realtors Association of Martin County, faulted creative financing and exotic loans offered by some banks during the peak….”
It’s your fault. No, it’s your fault! No..No..it’s your fault! No! No! It’s your fault!!. Hell NO! it’ your BLOODY FAULT!
You know, as I read these comments from the NAR, I really feel sometimes that I may be killing my braincells. No f**king s**t! Of course the financing helped lead to this disaster. As well as homes costing 2X what they should.
What a bunch of idiots.
FL is totally, utterly, toast. Its so ugly to watch this play out; my landlord (I am moving to a new place) was over last night, telling me how “He wished he never got into this”; and “What a disaster this CityPlace thing has become”. Brutal honesty, and I do feel for him; but, at the same time, buyer beware is the order of the day!
Where are you? What city? Please.
CityPlace is in downtown West Palm Beach
Been there are partied around the place. Great place to eat and meet friends for entertainment. I thought it to be first class. Sorry to hear it is imploding. By the way I see parking as the biggets issue. Drove around for an hour looking for a spot.
Sorry, West Palm Beach, FL. In CityPlace (a “master developed” area). Supposed to cater to young professionals; instead its a wasteland of flippers and caught buyers. Total disaster.
When a buyer gives up his deposit on a new home, the builder probably keeps all of it, which helps subsidize a reduced offering price. Say a buyer backs out and the builder keeps his $40K deposit. When the builder lowers the selling price from $400K to $325K, he’s only out $35K in profit, not $75K.
People who bought new in 2004 through early 2006 are truly FBs because builders can, with this high cancellation rate, undercut their old prices by quite a bit and still make a profit.
“…builders can, with this high cancellation rate, undercut their old prices by quite a bit and still make a profit.”
That’s what I’m counting on. Just trying to figure out when to blink, or whether to build.
For that matter, ever-lower new-home actual sales prices should drive down the comps in the used-home market, but I haven’t figured out how much to count on that, with the screwball mentality some of these sellers have.
Chip, word I hear is you can get a builder pretty cheap right now. Have you seen the signs along roads, “looking for remodeling jobs?”
The builders now know it’s “our a$$ or theirs” - the days of trying to save face with recent purchasers are ending. I have to believe that was the thinking at the recent meeting in NY.
The strategy to clear inventory is something like: I can think of a lower sales price than you can. It follows the economic model in which buyers can’t adjust expectations to the new paradigm fast enough and continue to see price reductions as relative bargains. Those builders slow to move in their pricing won’t make it.
But, it’s becoming almost like two separate housing markets. All the new stuff that competes directly with the builders is just going to get killed - down 50% or more in spots. But old, established neighborhoods in desirable locations with little new building will probably weather it pretty well.
Paul, I agree with you that old, established neighborhoods in desirable locations with little new building will do well. At least the dwellings there have stood the test of time. We haven’t even seen yet the fallout from the lousy construction. Anyone have any thoughts on when that tsunami will hit? I’m thinking 5 years from now.
As long as you define “do well” as only dropping 50% instead of 75%.
The problem is that the builder has just set a new comp for all the rest of the homes he has and will be losing that $75K on all of the remaining inventory.
The price cut lowers the comps on ALL of their home sales, even the ones where there wasn’t a deposit.
Excellent point Bill. I had not considered this scenario. Makes good sense.
“The bank is demanding Technical Olympic USA, based in Hollywood, Fla., repay money it borrowed last year to buy Transeastern Homes”
GetStucco, here it comes.
Many of these publicly held builders entered joint ventures as a way to offload the debt from the balance sheet. The deals were structured either as LLC’s or LLP’s, but now the lenders are looking past the entities for payment. These deals are hidden time-bombs that guys like Bill Miller have been all too happy to ignore.
Some builders have way more exposure han others. I remember reading an article on this, but I don’t remember which builders are most at risk. Herb Greenberg has been all over this, so maybe he did the analysis.
In many cases the JV puts up 51% and the builder the rest, but the builder is ultimately on the hook. If the bank demains more money and the builder supplies it, that puts their share of the JV over 50%. Due to accounting rules, they must then show the entire JV on their balance sheet. So even if they don’t go into default, they will likely have to bring the JV on balance sheet, not a great proposition for a company teetering on the brink.
We moved out of Palm Beach this spring, finally selling the property we purchased in 2003. A house identical to ours but without a pool sold 5 months later for 20% less than the one we sold. I am on my knees every morning thanking the good Lord for getting us out of there in the nick of time…….it’s turning into a blood bath.
Palm Beach country is a nice area. But lacks the income for the crazy prices. Bloodbath is an understatement. With almost 4 YEARS of inventory in PB… its beyound toast.
Now there is one good thing the government can do: reform the NRT for PB (first, other areas later).
1. Assumes the leins on the properties.
2. Auctions the properties
3. Lien holders are paid for the property by the agree fraction of the property auction price (negotiated prior to the property auction).
Since its the Feds… no lien holder can say “no.” All liens are zerod on the property at the sale. (Obviously excludes the auction mortgage, if their is one.)
Otherwise the housing market just locks up.
But with what insurance is doing in Florida… That market could be toast anyway.
Something has to be done. Perhaps like earthquake insurance where the first 10% of repairs is borne by the owner? Katrina made it clear that the Hurricane insurance provider was liable for all damages; even if said damages were excluded in the contract. Thus… they are charging for that coverage.
Neil
I was at a dinner party the other night with an architect who has made a lot of money in the So Cal in the last years with building. I am a very bearish on RE in So Cal, but he kept saying that homes that are >$1.5MM are “immune” to the price decline that condos will have. Anybody have any data or statistics to refute that higher-end homes are less prone to collapse?
On a side note, he was much more sober in his view of the property market in general than he used to be.
Thanks
this is a pretty common psychological reaction. everyone says it won’t happen to them. always. maybe it won’t, but it’s the attitude that’s shared by everyone in the business. everyone has their own reason why they’re special or immune, but once they get caught, they’re not so special anymore.
Demand was artificially inflated due to Easy Al and lax (no) lending standards. As long as the guy working at Hess pays his phone bill monthly (Mr. HowMuchAMonth), his FICO score will be high enough to get a loan for a $1.5M house. When the easy money is gone (starting, but lots of easy money still sloshing around), Mr. HowMuchAMonth will only be able to get a mortgage at some multiple of his income, say 5x (it was 2.5-4x, but I doubt we’ll go back there). But even at 5x, he’d have to make $300k/year to get that loan. The demand curve will shift way, WAY down, but the supply will remain artificially inflated (every builder builds $1.5M homes these days). Then your friend’s $1.5M wishing price will be just that, and the market will determine the actual price (my wild guess? Under a million in 12 months).
Those Realty Trac foreclosure numbers are astounding.
Miami +97% in one quarter. They’re still building.
I was in Miami yesterday, can’t believe how many cranes are there. There will be some dirt cheap condos in 2009.
Hey, new idea for Florida tourism: bungee jumping from the cranes, dirt bike parks at the construction sites.
(‘They bought at the peak,’ and are faced with closing now at a price that may be underwater for three years.”)
that got my interest.
“The bank is demanding Technical Olympic USA, based in Hollywood, Fla., repay money it borrowed last year to buy Transeastern Homes, the home builder involved in a handful of local developments, including Live Oak Preserve and the Hammocks in Tampa, and Tampa Bay Golf & Country Club in San Antonio. The total purchase price was $857 million.”
Wow, this is big, 1 BILLION big. The Dutch can kiss their money goodbye.
Quick, we need to divvy up the loot.