Mike Morgan at Morgan Florida sent me another update that I can post with the exception of one small section. This update is called Rear View Mirror Experts.

Quote of the Week - F, F+, C, F, F+, B, D, F, F, F+ - Bob Toll on the Toll Brothers Conference Call as he reviewed markets assigning letter grades. Although this is not the exact order of the markets he rattled off, we heard a lot more F's than the last time he issued a report card. No more "dancing on the bottom." No more Kool Aid. He gave it to us loud and clear . . . providing you listened carefully.

This Week's Update - I've cut this week's update short. No sense in beating a dead horse. Call me if you would like to discuss specific companies or markets. Much of the news this week covers areas I have been discussing for 12-18 months. It's a bit depressing to know you were right, after taking the heat along the way for being so negative . . . and now to read all about the very same issues I was discussing a year ago, as if these are brilliant forms of analysis from leading economists and research analysts. So what's in the future. More bad news . . . but then I'm sure I'll take more heat for being so negative again. I'm still hearing comments about how wrong I am and how isolated these markets are. Bob Toll's comments are a perfect example. All of those F markets were F markets long before now, and many of the A,B and C markets are simply NOT. But that's what you get from the rear view mirror.

Market Conditions - Another week of mini-good tidings . . . I think. We've seen a second week of increased buyer interest here in Florida, as well as from other throughout the country. Most of it is coming from traditional buyers that have school age children. This is a seasonal blip where buyers are concentrating on purchased to lock in school systems for their children for the fall. It's certainly not anything to get excited about, but you may hear a few cheerleaders over the next few weeks. Unfortunately, this market is a trickle, and it trickles out as we approach the summer months. Moreover, even though we're seeing traffic, we're not seeing a bump in contracts or buyers that can get a mortgage.

Seattle - Yessiree, Seattle. My wonderful sister (a famous, carefree, glass blower in Seattle) and her Microsoft exec hubbie live in the cozy, comfort of Seattle. They've both boasted, as have most on Wall Street, that Seattle is in its own little world . . . and all is good. Here's an article in the Seattle Times called Borrower, beware: Debt disaster looms as rates rise on easy-money mortgages that shows you the housing and mortgage issues are everywhere . . . it's just a matter of time before the infection becomes visible.

I'll be making a trip to Seattle next month for a little more color on real estate and mortgage issues.

Nationwide - The Washington Post ran a piece about the drop in prices and buyers in markets as "secure" as the Manhattan commuter areas of Connecticut. Below you will read a few things about Minneapolis, South Carolina and Georgia. It's not just a Florida and California problem. For the rear view mirror drivers, they'll feel the whiplash within the next 2-3 Quarters.

Conference Calls - I'm sure the analysts you work with have provided you with detailed updates on their models by now. Even though the models are rear view data, it should start to paint a picture. And if you take the time to realize how incentives are being buried in other line item areas, you'll see how prices must continue to fall if inventory is going to drop. Unfortunately, the builders are still building more inventory than the market is absorbing. Personally, I didn't hear much to write about on any of the calls. Toll Brothers is stepping up to the write down buffet table with $90-130 million estimate. I don't think I can stress this issue enough. More on impairments below, as well as WCI.

Numbers - Tuesday we get the housing index from NAHB and the Commerce Department reports April housing starts Wednesday. Big deal. I can't say any of the numbers we've been fed are in touch with ground-zero reality.

NAR now expects sales of previously occupied homes to fall 2.9% this year. With David Lereah given the boot, maybe NAR will start reporting numbers that are in touch with reality. (probably not) The 2.9% number is a 31.81% negative revision in the previous estimate. Almost as bad is the revised-estimate of new home sales to 864,000 units for 2007. That's a 27.34% negative revision. Two things to remember when looking at NAR numbers. First, they use a sampling and we don't get to see what markets are sampled. Second, quite a few Realtor Boards no longer report numbers. Naples, Florida is a perfect example. They will no longer share data.

The only way to look to the future, is to get in the car and see ground zero. I did just that this week. Forget about looking back at numbers that are unreliable.

I made a road trip to South Carolina this week for interviews with an ABC and NBC affiliate reporting on defective homes. Along the way I drove by developments in South Carolina, Georgia and Florida.

I saw an awful lot of very ugly developments with hundreds of millions of dollars in the ground for horizontal development, but no homes going vertical. And I saw an awful lot of communities half built . . . with many of the homes for sale. It's hard to swallow the "we don't build spec homes" garbage we hear so much on the conference calls. And even if they don't build specs, when the buyers walk away, the builders now have a spec home.

