patrick.net

Lennar is encountering a significant and rising number of European buyers in Sarasota - enough to resume new construction on a reduced scale and after a period of several months in which no new developments were announced.

While I know the concept of foreign buyers as saviors of the market has no currency here, this 'new' wrinkle reproduces exactly the local experience of the early 1990s when many foreigners - who generally like this area as a holiday destination - decided local real estate had become too cheap not to buy.

Does the shrinking dollar add similar luster to BA real estate? Prices may not have fallen much calculating in dollars, but they've fallen sharply this year if you're holding euros.

This reminds me of the thread regarding the allegations by hedge funds that somehow servicers renegotiating loans was somehow market manipulation. Lennar is not De Beers, meaning they are not a sole source supplier with the power to control supply. If Lennar doesn't want to sell houses at a loss, they will just lose out on the few buyers who would take some of their excess supply. Lennar wishes they had that sort of power, the reality of the situation as we've seen with the servicers renegotiating is that the market has already determined that house prices are out of line and it will take all of the builders holding out to have any impact. Even if that happens it will still take about 5 years for supply to dry up to the point that it impacts pricing.

Although it is light hearted humor, the property tax issue is quite relevant. Remember that the builders have to pay property taxes on the houses they are mothballing. They don't just pay the tax on the land basis. Some might not realize it but the builders have to pay the taxes on the full market value of the finished construction. Basically each year that goes by is equivalent to the builder having to write off the cost of an entire house for each 90 or so houses that the builder is holding. Another way to look at it is that it is bad business to hold out given the current slim margins, it doesn't take very long in holding out to go into the negative just on the taxes and the debt service.

Bruce, it is true that a falling dollar makes houses cheaper to foreigners. It is still a bad deal especially if the dollar will fall more. It becomes compounded by leverage. It would be like trading euros for dollars to have those dollars lose even more value. Any rents of course will be paid in dollars not euros, like everyone else foreigners will just sit and wait for either prices or the dollar to bottom out. It is not normally not a sound investment to invest in something that is declining; foreigners are currently dumping US currency.

Peering into Lennar's crystal ball I see:
1. Something Bruce stated. With the on-going destruction of the dollar those properties are rapidly becoming more affordable to foreign buyers. They would still be bad investments, but as second homes they can be pretty good.
2. I wonder what Lennar's lobbiests know. Some bizzare legislation may prop up prices. That would make this a 'wait-for-a-while' approach and not a 'wait-forever' approach.
3. Maybe Lenna has some legal maneuver coming? Restructure their debt? Argue the value of the home to the city for tax relief? Anything to reduce the holding costs.
4. Insurance? Maybe they want the homes to have squatters? A few, "Gee I am cold, lets have a barrel fire in the living room" and Lennar gets full insurnace claims?

I just can't buy the wait for spring idea unless its spring in conjunction with some other external force - like tax relief.

Ha ha, like when a white guy who owes too much on his car just parks it in a poor neighborhood with the keys still in it. That gave me a little laugh.

Here is the latest spin I got in an email from a realtwhore - basically "Buy now before the buyers rush back in Spring!" I wonder how much they paid the Mercury News' Sue McAllistwhore to fluff up the buyers:

I have a number of clients who think waiting till Spring '08 to buy is a good idea. My reaction is don't give up now! This is the time of the year for the best deals for buyers; especially this year. So you can imagine I was glad to see that the real estate writer for the Mercury News agreed with me. I have included her thoughts below from the Mercury's great real estate blog. By the way, if you are serious about buying or selling, this blog is a great resource.

Best regards,

I sent the realwhore a reply saying that if she can personally add 5% discount on the asking price, in addition to the agency's 20% rebate off the asking price, then I may be interested enough to think about fixin' to get started. In 2009. :-)

SP

SP,

Write back and say "Are you willing to write up offers for 40-60% under asking? If not, go f**k a lipsticked pig!"

@SP,

Yeah, it's interesting comparing the SF Chronicle vs. Mercury News spin on the DQ data. SFGate's link is, "Bay Area Home Sales Tank", while the Merc has, "Area House Prices Jump."

