Nov

29

HurricaneI live in Florida. I own a house in Melbourne and a rental townhouse in Jacksonville which was built in a planned community by Centex homes.

My ex- is a mortgage loan officer with a regional bank here in Melbourne. I have other friends who are in the real estate business and in businesses that support real estate such as mortgage brokers, title companies, construction, and banking.

Here is my view of the local real estate market. In Florida the real estate crisis is very real. Foreclosures are a serious problem and people are being forced to walk away from their homes because they cannot afford the mortgage payments. There have been several homes in my area foreclosed on. This is one contributing factor why a vast number of existing homes are not being sold, and also why the homes that have been built over the last several years are vacant.

Individuals did the unthinkable and took out ARMs three years ago when they were very low, and thus are being refinanced yearly at higher and higher rates. This is contributing to the foreclosure rate and also is putting a tremendous strain on those who are attempting to remain in their homes and keep up with higher mortgage payments.

Taxes have gone up due to revaluations on real estate that have increased over the last several years. My townhouse in Jacksonville has seen two real estate hikes and both have been very difficult on me.

Insurance is a big problem in Florida. Many companies such as State Farm, Allstate and Nationwide have canceled homeowners thus forcing them to get higher insurance from other carriers. In places such as on the coastal areas many of us have resorted to the state insurance company to insure our homes.

Real estate prices have plummeted this year and the liquidity has dried up. There are four homes for sale on my street alone and they are all in a row. Those who want to buy a home may not be able to, due to tighter credit constraints by banks and mortgage companies. Down payment requirements have gone up and the speculators have disappeared. Inventory levels are high due to overbuilding. It will take years for this problem to go away. Those who want to sell their homes are slowly coming to the realization that this issue is going to be around for some time to come. It just will not be corrected overnight.

Buyers who are searching take the attitude that homes will be worth less in six months, so why buy now? Fear is definitely there and lethargy is ubiquitous.

The homes that are being sold are the higher end homes, $1,000,000 and up and the lower end homes below $250,000. The middle market is suffering.

Work in the real estate world is nonexistent. Brokers are whining that homes are not being sold. Listings are way down. Construction workers are out of work. Improvements such as shingles are way down because much of those improvements occurred after the hurricanes of the last three years.

I lived in Florida in the late 1980s when the commercial real estate market collapsed and I recall vividly how brutal that was. However, that affected only a small segment of society, not Middle America. This is far different. There is no way to compare the two events. This is affecting Mr. and Mrs. America and people are very concerned. I don't wish to overstate but I can say with great confidence that it is a very real problem where I live.

Affected the least are those who have lived in their homes five years or more and have seen their home's value retreat to the level of 2000. They are protected from tax increases with their homestead exemption protecting them to some degree. They still have to suffer through the insurance crisis that was touched off by the spate of hurricanes over the last three years. But is not nearly as ominous as those who bought their homes three years ago and are now upside-down, meaning that their home has declined in value and their mortgage and insurance has gone up.

I believe that if it is happening in Florida it is happening in other parts of the country with the exception to Charlotte and New York City.

The threat is very real to this economy and the Federal Reserve is aware as to how dangerous this is and how pervasive it is. Furthermore they are aware of how this could trickle down through the economy, affecting so many segments — entertainment, travel, retail, auto, consumer durables and other industries. The threat of a recession is also very real if this persists and once the genie is let out of the bottle it is very difficult to get it back in.

Let us hope that it does not come to this and we slowly and methodically work our way out of this mess.


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5 Comments so far

  1. gabe on November 30, 2007 12:45 am

    a hope and a prayer. where is mr gavekal when you need him to advise the world on how the 'subprime' is not a problem?
    anyway, don't feel too sorry for the buyers. they got handed a cheap call option on economy and they took it. they can walk away with a small dent in the credit score.

    the real losers are the equity investors in financials. if the recent FAS 157 and FAS 159 get enforced as they should, the 74% mark-down of E-Trade portfolio in the Citadel deal will prove fatal to many. ouch! talk about 'temporary' book value impairment…

  2. Kevin L Puskar on November 30, 2007 9:55 am

    I too live in Florida and have have watched the situation you commented on develop. Thankfully, as long as I keep working I should be able to ride out the storm. I believe that the developers that overbuilt and the lenders that created the “false economy” responsible for the mess we’re in should be tried for treason because their wanton greed amounts to nothing less than an attack on the US economy. No telling how many wounded will be left bleeding by the roadside.

  3. Greg Rehmke on November 30, 2007 12:34 pm

    Two years ago, meeting with economist friends in Miami, I argued that the housing boom was looking messing. Everyone seemed sure that new houses and new condos could only go up in price. I couldn’t predict when it would end of course, but it was clear that when too many “buyers” were just there for the flip, it was unlikely to last. One friend was from Argentina, and he argued the stability of America and the central location of Florida would draw buyers from across Latin America. It the end though, it will come down to housing and condo costs. What does it actually cost to build new units, once speculative land values are erased?

  4. Sherman McCoy on November 30, 2007 3:43 pm

    A fool and their money are soon parted. Thanks God for brainless boldness. If it weren’t for amateurs, I’d never gotten rich. I sold all my investment property long ago, have no mortgage on my home, and am looking to buy. The rental real estate market is booming as those that have realized their limitations move back to where they should be. God bless America!

  5. Sam on November 30, 2007 4:03 pm

    There is one thing that nobody seems to want to accept amid all the media soundbites and spilled ink; much like the tech boom/bust, the spectacular gains of the last few years were illusory. Waiting out the bust in Florida is akin to waiting for JDSU to get back to $1000. The flippers and condo punters will be fortunate to get back 50 cents on the dollar and may even have to hit a bid if there is one (funny how mortgage brokers and homebuilders still talk about “offers”, as if it mattered in an oversupplied, illiquid bear market). The crunch has engendered pain for everyone, and the market is currently finding a new equilibrium for prices, homes, rates, and securities. The US economy is dynamic and quick to adjust to shocks like S&L, tech/Enron/accounting, subprime. The people who bought overvalued homes with loans they didn’t understand are just as culpable as the lenders who funded the loans and the hedge funds who levered CDO’s on CDO’s. Both created the “false economy” collateralized on illusory wealth and 10,20% compounded gains in housing.

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