The dreaded "D" word surfaces

No, I do not mean deflation, not yet anyway. I mean discounts. Builders have been offering free upgrades such as granite countertops, better cabinets, and landscaping. They have been also offering free closing costs, increased lot sizes, and low mortgage rates. One is even offering free cruises. Today DR Horton is finally using the word "discount". They are the first builder to do so. They are still trying to disguise the amount of the discount, as they are giving a discount AND they are giving buyers a free lot and upgrades. Others will no doubt follow suit.



Mike Morgan of Morgan Florida is keeping me posted on what is happening in Florida and it's not pretty. Mike is doing everything he can too, to drum up customers. I will tell you more about that next week. For now, here are some updates from Mike Morgan.

I hope you’re all sitting down. These numbers were just released by our Board for February – Martin County, Florida. These numbers do NOT include builder inventory, so the numbers are much worse than what you see below.
2005 Inventory 1148
2006 Inventory 3594
Increase – 213%

2005 Absorption Rate = 0.19 months
2006 Absorption Rate = 21.8 months

This is not an error and the condo rate is even higher!

Is this just a Florida thing?
Nope.

NEWPORT BEACH, Calif. - Homebuilder William Lyon Homes said on Wednesday new home orders during the first quarter fell 26 percent from a year ago, while its cancellation rate for the quarter more than doubled.

LOS ANGELES, April 5 - Homebuilder Brookfield Homes Corp. on Wednesday said net orders for the first quarter fell to 227 units from 517 units a year ago, saying the decline was primarily in the San Diego/Riverside and Washington D.C. markets.

Morgan had this to say about those releases:

I think those two releases say it all. If you think this is isolated to these two builders or a region, think again. All of the big boys will have similar releases in the coming weeks. On the latest KB conference call, Ivy Zelman tried to pepper the KB execs with hard questions. Karatz’s response when he cut her off was very interesting: "do the math Ivy." Well, if the Street was doing the math, it would be clear these guys will miss their new home numbers by 15-20% this year with lower margins to boot. The incentives and commission bonuses are increasing daily.

KB reps have called me twice this week with "inventory" homes. These are homes deeply discounted because buyers (flippers) walked away from their contracts. By the way, the math for Brookfield is a 56.09% drop. I’ll bet you a dozen donuts KB, PHM, LEN and CTX report double digit drops in order this year approaching, and maybe exceeding 30%. If the Florida market is any indication, the numbers will be north of 50%.

Here is an ad from LEN that Morgan sent me.
Great Incentive on The Millbridge
April Move In!!!!!
Special 4% Realtor Commission
Was $486,365…Weekend Special……..NOW $396,365



Weekend Special? $90,000 off!
Poof. Anyone that paid full price a few months ago is now 18.5% and $90,000 in the hole, and that does not count real estate commissions either. Is Lennar using the dreaded "D" word? No, not yet. How long they can go on selling houses at full price but offering $90,000 in weekend incentives is anyone's guess.

I could not find Millbridge on any of Lennar's Florida listings but by calling a phone number on the ad I found what I was looking for: It is in Port St Lucie, Florida - The Treasure Coast. Interestingly enough there are only 3 units left, and apparently there was a closing breakdown of some kind or other. So... to get rid of those last 3 units, Lennar just repriced that entire subdivision down by close to 20%. Is that desperation by Lennar? If not, exactly what is it?

Let's finish up with more comments from Morgan.

This was our worst week yet. We went three days this week with not a single showing. That’s incredible. I have 35 listings. We usually get 2-6 showings a day. I noted a few months back that once the snowbirds left Florida in March, that we would be in deep trouble going into the Florida shoulder season of April and May. It is here and the buyers are gone. We will see a small surge in buyers for June and July as buyers jockey for school systems, but then it is a decline from August through December. January picks up with the return of the snowbirds.

Not only did we see three days without a single showing, but I received more desperate calls from sellers than ever. One lady broke down into tears. Her husband bought two investment properties, and they are now going to lose their "life savings" if they sell the homes in today’s market. Her only option is to lose her life savings trying to carry this through the next 12-24 months. I received calls from Utah, California, South Carolina, Vermont, etc. etc. All the same. "We bought a house or a couple of houses for a flip, but we can’t sell them. What do we do, Mike?" I can only tell them that the $400,000 house they bought is now only worth $325,000 - $340,000. Their 10% deposit is gone. Their $3,000 a month in carrying costs is killing them. A year from now these homes MAY be worth $350,000 - $375000 IF we have a strong market. So even a best case scenario means $36,000 in carrying costs to recoup $25,000 - $35,000. That means another $1,000 - $11,000 in losses if they wait . . . and IF the market rallies strong.

I am hoping that if prices fall far enough, the investors will step back into the market, but mortgages and insurance on investment homes is now very difficult to procure in this market. Moreover, rents are down by 20-40%, so the numbers don’t work for investors that cannot afford the 5-10% negative cash flow. The other side of that is, we will need a minimum of a 5-10% increase just to cover the negative, not to mention another 4-8% to cover the commissions. Will we see a 9-18% increase in prices? Hardly likely.

Next January we will see a surge in buying with the return of the snowbirds. They will return not as snowbirds, but as vultures, looking for the bargains at the expense of the flippers.

Don’t forget the ripple effect. Building has come to a screeching halt. Thousands of construction workers are out of work. They are forced to sell their homes, adding to the inventory. Foreclosure filings are on the rise and will hit record highs this year. Banks will suffer as well.

These issues are not isolated to Florida. I hear the same story from friends in Arizona, California, and Washington DC Metro.

By the way, I don’t even take calls from the builders anymore. They have their sales reps on the phones calling agents every day. These are the same guys that didn’t want to know us a year ago. At some point the real story will come out. Brookfield and Lyon are just two small companies that have come clean with the Street. The big boys will have no choice but to start revealing the real numbers. Incentives, free upgrades, free lots, free closing costs, credits, bonuses to agents, increased commissions all mean lower prices to the builders and lower margins. Moreover, we are now seeing a big problem getting homes to appraise for any of the higher prices that a seller might be able to snag. As prices come down, this will be come a major problem for buyers.

The totality of the circumstances paints a bleak picture.

Here's a tip of the hat to Mike Morgan for telling it like it is. Not many brokers are willing to tell people what is really going on. Morgan is one of them and I for one appreciate his honesty. I also appreciate some of the things he is doing for his clients, and I will have more to say about that later next week.

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