McCabe Research April 2006

I had an interesting one hour conversation today with Jack McCabe of McCabe Research and Consulting, a firm specializing in micro/macro research of multifamily residential and commercial mixed use projects. It seems he found me after I put a double "black mark" on his soul and jokingly banned him from The Apologists Club on March 24th.

"That is a trend, not a blip," said Jack McCabe, chief executive of McCabe Research and Consulting in Deerfield Beach, adding that too many good people took out too many bad loans.

I was pleasantly greeted with a surprise phone call from him just today. I will try and summarize the conversation as best as I can. Here goes:

For starters, Jack McCabe was telling me that there are 290,000 real estate agents in Florida. "That equates to one out of every 57 people", he said. Imagine that. The real question I asked McCabe is "How many of them depend on sales commissions for their livelihood?" Let's face it I said, there are a lot of housewives masquerading as real estate professionals happy to get a sale or two a year as extra income. Jack estimated there are approximately 130,000 full time professionals based on the number of registered Florida association of realtors.

For the sake of argument let's call it 150,000 (assuming that there are some full time agents not registered with the association and others even if not full time very dependent on commissions for living expenses). That would make it roughly one in a hundred people in Florida are directly dependent on real estate for their livelihood. "But wait" Jack said, "That does not count loan originators, home builders, contractors, subcontractors, landscapers, or anything else housing related".

Jack is correct of course, and even though the others may not "need" the extra money, it is certainly flowing through the system. That is a theme I have been harping about for months as Mish readers know full well. As long as the building continues, people will have jobs. When it dies, it will be lights out.

"Look at Countrywide" McCabe said. "Countrywide?" I asked. It seems that with little fanfare Countrywide closed a South Florida office in December. With it perhaps a couple hundred people lost their jobs. "Not only that but Washington Mutual is laying off people", he said. A couple of hundred people might not sound like many, but the real question is how many home sales did a couple of hundred loan originators support?

Jack was telling me about "mezzanine financing". I had to ask him what that meant. It seems a lot of home builders were on short term financing, hoping to get projects completed "Wham bam thank you mam". Jack is now telling me that some of those developers now have a "cash flow problem". It is one thing when people are camping out overnight to get in line to buy a condo. It is a far different situation when projects are being delayed and even cancelled.

In fact, projects are now being cancelled left and right. McCabe told me of a development that has sold 2 units out of 250 after cancellations. Hello world! If that is a small time developer, that person has just been busted big time for speeding. The next step is bankruptcy.

Jack spoke of a project in Sarasota where because of a technical delay in condo document filing with the state of Florida, the developer had to recently do a special two week rescission period. Well guess what? It seems that 100 units that the developer thought were sold have now been cancelled. That is 100 out of 270! Given that not all of the units were presold, the cancellation rate is enormous. "Speculators are bailing every chance they get" he said.

I have one more interesting factoid. Jack is telling me that "as soon as ground is broken, the ability of investors to get back deposits is limited". I commented that seems like fertile ground for fraud. "Indeed", he said. It seems there are situations right now where developers are bringing in bulldozers and breaking ground "with no real intention" of getting underway with actual development. The reason they are doing this is because as soon as ground breaks at least a portion of deposits are not refundable. Some lawsuits are now underway.

Although McCabe Research specializes in Florida and the Southeast US, Jack is telling me of similar stories elsewhere including Las Vegas, San Diego, Chicago, Boston, New York, and Los Angeles. Interestingly enough, he thinks that housing is a "local problem". That was the good news. The bad news is that the "local problem" includes areas where a huge percentage of the population lives.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/