A Path of Devastation

The Rocky Mountain News is reporting, “Foreclosure Shock”:

“Denver market sees 31.5% increase from first quarter of 2005…

“The 31.5% jump is the largest year-over-year percentage increase for a quarter in almost two years.


“The jump to 4,764 foreclosures, compared with 3,624 in the first three months of 2005, took some experts by surprise. Public trustee offices in Adams, Arapahoe, Boulder, Broomfield, Denver, Douglas, and Jefferson counties estimated the number of foreclosures they expect to open this month.

“‘That is disturbing,’ said economist Patty Silverstein of the soaring number of foreclosures.

“‘We still expected to see increases in 2006, but this is larger than what I would have expected. At this point in our economic recovery, we would have expected to have seen a smaller increase in foreclosures,’ said Silverstein, principal of Development Research Partners.

“She said that a main culprit appears to be interest-only and other variable-rate loans that homeowners have taken out in huge numbers in recent years to reduce their monthly mortgage payments…

“‘What I see is not pretty,’ said [Keller Williams Preferred Realty’s Sean] Healey, who also heads the Healey Group and hosts a radio talk show called The Real Estate Advocate on KKZN (AM 760).

“He said the number of unsold homes on the market has been growing by an average of 2.5% a week. The increasing supply is putting downward pressure on sale prices, especially for the lower-priced homes most likely to go into foreclosure.

“That’s a vicious cycle because it forces more sellers to lower their prices, driving even more houses into foreclosure, Healey said.

“‘Primarily, I see a huge glut of homes priced under $300,000,’ Healey said. ‘Under $200,000, it is just a blood bath, a path of devastation. It is just ugly.’

“In some areas of Adams County, sellers of lower-priced homes are finding that the market value of their home is down 15-17% from what they paid a couple of years ago, Healey said…

“Economist Tucker Hart Adams said that foreclosures are a lagging indicator and will continue to rise even as the economy gets back on its feet.”

Quotable Quotes

1. “That is disturbing”
2. “What I see is not pretty”
3. “Under $200,000, it is just a blood bath, a path of devastation. It is just ugly.”

Exactly what kind of nonsense is this: “as the economy gets back on its feet”?

We have had 15 consecutive rates hikes (presumably showing economic strength), as well as low unemployment, if you happen to believe the government numbers (I don’t). We have also had record low interest rates for years, so I am tired of these cheerleaders making up excuses. The “lagging indicator” of foreclosures is just another feeble excuse.

That said, Tucker Hart Adams is correct in a way. Foreclosures are indeed a lagging indicator. Unfortunately, his thought process is flawed. We are so deep into a recovery that foreclosures should be falling. We are also so deep into a recovery that wages should be rising. In fact, we are so freaking deep into a recovery that the recovery is nearly over.

Yet here we are, foreclosures rising in a recovery, real wages falling in a recovery, and in our Alice in Wonderland scenario, virtually no one sees the recession that is staring us smack in the face.

Just as every peak produces new logic proposing that “It’s different this time,” this bubble peak is no different.

Check out the latest “New Math on Homes.” I was staggered by the number of economists falling for such absurd assumptions.

Every week there is another story:

· Inventory rising
· Sales falling
· Builders slashing prices
· Foreclosures rising.

The real estate bears certainly were early, but it is the bulls that have zero sense of reality right now.

Builder Sells Homes for Cost

This market turned on a dime. They always do. In July of 2005, people were camping out in Florida to get in line for buying a condo. Now you have projects being cancelled, not only in Florida, but in Las Vegas and Massachusetts. Want to buy a home in Florida? How about 40?

The Daytona Beach News-Journal is reporting, “Builder’s Sale Aims to Move 40 Homes”:

“Skittish investors, leery of the air seeping out of the housing bubble, have left at least one area home builder awash with completed homes and no buyers in sight.

“Holiday Builders, the 30th largest builder in the nation, is hoping to turn the situation around by selling homes at what the company says are ‘builder’s cost’ this weekend.

“Jennifer Youngblood, a spokeswoman for the builder, said homes that were previously priced between $219,000-276,000 will be sold at rates ranging from $204,000-249,000.

“‘These homes are available on a first-come, first-served basis,’ Youngblood said, about the properties that are spread throughout the community.

“The company is staging a special sales event between 10 a.m.-6 p.m. today at their showcase home here on Eagle Harbor Trail in an attempt to sell about 40 new homes that had been ordered by investors. Consumers should be prepared to put down $5,000 and close on the property in 45 days.

