The house flippers are under stress


By Michael Corkery,
The Wall Street Journal -
Originally published April 17, 2006 --

MIAMI // Todd Linsley, a 37-year-old investor, bought a three-bedroom
house in Stuart, Fla., for about $318,000 in late 2005. His original
plan was to quickly flip the property -- which is in a new housing
development about 40 miles north of West Palm Beach -- by selling it
for as high as $425,000. But when he saw that the market was turning,
he decided to list the home for $379,900. It's been on the market since
early January with no takers.

Linsley says home builders keep discounting unsold houses in the
neighborhood -- sometimes axing as much as $100,000 off the original
asking price. He says he can't afford to go that low. "If I got in a
jam I would have to drop the price, but I am not at that point," he
says.

So now he's renting his investment house out for $1,000 a month, while
paying a $2,045 monthly mortgage and a $108 monthly homeowner's
association fee. "My Plan B was always to rent it out. I am not going
to lose my shirt," says Linsley, a salesman for a medical-products
company.

Linsley is far from the only housing-market investor who has been
forced to go to Plan B in recent months. Many cities that experienced
fast run-ups in home prices during the past five years are now seeing
sales cool the fastest.

Homes that just last year were selling so rapidly that they stayed on
the market for just days or even hours -- condominiums on the Florida
coastline, desert haciendas in California and Arizona, townhouses in
Washington, D.C. -- are now languishing without buyers or even
prospects. Many once-booming markets are seeing double-digit declines
in sales.

Home sales have been slowing for several months, but real-estate agents
in some of these formerly red-hot markets have been surprised at how
suddenly market conditions have deteriorated in the past few months.
The Florida Association of Realtors reported recently that sales of
existing single-family homes were down about 20 percent in February
when compared to the same month a year ago -- and they were off as much
as 47 percent in Naples. In California, sales dropped 15 percent in
February compared with last year, led by a 30 percent decline in
Sacramento, according to the California Association of Realtors.
February sales were off year over year by about 19 percent in
Washington, D.C., and down about 25 percent in and around Phoenix.

Nationally, housing sales are a mixed picture. While nationwide sales
of existing homes increased 5.2 percent from January to February on a
seasonably adjusted basis, new-home sales dropped 10.5 percent. Right
now, economists say the housing market will have only a modest negative
impact on the overall economy, which has been robust. They note that
while sales are slackening, they aren't collapsing -- they are, in many
cases, simply settling into a normal market pace. Inventories are
rising but they haven't reached an alarming amount. And while demand
for homes is easing off in markets that previously sizzled, they are
posting gains in cities where prices are still considered bargains,
including Indianapolis, Albuquerque, N.M., and Houston.

But for cities like Fort Lauderdale, Fla., Phoenix and San Diego, the
dropoff in sales and rising supply of homes on the market could soon
put downward pressure on prices.

"In some places prices might fall. In others, price gains will slow,"
says David Berson, chief economist at Fannie Mae, the mortgage-finance
company. The price gains over the past five years, which caused home
values to double in many of the hottest markets, "were not
sustainable," he says.

The current slowdown reflects three broad trends, according to
real-estate agents and economists. One of the most important is that
many speculators have started to dump homes that were purchased as
investments. In addition, high prices and rising interest rates have
reduced affordability for middle-class families. Finally, the intensity
of recent hurricanes has prompted potential buyers of second homes to
pull back in places like Florida. Some even blame media coverage that
has warned of a possible downturn for triggering a real downturn.

Nowhere are these trends more vivid than in Florida. There were more
building permits issued for single-family and multi-family homes in
Florida last year than in any other state, according to the National
Association of Home Builders. Five of the 10 metropolitan areas with
the strongest one-year price appreciation last year were in Florida,
the Office of Federal Housing Enterprise Oversight reports.

"You could consider Florida to be ground zero for the housing market,"
says Mark Zandi, chief economist at Moody's Economy.com, an economic
consulting firm in West Chester, Pa. He says the factors that caused
the housing market to overheat nationwide -- such as "creative
financing" offered to credit-risky buyers -- were exacerbated in
Florida. "There were more lenders, more realtors, more foreign
investors," than anyplace else, he says.

How investors react will have a big impact on how Florida's correction
will unfold. According to San Francisco-based LoanPerformance, which
tracks mortgages nationwide, 15 percent of Florida homes last year were
purchased by investors, the most of any state. Investors are also
critical, economists say, because in a slowing market they could be
quicker to drop their prices to cut their losses than typical
homeowners.

