Look Out Below

From the blog "Mish's Global Economic Trend Analysis":

I have it on great authority that there will not be a hard landing in real estate.
Who told me that? It was none other than Mike Morgan at MorganFlorida. Please listen in to what Morgan has to say.

Mike Morgan:

Will there be a hard landing? No!
Will there be a crash landing? Absolutely!

Despite September’s short covering of home builders and value buyers trying to cash in on low P/Es and stocks selling at or below book value, a hard landing is now out of the question. We’re in for a market crash. Read between the lines, or read actual comments for content.

Here’s what Robert Toll, CEO of Toll Brothers said at the Credit Suisse conference. “The market got ahead of itself in recent years, citing "greed on the part of buyers and sellers, and that the current level of speculative inventory is probably the largest ever.”

And how about Don Tomnitz, CEO of D.R. Horton. “We have never seen housing prices and demand slow as quickly as they have during this down cycle."

Take it a step further and look at the statistics. Never before have we seen inventories at these levels. Recently NAR finally admitted home price are coming down. Never before have we seen home prices fall. And RealtyTrac just announced that foreclosures are up 53% from a year ago.

For those “value investors” buying the home builders because the P/Es are so low, I ask, “What happens when there are no earnings?” And for those “value investors” buying for the book value, I ask, “What happens when the builders take massive write downs to land, and burn up cash with carrying costs of unsold inventory?”

But that’s not even the heart of the current problems. For the last two weeks I’ve been receiving daily calls from desperate mortgage brokers, real estate attorneys, insurance brokers, title companies and subcontractors looking for deals and work. This week I spoke with a real estate attorney closing his office and returning to the corporate world. And several of the smaller builders have called me offering triple commissions to entice sales of their inventory. It doesn’t end there.

Who will the housing crash effect? Everyone. Real estate agents will be first. As a group, they’ve made a ton of money during the housing boom, and they’ve spent millions on new cars, vacations, restaurants, clothes, and everything else that comes with excessive discretionary income. That’s over now. Agents are not buying the luxury items that helped feed the economic boom, and they are cutting back on business spending like advertising and marketing. That hits the vendors and newspapers revenues.

Take it a step further. With sales off 50% and more, all of the industries that have benefited from the boom, will suffer loss of revenue and jobs at accelerated rates and massive proportions. Home builders and condo developers have been announcing cancellations of projects and cut backs in spec building. The flippers fed the housing boom, and they’re washed up right now. In fact, they are making the crash much worse than it should have been.

Many flippers bought multiple properties. When in the history of the world have we ever seen the housing industry conduct business like a stock exchange. We had bidding wars. We had lotteries on new developments, just like we had allocations for new tech offerings during the late 90’s. And just like the tech boom, the buyers were not making decisions based on fundamentals. Take a look at the recent Vonage offering, where buyers don’t want to pay for their stock, because the price dropped after the public offering. The same thing is happening in the housing market, with thousands of buyers walking away from deposits, refusing to close on homes. That adds to the woes of the builders.

And just like we saw a tech crash with everyone rushing to sell, we’re now just starting to see flippers dump properties for 200-400% losses on their deposits. Add to the woes, the fact that interest rates are up and most flippers bought using creative financing and low rate ARMs.

But this is all old news for us. The other shoe is dropping now. Loss of hundreds of thousands of jobs created from housing will act like a virus and spread throughout our economy. As real estate agents, attorneys and mortgage brokers reign in their spending, it will affect restaurants, car dealers, advertising companies, jewelers, remodeling contractors, furniture manufacturers, bank profits, electronic retailers, clothing and the list goes on and on and on.

As the primary players are affected, and they cut back on spending, so will the secondary players in this market. These companies will be forced to lay off employees, and the cycle will grow like a virus. Is that it? Not a chance.

The housing market benefits most when rates are low and jobs are being created. With rates rising and job loss skyrocketing, the affordability index for homes drops in step. The buyers that are still in the market can not afford the same home they could a year ago. On average, with the rise in interest rates, the buyer that could afford a $500,000 home a year ago, can now only afford a $425,000 home. But with the loss of jobs growing, there are fewer buyers that can afford the $425,000 home and many existing homeowners that can no longer afford to make their monthly mortgage payments.

So now we have a third group of sellers scrambling for the ever dwindling buyers’
market. You’ve got the flippers desperate to sell. You’ve got the builders stuck with inventory of unsold homes, and now you have the group of sellers that are being foreclosed or simply decide to sell because they can no longer swing the monthly mortgage payments after losing their jobs.

Nonsense? Hardly. I spoke with a real estate agent the other day that has not sold a home in three months. His wife works for a title company and was just laid off. He’s now sending out applications for a job in his former field of banking. Lots of luck. He’s been out of the field for five years, and he’s 54 years old. They have two kids in college and a hefty mortgage. Oh, by the way, did I mention they own three flip properties that they can’t sell.

How about the attorney that is closing his office and returning to the corporate world. He’s laying off six people in his office. And how about the builder that called me this week. He employs about a dozen people, as well as a small army of subcontractors. He’s closing up, and he has unsold inventory that he cannot sell at a profit. That means the dozen employees are out of work, and his army of subcontractors are out of work for the first time in four years.

And how about my office. I’ve decided to lay off one of my team members. She’s a single Mom, but as much as it hurts to break the news to her, I have no choice. If things don’t pick up within the next 30 days, I will be forced to lay off a second team member. When you do the math, the choice is survival. It doesn’t end there. Realistically, if things do not pick up within 90 days, I will close my office and concentrate on my other businesses. This is reality, and you’re hearing it from the horse’s mouth.

Multiply these four scenarios by thousands and you have a crash. A hard landing is out of the question at this point. The economists should be talking about how devastating the crash will be.