Promises, Promises

The Palm Beach Post is reporting, “Be Wary of Condo Builder Promises”:

“Did you buy a condo pre-construction? Remember these words: Buyer beware.

“Some buyers moving into two new condos in downtown West Palm Beach say things are oh-so different from what they expected. Others are exasperated by what they say is shoddy interior workmanship and unfinished punch lists…

“Experts say the problem with pre-construction is you can’t see what you’re getting. So some owners of One City Plaza who thought ‘European-style cabinetry’ meant wood were surprised to learn it really means laminate. ‘There’s nothing redeeming about this building, other than the location,’ said Kevin Landers, who bought a $600,000 condo in One City Plaza.

“Valet parking was promised at first, but along the way was taken out during a redesign. Kolter execs say they disclosed the change, but Kenneth Pincourt, owner of two $750,000 penthouses, disagreed. The missing valet and doorman hurt the building’s image, Pincourt said, and he hates the unfinished entry from the garage. ‘I’ve never seen a building finished this way,’ he said. ‘It’s a damn shame’…

“Karen Zarif is unhappy her 610 Clematis unit is 100 square feet smaller than sales brochures promised. Now she says her dining area isn’t big enough for even a bistro table. ‘I’m so upset, I get sick to my stomach,’ Zarif said…

“Back at One City Plaza, some owners rue the day they bought in a place that sells ‘decorator ready’ units. Those are condos sold with some interior work, such as flooring, left undone.

“Owner Dwain Wall, who owns an $800,000 condo, says he’s realizing ‘decorator ready’ means the building will be in a perpetual state of construction. Nearly half the building’s units are unfinished, and some of those are owned by investors who plan to resell them. Wall says he’s started a Web site to address homeowners’ concerns…

“Others are pondering lessons learned. One buyer says he’s reached this conclusion: ‘I will never buy pre-construction again.'”

Sin City

The Los Angeles Times is reporting, “Highrollers Are Folding in Sin City”:

“First, the Icon Las Vegas was derailed, then the Hard Rock Hotel and Casino expansion and now the Curve. What’s up with Sin City’s luxury high-rise condo market?

“In the last several months, at least seven marquee Las Vegas condo projects have either been canceled or put on hold, causing a dust storm of rumors to swirl through the city and elsewhere as investors wonder if this is a harbinger of a slowdown. The reasons for the projects’ retreats don’t bode well for the larger picture: lack of buyer interest and escalating land, construction, and labor costs.

“But is this really the beginning of the end of the Vegas market? Experts say no and are eager to put things in perspective — an act made more difficult by the fact that the latest high-profile project to halt sales is the $3 billion Las Ramblas luxury hotel and condominiums. The planned casino, boutique hotel, and sprawling residential project, backed by actor George Clooney and partners, was to include 11 towers on 25 acres. The resort was billed as a throwback to a bygone era when jackets and dresses were de rigueur at dinner. Today, its future is anybody’s guess.

“The Las Ramblas reorganization, announced in March, comes on the heels of the cancellations of the Aqua Blue, Krystal Sands, and Icon Las Vegas. Ivana Trump’s eponymous project, Ivana Las Vegas, is also said to be regrouping, as are the Curve — a proposed mixed-use project with twin 18-story luxury towers on 45 acres — and the Hard Rock condo project, once scheduled to be built next to its hotel and casino, which now are up for sale. The fate of the latter project depends on the new buyers, industry watchers say.”

Hmmm. It seems a lot of “promised” buildings are biting the dust big time in Las Vegas. But Mish, what about Phoenix? Good question:

Phoenix

The Arizona Republic is reporting, All Buyers, Not Just Investors, Pull Back”:

“Speculators supposedly have fled metropolitan Phoenix’s housing market, so it’s no surprise that home sales have dropped as that demand has dried up.

“What is surprising is that home sales and building are down more than the rate at which investors were buying last year. New-home building permits were down 16% for the first three months compared with a year ago, reports real estate analyst RL Brown. Resales plummeted 34% during the first quarter, according to the Arizona Real Estate Center at Arizona State University.

“Roughly combine those two figures, and the housing market is off more now than the boost investors gave it last year.”