McAllister is a complete REIC shill and whore. Her articles are completely useless. RE agents might as well cut-and-paste her drivel directly into their ads.

And it's not like the Chronicle is some haven for RE bears. They are plenty shill-ish. They just pale in comparison to the crap that passes for journalism at the Merc.

sfbubblebuyer Says:
Write back and say “Are you willing to write up offers for 40-60% under asking?

I love the way realtwhore's eyes light up when they find out I am thinking about making an all-cash offer... :evil:

... at 40% below asking price. Yeah, verily what the large print giveth, the fine print taketh away.

SP

They will call you unreasonable and unrealistic; that is, until 5 months from now when they call you back to see if you are still interested.

Data point: I saw a sign-twirler offering "free rent" in Mountain View this week. It might not have been the most prestigious neighborhood, but still.

Here is something I saw in the SFChronicle:
Larry St. John bought a home for more than $900,000 early this year in a new development on [Vacaville's]’s northwest side. This weekend, the builder is planning an auction of more than a dozen similar homes, with starting bids about $300,000 less than what recent buyers paid.

Christ on a stick - who the f*ck pays 900K in Cacaville?

And some more wisdom from clown Larry:

“As a homeowner in the Bay Area, ‘every couple of years you have an opportunity to refinance and do some improvements and still have equity,’ St. John added. ‘If you’re starting off from a position of negative $300,000, that takes more than a few years to rectify.’”

By the time this blows over, dear Larry, there will be plenty of fools in the Bay Area in your position - bent over with a $300,000 shaft permanently lodged in their sphincter.

SP

the property tax angle is a significant holding cost -- property development is a short-term cash flow business, developers want to get in and get out and minimise their holding costs, not wear this sort of hurt -- what sort of money are we talking about per year, a couple of thousand presumably?

(you don't pay property tax in most parts of oz, although there is a land tax on investment property in NSW, not PPOR, which is probably similar in magnitude)

So, when are the buses full of homeless going to start pulling in?

Then they'll have residences, addresses, 4-5 per place fixed up with Welfare benefits could pay the tax on the places just fine.

That would open it to eventual adverse posession, and a bunch of homeless folks have a roof over their heads.

A win-win deal!

ex-sunnyvale-renter Says:
So, when are the buses full of homeless going to start pulling in?

A win-win deal!

Gosh, that sounds like some sort of socialized gummint affordable housing solution! Decent affordable housing for all! Non-institutionalised housing for the mentally ill! From each according to their ability, to each according to their need! Who would've thunk it...

Malcolm Says:

> This reminds me of the thread regarding the allegations by hedge
> funds that somehow servicers renegotiating loans was somehow
> market manipulation. Lennar is not De Beers, meaning they are
> not a sole source supplier with the power to control supply. If
> Lennar doesn’t want to sell houses at a loss, they will just lose
> out on the few buyers who would take some of their excess supply.

With 259 homes that cost $600K each to develop it will cost a lot to hang on to them.

Property Taxes will be about $1.8mm a year and the construction loan debt service will be about $12mm a year.

Add in security and maintenance and will cost about $1.2mm a MONTH to “mothball” the development.

It sounds like Lennar is doing what many flippers did holding a bunch of real estate and “hoping” that the value goes up by more than their carry cost of $50K per home per year…

DS, it is quite significant. Here in California the builders have to pay 1 to 1.3% depending on the county, on the current market value of their improved properties. If the average house is $500,000 roughly then it is more than $5,000 per year per vacant home.

Like you said before though, it is a short term business, and there are even more significant costs which ruin the whole profit model. I actually invest in construction loans and it is doubtful that any of them can borrow for less than 10%. Certainly not the smaller ones who can easily pay 12-15% on hard money construction loans. Hold a house for a year and basically that is the whole margin....gone.

FormerApt,
It is funny how the psychology is the same whether it is an individual or a giant corporation. I can't be too judgemental, it is a bad decision but it is like a gambler who is down. As long as you keep playing there is a chance, but as soon as you call it quits, that's it, reality hits them in the face, it is a REAL loss.

