View From FL, 2007 (Part II)

January 4, 2008

View from Florida (Part II, 2007)

Our annual visit with relatives in and around Orlando, Florida is not complete without a tour --or three-- of local real estate developments and, more interestingly, the local "spin." The local papers were full of quotes from realtors expressing confidence Orlando is not Miami/Ft. Lauderdale or, heaven forefend, Tampa/St. Pete. Metro-Orlando prices were mostly firm and excess inventory was sure to correct once the spring selling season got underway.

Our first stop was the sales office of an Oviedo development. We visited this same office last year (see, "View From Florida (Part II)," http://www.viewfromsiliconvalley.com/id289.html). You may recall Oviedo is an outer suburb of Orlando, easily 25 miles from downtown. In 2006, we heard about this development's "Phase IV" with "free Level III" add-ons priced at $600K to $740K for lakefront houses built on 16 lots listed from $220K to $375K each.

Last year's conclusion was, "The first sign Orlando... real estate prices are seriously heading down will be when builders start actually discounting prices, instead of throwing in 'free' upgrades."

Our relative is still very happy with his house and was even happier to show us the nearby shopping and apartment areas under construction by the same builder. However, he also mentioned there was a blurb in the local paper suggesting the builder might be in the verge of bankruptcy. Keeping this info in my back pocket, we set off for the sales center.

This year there was only one car in the lot, but it was still a BMW. Inside, the agent explained they would no longer give out printed lists of the properties available but she would be happy to show us any houses or lots in which we were interested. This year, I decided to argue less and ask less-argumentative questions, so I let that one pass.

I'm not sure, but it did seem her eyes lit up a little when she heard we were from California. She commented she had recently spent time in Napa and really loved it out there. (And my sister, mother and niece all have the same name as you. I'm in sales too and decided to just let this "coincidence" ride.)

Instead of pressing for price lists, I started pulling what fliers were available while my wife distracted the agent with questions about the schools. (Highly rated, of course, but also already over-crowded and using portable classrooms, as we could see for ourselves a mile or so down the road.) The agent claimed they sold nearly as many houses in 2007 as in 2006. I think she said 60 houses sold. She then boasted they had nine closings scheduled in December (it was already the 26th) and 14 more in January.

"Wow! That's great. You don't hear a lot about that kind of success in this area." I replied. "What's the key to your success?"

Apparently filling with confidence we might become real prospects (or maybe just boredom from no buyers visiting all day) she proudly told us, "This is the number one-rated community in Orlando. People are anxious to live here and utilize the pool and clubhouse in the community."

Then she may have gone a bridge too claiming (admitting?) numerous employees, and even their Ft. Myers VP, bought in this community. The shark in me quickly wants to ask how many of these 2007 sales were to employees? What kind of special deals did they get? Can "civilians" get the same deal?

Instead I settled for, "So your Ft. Myers VP is moving to Orlando?" (The unstated questions become, "Are sales so bad in Ft. Myers that even your employees are bailing out?" Or, "Is he renting it out and/or planning to flip it?")

"No," she assured me. "He's put his daughters in the house while they attend University of Central Florida."

We'll set aside the discussion on the advisability of paying ~$450K+ to save four (or eight) years of dorm fees/apartment rent for another day.

Moving on, I trued to get a feel if the sales were pre- or post-August, 2007 credit crunch by asking, "How steady have the sales been?"

She claimed their slowest month was June or July when only four houses sold. (Hmm, just before the "crunch"...)

It eventually emerged, their sales were concentrated in what was apparently a new "Phase V" with prices in the "$300's" plus some other lots across from the lakefront lots where it was a "no brainer to buy houses across the street from million dollar homes." Certainly sales in the "$300's" is down from what seemed to be last year's ~$550K, and up, price points.

I decided to let it slide about how it was obviously easier to qualify for and "buy" houses in this range than the $820K to $1,115K houses on the lake. (BTW, $820K to $1.115K is 12x to 17x the $66K local median family income. Santa Clara County's median house is "only" 7x our median family income.)

Instead, I asked why they were getting such a surge "now?"

She explained these closings were on houses "sold" in the spring but the houses were just now completed and move-in ready. (In other words, they were counting these as "sold," even though they haven't actually collected their money...)

Aha! Now if I could just figure out a way to challenge her definition of sold without making it obvious I thought she was full of it. I guess we're all going to be left wondering how many of these actually will close since I was unable to conjure up that perfect question on the spot,

I settled for changing the subject to ask about bankruptcy. She quickly assured me they were the number-one rated builder in the state (based on buyer ranking) and number five at $195M (divided by $400K, this is less than 500 units).

She claimed a company they acquired (eventually named as "Tousa") "just had a lot of over-priced land" on their books and it was dragging down their own status. She implied this would be easily cleared up and posed no threat to the on-going viability of "her" builder. (A little research later found Tousa bought this builder, not the other way around. News reports show the combined entity is in violation of their loan covenants and could be forced into bankruptcy unless somebody decides to instead inject fresh capital. Exactly who is putting fresh cash into builders these days?)

My own opinion is this builder is essentially counting on the closings over the next two months to keep the doors open. If they get a lot of cancellations (as most builders are getting these days), it could be lights out.

OK, that's all well and good, but you dodged the original question. Are the top-end lakefront house prices up, or down, since December, 2006?

Fortunately, we did manage to get a price list for the lake front lots and house options (plus a "Clearance sale") after all. Their 2007 lot list shows six out of 20 total lots sold (vs. 2006's four out of 16 sold). One of the six lots sold was bought by an employee (who also got a waiver to use any builder, not just "her" employer. Hmmm...) One lot listed as sold in 2006 was back up for sale again in 2007.

Surprisingly, despite all the lower-priced house sales (assuming they all actually close), and the lack of movement on lakefront lots in 2007, the four "new" lots were listed at even higher prices! ($375K to $415K vs. 2006's $220K to $375K range.) Maybe that's the key? If houses and lots don't sell, raise the price!

The list price for the lakefront house options was exactly unchanged at $600K to $740K but "free level III upgrades" were upgraded still further to include "Interlock Brick Paver (half-circle) Driveway" and "Substantial Iron Mail Boxes." (also already thrown in on all the houses sold in 2007) and a "free $60K pool option" (which was a "new" new "free" option).

But wait a minute, if the community pool is so great, not to mention I would be on a lakefront, why would I need a pool??

Conclusion: In their effort to keep list prices up, the builder literally "invented" new "free" features to throw in. Even so, their average 2007 sale price is likely down 15% -20%+ from 2006. Not to mention, over a third of what the builder already counts as a 2007 "sale," had yet to actually close as of December 26.

For extra credit, remember the builder parent's technical default on their loans.

Maybe, "The first sign Orlando... real estate prices are seriously heading down..." should instead have said, "The LAST confirmation prices are headed down is when builders lower their list prices."

The builder may be preserving prices, and therefore defined as "winning." However, we submit it's a Pyrrhic victory. They're not going to have any resources left to fight the next war. (Or develop the next sub-division.)