“Changes in the market, including rising interest rates and an abundance of inventory, apparently caused some buyers who hoped to profit from the boom in area housing prices to walk away from the idea.

“‘We found ourselves in a unique situation,’ Youngblood said. ‘This is the first time that we have done something like this.’

“Charles Rinek, president of the Flagler/Palm Coast Home Builders Association, said he has heard of similar situations in which buyers forfeited their deposits and walked away from contracts.”

Selling homes at cost, huh? How desperate is that? If true (and it is hard to say), this builder is in deep trouble. If it is not true then the builder is a liar (but likely in deep trouble anyway). My guess is that they may be going near cost, but the developer is hoping to escape with profits because of the forfeited deposits.

Cancellations in Las Vegas

The Miami Herald is reporting, “Las Vegas a Rough Ride for Miami Builder”:

“Two years ago, Miami developer Jorge Perez said the Las Vegas market was ripe for the high-rise condominiums he has built so successfully in Florida. But Sin City has not been kind to South Florida’s ‘Condo King.”

“In January, Perez canceled a twin-tower condo called ICON Las Vegas. Now he’s weighing selling the 25 acres on which he, along with actor George Clooney, planned to build a massive — and much-hyped — 11-tower condo project, Las Ramblas.

“The $3 billion project was to rise near the Las Vegas Strip, and full-page newspaper ads heralded the arrival of Perez, Clooney, and team as the second coming of the Rat Pack. But now Perez says demand is lower than expected and construction costs much higher — in fact, he says, Las Vegas’ condo market has dropped off more sharply than any of his other markets.

“‘Did we misjudge the levels of demand and costs in Las Vegas?’ said Perez. ‘The answer is yes’…

“Fortune International CEO Edgardo Defortuna considered a Las Vegas project but backed out.

“‘The reality is that there are such wonderful, gorgeous hotels at very reasonable prices,’ said Defortuna. ‘Why would you stay in a condo when you can stay in a hotel in the middle of the action and not pay that much price?’…

“But not everyone is ready to throw in the towel on condos in Las Vegas. [Miami Beach’s WSG Development’s] Eric D. Sheppard said the condo market is real in Las Vegas, but too many builders rushed in and sold units before understanding their construction costs.

“‘We are very bullish,’ Sheppard said. ‘We plan to announce a two-tower, 1,600 unit condo, condo-hotel, and spa project in the next 30 days.’

It seems to me that Sheppard is begging for bankruptcy. Perez and Defortuna saw the warning signs and backed out in time. Perez in particular got very lucky. Once groundbreaking starts, it is very hard to back out of it. On a condo project that size (11 towers and $3 billion on the line), Perez was going to be in one nightmare of a problem.

“‘The reality is that there are such wonderful, gorgeous hotels at very reasonable prices,’ said Defortuna. ‘Why would you stay in a condo when you can stay in a hotel in the middle of the action and not pay that much price? ‘”

That indeed is the reality of the matter. Let’s add to that reality.

Why would you buy a house in California or Florida when you can rent it for half as much? Please add Boston and Las Vegas to that list. Also note that the Phoenix active listing count is now over 40,000 homes. That does not include for sale by owner.

I do not know how to even begin to describe what is happening in one of the most affluent suburbs in the nation.

Outside of a few still appreciating areas (one trusted source tells me that Atlanta is still one), housing has turned. But not only has housing turned, it has turned 180 degrees. Yet Bernanke keeps hiking. Why? Bernanke hikes because he has to. The stock market, the carry trade players, 5,000 hedge funds, and the mortgage loan sharks still have not gotten the message. The message is that the Fed no longer wants speculation.

Speculation was fine “nudge-nudge, wink-wink” when the Fed was acting to contain “the deflation monster,” but now it seems that perhaps it has unleashed something else indeed: a bubble credit blowout that they do not know how to contain.

Yet each hike in rates is another nail in the coffin of housing. Given that “housing is the economy, stupid,” Bernanke better damn well be praying that the markets get the message before he turns a recession into a depression with these rate hikes. Right now, he simply has no choice whether he likes it or not. Market speculation is forcing his hand. Laugh if you want, but it seems to me that housing says Bernanke has overshot already. It remains to be seen how long it will take before the market gets the message.


Mike Shedlock ~ “Mish”
April 5, 2006


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