In case anyone missed the news yesterday, Starbucks reported a 1 percent drop in traffic at U.S. stores open at least 13 months, the first such decline in the company's history. Leading economic indicators are not looking good. Is anyone handicapping "Black Friday"? One last Merry Christmas, or is it all downhill from here?

FormerApt,
Using your numbers it is fun to flip the problem around. Say that they hold them for a year, it is indisputable that they will have a hard cost of 25 million or more. Now let's see what they need to do to dig them out of the hole.

Assume that they are right and they will get full price in a year. (yeah right). Assume a 10% margin on each 600K full price house. That is $60K. Given this best case scenario they would have to sell 417 houses just to walk away, ooops they are only mothballing 259. Uh oh.

I guess they better get started building the extra 158 houses and hopefully the market will have picked up by the time they are all built.

This is a classic "let's lose a little on each one and make it up in volume" model. Oh man, that is so painful just to simulate.

EB, do you think it is a real decline or could the stores open for less time be cannibalizing their existing base?

EB, do you think it is a real decline or could the stores open for less time be cannibalizing their existing base?
You are asking the wrong person... because, as a Peets shareholder, I know in my heart-of-hearts that their high end customers are defecting :-)

St. John added. ‘If you’re starting off from a position of negative $300,000, that takes more than a few years to rectify.’”

St. John was martyred, impaled upon a golden pike. He remains patron saint of diseases of the lower colon and nether regions. He is often prayed to in cases of multiple annual rectification.

now that I think about it .....

They could've burned 'em a few weeks ago.

I worried about arson here before.....

If a house burns down, on what basis does the insurance company pay out? Original sales price? Comps and square footage? Stated value by the developers? Will they pay out less now that prices are falling? And then of course the land doesn't burn.

EBguy I hear you on Peet's.

Starbucks is a level lower in quality than Peet's. The coffee the same price but better, the little snackies are equally sugary and annoying at both places, the people are nicer at Peet's, and Peet's has a higher grade of coffee cups etc - less made in china stuff and the stuff doesn't have the "K-mart chic" feel to it.

So overall Peet's wins.

I got my awesome Chemex coffee maker at Peet's too, great gadget.

BTW .... WTF?

http://www.click2houston.com/news/14615114/detail.html

Oh, fuck, Pasadena TEXAS.

Sometimes I read things too quick.

And now we return to our scheduled bubble coverage .....

Rumor and innuendo on the commercial market from Ben's. Toth says he heard that grade A real estate saw vacancy rate increases across ALL bay area markets. Can FAB or anyone else confirm (or deny)? Oh, now this would get some of the regulars here worked up.

# FormerAptBroker Says:
It sounds like Lennar is doing what many flippers did holding a bunch of real estate and “hoping” that the value goes up by more than their carry cost of $50K per home per year…

Didn't you hear? Sue McAllister said the market will pick up after the superbowl. It was in the Mercury News, so don't you worry about a thing...

SP

EBGuy Says:
In case anyone missed the news yesterday, Starbucks reported a 1 percent drop in traffic

Yep, I saw that and raised my home-made cappuccino (about 25 cents to make) in silent celebration of this forum's foresight.

More interesting to me was the daily news warnings about bond insurers. Every day now for the past week, someone or other has been warning that sellers of credit default swaps and other insurance could be hit.

I think it is a signal that it is already happening - watch out when that news breaks and the collective-dump hits the fan. Remember, you heard it here.

SP

EBGuy Says:
grade A real estate saw vacancy rate increases across ALL bay area markets. Can FAB or anyone else confirm (or deny)? Oh, now this would get some of the regulars here worked up.

You lookin' at me? :-)

Seriously, FAB, do you have the numbers? It would be a VERY unmistakable indicator of health in the Bay Area wreckonomy (tm)

DennisN Says:
November 16th, 2007 at 5:48 pm
"If a house burns down, on what basis does the insurance company pay out? Original sales price? Comps and square footage? Stated value by the developers? Will they pay out less now that prices are falling? And then of course the land doesn’t burn."

