Archive for April, 2006

Date: April 27th, 2006, Filed under Uncategorized

The number of condo towers cancelled before groundbreaking continues to rise, but now additional pressures are added on developers who consider taking a risk to building the multi-million dollar ventures. Today the Miami Herald reports on a condo tower that was cancelled, with full deposits returned, but the buyers are suing based on the fact that the condo was promised to be built. Most deposit contracts offer exit clauses for developers (who ask for 20% down payments but take the bigger risk on the remainder of the building costs). The market is softening up in southern Florida, and other developers will come under the same legal burdens if this class action lawsuit continues.

The variations of all the tort laws make it very difficult to do any business in this country now. What used to be a basic contract agreement can now be thrown away if a judge decides the contract is unworthy. Instead of a legal binding agreement, we now have contracts that can be stretched and pulled in almost any direction. The law is no longer there to protect the solidity of contracts, it now is there to create a preferential atmosphere for whoever the legal system sides with. This is a big case to watch, to see if our legal system falls even further into paternalism and consumer protection rather than tossing the case and forcing people to read their contracts before signing.

The parties suing the developer in this case want more than what they paid: they want the profit cash value of the condos if they were build and resold. From the article: The plaintiffs seek not only interest on their deposit but the value of the condo if it had been built. Walroth-Sadurni said that if Baboun can be shown to have acted in bad faith the plaintiffs are due the benefit of their bargain, not merely a returned deposit plus interest. This is ridiculous, and shows that the market has speculators who are buying for profit-sake rather than having a place to live. These speculators should be happy that the condo tower was canceled, as they’d likely have a hard time moving with the increase in inventory in that region.

In more Florida condo news, the Sun Herald offers an article on the softening of the condo market. From the article: Almost as quickly as Panama City Beach’s boom began, it hit a trough. Several developers have put plans on hold in this Florida Panhandle town, some after starting construction, waiting for better times. Condo prices have - hold on to your beach umbrella - stagnated or even dipped. Much of Panama City Beach is for sale. The panhandle region is badly hurt by the fear of future hurricanes, but many speculators invested anyway and most will lose money on the transactions.

Citytimes has an article on a dilemma in Tampa, one that plagues developers almost everywhere: the city planning council. Rather than allowing the market to drive in the direction that the money is, these city councils use their power to create preferential pro-voting atmospheres rather than allowing people to buy what they want, and allowing developers to build what people want built. People that don’t even live next to some parcels have power over what is built just because they live in the town. No one argues on behalf of the property owner, believing that restraining the market will make things better for those who live in the same town. Towns are just many parcels of private land that decide to unite under one names — they should not be structures of controlling what you do with your property. As more towns flex their zoning powers, they’ll feel the burden of flight of developers who decide to build projects elsewhere. A town close to my home has been in the gutter for 20 years due to powerful zoning boards. Nothing changes, the money just goes elsewhere.

Beazer Homes announces a few hours ago that their orders have tumbled and their home sales in California dropped 46.3%. Ouch.

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Date: April 26th, 2006, Filed under Uncategorized

As I’ve said in previous articles, the huge increase in the price of housing is due to an increase of money created by the U.S. Federal Reserve and other central banks internationally. When money is created, money is spent. As additional new money comes into a given market, those prices get chased higher as sellers can select who they sell to. The more money that is created, the more opportunity for a bubble happens.

The Federal Reserve hopes that new money is spent equally in all markets — creating a soft inflation that is tamed by an increase in wages across the board. Unfortunately, markets don’t work that way. People tend to put money into the markets that are growing the best, and this cycle causes those particular markets to increase faster than the overall prices in all the markets.

The housing bubble may have been created by new money, but the idea that it could pop is still to be confirmed. Usually bubbles pop when there are no more new buyers to take over what the previous speculators bought at over-valued prices. A bubble grows as new speculators buy an item at a higher price than the previous speculators, in hopes of selling it to the next speculator in the chain. Many people are forecasting the bubble popping because demand for housing is down, yet it isn’t homeowner demand that is to blame: it is the supply of new money.

The Federal Reserve has raised interest rates over and over again over the past few years, and as rates go higher, buyers tend to cut back on loans. Yet even with higher rates of interest today over 2 years ago, the Fed is still printing new money and that money is being loaned to someone. It is where this money goes that is where he have to watch for new bubbles, or for bubbles to burst. If these groups that are still borrowing money (even at higher interest rates) think that housing still has room to grow, they may still put their money into the housing market — keeping the high price stable if not pushing it higher.

Bloomberg offers an article that believes that the housing bubble won’t pop soon: Around the Markets: Signs in U.S. reassuring for housing. They don’t talk about the newly created money streams entering the housing industry, but they believe there is still money available to enter the new housing market.

The number of homes on the market for sale is up significantly over 12 months ago, with many speculators unhappy that they can’t move their homes for a profit. Yet comparing the market today to 12 months ago isn’t an accurate way to gauge where the market will head in another 12 months, all we can watch is where the loans on newly created money will head, an judge the market at that point.

I do believe we’re seeing a huge bubble, and I believe we’ll see it pop this year mostly on the devaluation of the dollar. The Fed can prevent that by devaluing the dollar even more (increase velocity of printing new money), which could cause everything to go up in price but down in value. Without knowing the rate of the Fed’s money creation, it is very hard to gauge where to put one’s money. My bet is on gold investing, but most people want to see a rise in their investment’s value, rather than the stable value that gold tends to offer. Houses deteriorate, housing need maintenance and tax payments, insurance and care. I don’t believe a house is a good investment, except for when the Fed goes crazy with their printing presses. The dollar price of your home may go up, but has the value gone up, compared to other products you’d spend that money on?

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