Homebuilder Projects Loss

This is interesting: “Levitt Warns on First-Quarter Loss”:

“Levitt Corp. on Friday said preliminary homebuilding revenue for the first quarter was flat from the year-ago period and warned it expects to post a loss for the first quarter.

“The Florida homebuilder said preliminary first-quarter revenue for the company’s homebuilding division was $118.3 million on 439 homes delivered, versus $118.9 million on 501 units in the year-earlier quarter. The homebuilder said there were 506 new orders during the quarter, at an average selling price of $334,000. In the year-ago quarter, the company received 605 new orders.

“Levitt’s backlog of homes awaiting construction on March 31 was 1,859 units with a sales value of $608 million. At the same time last year, the backlog stood at 1,918 homes, valued at $496 million.

“Homebuilding margins fell to 18.4%, from 20.7% the prior year.”

Let’s see if I have my facts correct. Margins fell to a “mere” 18.4%. Backlog is 1,859 units. The company is reporting a loss. Hello! Does this compute? It seems to me that Levitt is not disclosing something. Could it be discounts?

Discounts vs. Something Else

Speaking of discounts, it seems that Centex is holding yet another “Two-day” sale, offering “discounts” of a mere $100,000 on a $400,000 home.

Mike Morgan, a real estate agent at Morgan Florida, had this to say:

“Maybe it’s just me, but even though Centex says they don’t discount, they’re giving $100,000 somethings off homes. They did this in March across the USA with the excuse it was just to reduce assets in specific areas prior to closing the fiscal year. But it seems like they are still doing it, and the two-day sale gimmick loses any meaning when they are doing it every day. I sold several Centex homes with huge ‘somethings’ to my clients AND triple commissions. They tend to hide the commissions in SGA and other spots, but the bottom line is that it all comes off margins at the end of the day.

“By the way, the sale in the link above is for 13 communities in just one market. But these same discounts are being offered countrywide. They call them different things and some are 12-hour sales…but if you miss the 12-hour window, you can still get the discount…any day of the week, any time of the day.

“Hovnanian tried to come clean today, but nowhere near what is really happening out here. In the Florida markets, Lennar, Centex, WCI, and Toll Brothers are getting hammered with cancellations and sales that are just about dead. I have 30-plus clients that are going to walk away from $30,000-50,000 deposits. Better to lose $50,000 now than to close and lose $100,000. And as the execs at Horton said, they are going to compete aggressively with discounts. How do you compete with 20-25% discounts when your margins are about that?

“I simply find it hard to believe it has taken this long for the numbers to start trickling out. On second thought, the true numbers haven’t really started coming out yet. April was our worst month. I sell a house a week. I sold just two in April…and one of those just canceled today. He told me he’s going to wait till prices come down more! April was the first month we lost money. May doesn’t look much brighter. If we’re having such a tough time at our level, you can bet your last dollar that the big builders are doing far worse.”

Doors Close in D.C.

The Washington Post is reporting, “Doors Close for Real Estate Speculators”:

“Investors who sought quick profits buying and selling real estate in the Washington region are in full retreat, dampening demand for homes, most notably for condos.

“What is becoming apparent, market watchers say, is how big a part speculators played in the region’s real estate boom of the past few years. Not just condominiums, but also townhouses and single-family houses, were snapped up by investors using no-money-down financing and nontraditional loans. They helped send prices soaring at unprecedented rates. And now many are trying to sell, or rent at a loss. Some may eventually dump properties at low prices to get rid of them. That could weigh down values for everyone.

“Sales of new condos fell 43% in the first quarter of the year, compared with the first quarter of 2005, according to one report, and there are almost four times as many existing condos for sale than last year.”

Did they stop making land in Washington, D.C.? I think not. Mike Morgan offered the following comments:

“For those or you that think this is just Florida, think again. It’s metro D.C., San Diego, San Francisco, Atlanta, Vegas, Arizona, New Jersey, North Carolina, and more. Sounds like dot-com, where everyone insisted ‘not my stock.’ The recent Gallup Poll showed that most people believed there is a housing bubble…but not in their neighborhood.