The policies are for replacement cost, meaning they will rebuild the house to the same standards as before. After the Cedar fires of 2003 the laws were changed to avoid being underinsured. It used to be, that you would have a policy written for the value of the improvement, but as time went by people didn't upgrade the coverage and found inflation caused them to be underinsured. Personal contents are a small upcharge, and a good policy will have workers comp, as well as liability protection for things like dog bites. Believe it or not earthquake insurance is not in a standard homeowner's policy, that in my case is about a 50% upcharge roughly $300 extra per year. I don't carry earthquake coverage. Mold is expressly excluded from standard policies.

Since we seem to be doing the weekly news wrap up, here are my other highlights:
1. GE not-quite a money market fund going below $1 NAV
2. BofA setting aside several hundred million to prop up a money market fund
3. Wells Fargo CEO starting to mimic the Tanman with "housing not this bad since the Great Depression" talk. I can imagine many a Wells low LTV subprime loan in the Central Valley/IE is starting to become a not-so-low LTV loan.

I exited some mutual funds in the retirement account during the mid-week rally and am heading for the GLD fallout shelter. As Randy said on this thread a while back, they will fire up the printing presses before allowing a MMF to fail.

You lookin’ at me?
You and skibum were two folks I had in mind ;-)
And for what its worth, our building still seems to have a fair number of vacancies...

So, when are the buses full of homeless going to start pulling in?
There seems to have happened to a newer office building in Sunnyavle or Santa Clara (Lawrence and El Camino), This building was brand new a few years ago, and then the tenant moved out. A few months ago I saw a lot of broken windows and then the whole building was fenced off.

Sometimes a lot of things in Silivalley seems rather 3rd world.

McAllister is a complete REIC shill and whore. Her articles are completely useless. RE agents might as well cut-and-paste her drivel directly into their ads.

Agree, a few years ago at the height of the bubble she wrote an article quoting some RW, the RW made a comparison something about selling in the expensive neighborhood is not like selling a 500K house in Santa Clara (exactly what I forgot).

The funny thing is that I emailed Sue McAllister and told her that week there was not a single 3/2 house in Santa Clara that was under 600K, she replied the RW was speaking metaphorically. I was totally enlightened about her reply.

Lawrence and ECR ..... yeah, that rings a bell. Larry and El Camino is a very slummy area, that's where the true Silicon Valley ambiance is to be savored .......

If I'd stayed there I'd be living in the bushes with my stuff in a storage, sketching people (badly at least at first) at farmers' markets and probably making noise with a geetar on the street for variety for coins .....

Instead I came here.

Everyone's white! Everyone's nice! I have ..... a room and a workshop and tons of tools, material, 2 acres, a motorcycle (hehe!) plus tons of toys from lathe to BIG forklift to a truck and a car and more cars'n'trucks, and I got Welfare!

Red State Bliss!!

I should have something going in a few months, then can tell Welfare thanks for the help but I'm doing OK.....

Meanwhile back in the BA I'd be dodging meth-heads and essentially begging ..... not knocking begging in the BA, it's not bad, I guess on one level I sensed where things are going and started befriending some of the street people, the BA is actually very 3rd world.

Went to the Hudson and Marshall auction in Stockton last night. They auctioned off about 60 bank owned properties. What a realtor zoo. You had to run a gauntlet of re agents trying to get their 2 percent to represent you. I've never seen so many beggars acting so arrogant. The Eau de 2005 still oozes from their pores - but at least now you can see the fear in their eyes. Two of the open houses I visited last weekend had sold in the low 400's in late 2005 and went in the mid 200's at auction. Overall though, the winning bids seemed way too high for a market in meltdown.

low 400s to mid 200s is still too high? that's only a 40% drop, I can see why you'd be disappointed...

Different Sean:

The properties were sold with reserve, ie. the bank will review the high bids and accept or reject in a week or so. It will be a while before I can see what actually happens with the offers. Saved my catalog in which I wrote the high bids and I'll follow a few to see the outcome. Some lenders must realize that the offers won't be any higher in next few months. US Bank alone holds over 400 properties in this county. Unemployment in the Stockton area has jumped to over 8 percent. I'm thinking the smart money will wait at least until the ARM resets peak in 2008.