- The phone rang yesterday. It was Iowa Hal, my agriculture
- "I'm hearing about all the cheap properties for
sale in Florida," he says. "I've always wanted a Florida vacation
home. Do you know any good brokers?"
- Hal must have seen the news. It came out yesterday morning.
Every month, the National Association of Home Builders reports on sentiment
in the homebuilding industry. It surveys 352 homebuilders, adjusts for
the season, and then presents its results in an index from 0-100. If the
index is greater than 50, then builders who see "good" sales
outnumber builders who forecast "bad" sales.
- This month, the number hit 22 from 24 in July. The reading
of 22 marks the lowest point in the index since January 1991. Here's how
it looks in a chart: Housing Market Index (HMI)
- According to the NAHB statistics released yesterday,
these states suffered the biggest drop in sales in the second quarter,
compared to the same period a year ago:
- Florida, down 41.3%
- Nevada, down 37.5%
- Arizona, down 23.4%
- Tennessee, down 21.5%
- Maryland, down 21.1%
- California, down 19.8%
- "Adjustable rate mortgages in Florida are already
resetting like crazy," says Hal. "But the bulge comes in 2008.
So I don't think we've seen the worst yet. Besides, I hear it's impossible
to get a mortgage anywhere in the northeast. The banks up there have totally
shut down. That can't be good for house prices."
- The banks won't lend money in Florida, either. I live
- A neighbor applied for a mortgage last week at Bank of
America. My neighbor has great credit, he'd pay a high interest rate, and
the collateral - the house - was worth far more than the loan. For the
Bank of America, this should have been a slam-dunk deal...
- It refused his business. "Bank of America has told
everyone to stop lending," he said. "No exceptions."
- When the banks stop lending, you've got real trouble.
No one has access to money. Money is like oxygen. When it's cut off, everything
dies, no matter how valuable it was to begin with. That's the case in the
property market right now... especially in places where easy credit played
a big part in the property boom... places like Florida.
- The pain could be considerable. Cutting off credit while
house prices are falling and homeowners are defaulting can only end in
disaster. I expect more downside in property prices. I also expect more
institutions to go bankrupt.
- On the upside, you're close to the end of the crisis
when the banks stop lending... and those with cash are kings. It's like
the final battering in a boxing match: The consequences are serious, but
at least they unfold quickly. Cash goes far in these situations. The guy
with cash has no competition. He can have any asset he wants... at a big
- In sum, the news and statistics may seem dire, but we're
in a cash crunch. Florida is a great place to live, the place is on sale,
and there's no competition for houses.