“The picture in the article above says a lot…49 lock boxes for 200 units. And those are the people using lock boxes. Most FSBOs don’t use lock boxes. As Ivy would say…do the math.

“The Washington Post article says as much as 30% of the market was driven by speculators. Well, I’m here to tell you it is north of 50% in Florida…and metro D.C. as well. I lived in Alexandria, Va., and I have a lot of friends there. Despite some real estate brokers saying the media are hyping the bubble, I say the media have not even scratched the surface. Tulips, anyone? Maybe dot-com?”

Best Fiction

I had the opportunity to talk with Jack McCabe of McCabe Research & Consulting, a firm specializing in micro/macro research of multifamily residential and commercial mixed-use projects late last week.

McCabe reminded me, “New home sales are not what they appear to be, since they do not include cancellations. Cancellations have been soaring, and thus new home sales are inflated.” McCabe also went on to talk about David Lereah’s latest book, Why the Real Estate Boom Will Not Bust — and How You Can Profit From It.

His comment was that “Lereah’s book should win the Pulitzer Prize for fiction and that his weekly commentary should be strongly considered for ‘Best Fairy Tales.'”

McCabe just might be wrong about the best fairy tale. I offer the following “tall tale” for rebuttal purposes: “Economists Predict Soft Landing for Housing”:

“‘After topping out in the third quarter of last year, it is pretty clear that the housing sector is in a period of transition. Sales and starts are trending lower toward more sustainable levels,’ said National Association of Home Builders chief economist David Seiders. Even so, the slowing housing market is not likely to derail the expansion as housing yields its position as the economy’s major growth engine to other sectors, he added.

“Expressing a similar assessment, Michael Moran, chief economist at Daiwa Securities America Inc., said: ‘The housing sector is going through an adjustment, not a collapse.’

“Taking a bullish view on the current economic and inflation outlook, Jim Glassman, managing director and senior policy strategist with JP Morgan Chase & Co., said these factors will bode well for housing…

“Mark Zandi, chief economist for Moody’s Economy.com, said that ‘builders have done a pretty good job of matching supply and demand’ and that ‘nationally, house prices and supply will go flat in 2006, 2007, and 2008.’ This implies that there will be some price declines in key markets, he said, but the markets are going to ‘correct, not crash’…

“The NAHB Construction Forecast Conference was sponsored by the National Council of the Housing Industry (NCHI), the Supplier 100 of NAHB, Wells Fargo Home Mortgage, Fannie Mae, and Countrywide Home Loans.”

One of the things I look for in my sources is credibility. As a real estate agent, Mike Morgan has every reason to put a positive spin on housing, but he simply tells it like it is. Jack McCabe gets paid on the basis of his research. If Jack blows it, it will show up in his pocketbook. Compare and contrast that with complete contradictory nonsense from David Lereah that I reported on in “New Gold Standard.” You decide for yourself which story you want to believe.

Homebuilder Going Under

Before deciding, let’s consider some more evidence. The St. Louis Business Journal is reporting, “Lawless Sells Assets in Bid to Save Company”:

“Developer Michael Lawless is selling residential building sites, ground held for future development, the Valley Park office building where his company is based, and his $2.9 million home in an effort to raise money to pay off creditors owed thousands of dollars by Lawless Homes Inc.

“‘Right now, I realize it doesn’t look very good…and a good deal of the people owed money are my friends,’ said Lawless, 54, president of the homebuilding company he launched in 1990.”

Hmmm…”Lawless Homes” has a nice ring to it, and with that name, it might be fitting that some promises were broken.

Check out this May 1 report from a key homebuilder: “Hovnanian Lowers Second-Quarter Guidance.” While not exactly a “promise,” it sure blew its guidance.

“Homebuilder Hovnanian Enterprises said on Monday it was lowering its outlook for the second quarter and fiscal 2006 because of production delays, slower sales, and price increases.”

Centex, Hovnanian, Levitt, and others have all warned or worse. It’s time to face the facts. The party is long over, and all that remains to be seen is to see how big the hangover will be.

Mike Shedlock ~ “Mish”
April 5, 2006