Speculative buying helped drive up prices in many Florida cities and
shut out many nonspeculative buyers. Recent upticks in interest rates
have put homeownership even further out of reach.

To be sure, the slowing in Florida could prove to be temporary. The
state remains one of the fastest growing in the nation. It's growing,
on average, by 1,000 people a day. Florida's economy is relatively
strong and it continues to create new jobs. And while many Florida
cities are seeing declines in sales, a smaller group of Florida markets
is holding steady. Sales in Jacksonville were essentially unchanged in
February year over year, and they were up in Tallahassee. But in many
other parts of the state "things have slowed to a crawl," says Mike
Morgan, a broker in Stuart, Fla.

Another factor that may be affecting sales is the appearance of some
investor-dominated housing developments, some of which were built with
minimal landscaping next to highways, cemeteries and mobile-home parks.
Several of the housing developments snapped up by investors now look
like ghost towns, with "For Sale" or "For Rent" signs in many windows.
In some cases, the builders "were building for investors, not for
homeowners," says Morgan, who is trying to resell several
investor-owned homes with mixed success.

About a year ago, when the market was stronger, Morgan sold homes to
several out-of-state investors, who never saw the property in person.
"It's really no different from the dot-com (bust)," Morgan says. "The
people who bought the (low-quality homes) got clobbered." He says he
refused to sell poor-quality homes to his clients. "If I didn't have
any ethics, I could have made a million dollars last year."

The swelling supply of condominiums is also causing concern. In
Miami-Dade County alone, there are roughly 70,000 new condos either
under construction or nearing construction, and an additional 25,000
units that have been announced but don't have final approval, says
Michael Cannon, managing director at Integra Realty Resources-south
Florida, which analyzes the local market.

"We believe that the condo market is more distressed," says Hank
Fishkind, principal at Orlando-based Fishkind & Associates, an economic
and financial consultant. "We are seeing a mismatch in timing. The
projects started two years ago -- the delivery is accelerating, while
closings are slowing."

Adding to that supply are the rental apartments that have been
converted into condominiums. Cannon says roughly 150,000 rental
apartments in South Florida have been converted or have begun to be
converted to condos in recent years. Typically, the condo converter
buys the rental unit, renovates it and then sells it to an individual,
often an investor.

Paul Zani, an investor, is trying to resell two converted units he
purchased in Orlando. He bought one condo unit in November for $137,000
and had it listed for $185,000; he bought the other for $147,000 and it
was listed for $195,000. But he's been unable to resell either one. "We
will probably come down on the price," says Zani, who lives in
Nashville, Tenn.

Some pockets of the condo market may fare better than others. Cannon
says parts of Miami's downtown business district and the area north of
downtown, which aren't directly on the ocean, "have the signs of being
overbuilt. The jury is still out. We have to wait until they are
completed," he says.

Meantime, John Warsing, a broker of high-end Miami-area condos at
Turnberry International Realty in Aventura, Fla., says "anything
oceanfront is going to be fine," in part because well-heeled consumers
from across the world are attracted to buying oceanfront property.

Other problems are rattling Florida's market. Home-insurance costs are
rising, after the active hurricane season of the past few years. And
real-estate agents say some homeowners are spooked by the storms
themselves.

"A lot of people have that view of New Orleans in their minds and they
are getting nervous. They are putting houses on the market," says
Melissa Watkins, a sales agent with Michael Saunders & Co., near
Sarasota. "They are not living here full-time and (their home) is an
investment. They want to pull their money out and hold on it."

Watkins says sales are slow, inventory is rising and listing prices are
being reduced slightly. She says one recent deal almost fell through at
the last minute when the buyer balked at the insurance premiums on a
high-end, waterfront home.

Some Floridians blame the media and even Wall Street for scaring people
away. Linsley recalled a headline in a local paper declaring that the
local housing market was overvalued. The headline type was so bold that
it looked as if the nation had just declared war. "The media is killing
the investors," Linsley says.

Despite the current turmoil, some Floridians remain bullish, including
Stuart Miller, the chief executive officer of Miami-based Lennar, one
of the largest home builders in the U.S.

But Morgan, the broker, says for him the market has slowed
considerably. He wrote in an e-mail late last week that "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 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."

.

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