Looking to the future, I can assure you the rest of this year is a dud. No strike that. Not a dud. This year is a live bunker busting bomb. Even if sales pick up, there is so much inventory yet to be built in undeveloped developments, that prices must drop . . . and incentives must go up . . . and margins will disappear. The alternative? Longer carrying costs, a spike in SGA and huge impairments. I'd be willing to bet we see negative numbers by Q4, and worse for Q1 and Q2 of 2008. If you sat in the car with me and saw what I saw, you'd be scratching your head. I certainly was.

I've got to share this with you. I was on I-95 in and hit what I thought was the smoke from the fires burning out of control in Florida and Georgia. It wasn't the smoke. It was actually a dust storm that was being kicked up from a very large horizontally developed community with no homes. The roads and utilities were in, but everything else was dirt. And the top soil was up in the air in a dust storm. I can no longer comprehend how the builders intend to monetize this land without taking very heavy impairments. I saw the same thing in all three states.

Orlando Numbers - Even though the Orlando Sun Sentinel and other papers are now reporting about the strength in the Orlando markets attributable to a solid tourism market, the numbers show a different story . . . and ground zero is even worse. By the way, if gasoline continues the march higher, Orlando takes a heavy hit. I've attached a few files from the Orlando Association of Realtors. If you want more, I've got them. If you want to discuss the numbers and ground zero, call me. Here's a summary of April numbers for the Orlando MSA.

Sales - 1,768 v. 3,018 in 2006 - Sales DOWN 41.42%

Listings - 24,345 v. 16,036 in 2006 - Inventory UP 52.37%

And for those that say it's getting better, Inventory rose 3.77% from March 2006 to April 2007. While the inventory bulge might be slowing, it is still rising . . . and as you can see from the numbers above, sales are still falling. The active listings represent a 16.63 month supply in this market based on current sales.

Lawsuits - Just like I have been on the soap box about impairments and spillover, I've been talking about lawsuits for more than a year now. Well, the Wall Street Journal finally caught up with the story this week, revealing this is a national problem. Unfortunately, it is not limited to buyers trying to get out of contracts as they would like you to believe. The sharks are on the scent for predatory lending, mortgage fraud, defective homes and more. If you haven't seen the WSJ piece, you should pull it from the online version. As usual, Michael Corkery and Ruth Simon did a great job . . . even if they are limited with some of the things they can report on.

Watch for much more on the shark attack. By the way, CBS 60 Minutes called again this week. They are still trying to put together a feature on mortgage fraud and predatory lending.

We're providing them with contacts, injured parties and information. 60 Minutes will have a segment on the overall real estate market tonight. But it is also rear view.

By the way, this is not a builder-only problem. Wells Fargo recently settled a lawsuit regarding subprime lending. Credit Suisse took a big hit, and other banks have felt the stomach punch. Looking forward, as the banks are bent over from the stomach punch, they're going to get the knock out kick in the teeth.

Spillover - A few weeks ago I mentioned Clarence Otis, CEO of Darden Restaurants, commented that housing problems are affecting their business. This week Darden announced the demise of their Smokey Bones chain. They are going to close and sell the restaurants. And it's not just Darden. Walk into any furniture store and talk to the sales reps. Do the same at Best Buy and Circuit City, and ask them about sales of big screen TV's and computers. Boats, cars, clothing, jewelry and more. The housing ATM is out of money.

Retail Sales - We saw some ominous numbers this week. Housing was to blame, along with gasoline prices. The housing ATM is out of money.

Foreclosures - Last week I gave it a rest, and this week I'm not so sure this horse needs to be beaten anymore. However, I think it's important to reinforce how widespread this problem is. It is a national problem that will truly not come to a head for another 6-12 months. And then it will hit like a ton of bricks. Here's a great link to a graphic from the Star Tribune in Minneapolis on North Minneapolis Foreclosures. Minneapolis? I don't think you can show me any part of the country that is not being touched by foreclosures.

And here's the bad news that is going to get much worse. According to Foreclosures.com, for April 2007 v. April 2006, first notice of foreclosure climbed 127 percent, and homes going up for sale by auction jumped 164 percent. As the housing bust spillover spreads through the economy, these numbers will skyrocket.

Oh, yes, one more thing. Most subprime mortgages have an adjustable mortgage rate and most of these loans were at teaser rates that will double, triple and quadruple mortgage payments over the next three years . . . even if interest rates remain stable. If rates rise, the problem goes nuclear. Add to the increasing mortgage payments . . . falling home prices. Negative equity is already a reality for millions of homeowners.

Rental Market - I don't follow the REITs but I am at ground zero when it comes to looking at the rental markets. Even though Wall Street has been singing the praises of strong rental markets, we've seen the cracks in the foundation for more than a year. It's the same basic Economics 101. Too much supply and not enough tenants. Here's a link to a Bloomberg article called Rents Peak in Housing Glut

Commercial Space - Last week Barry Sternlicht commented about the strength of the commercial office space markets. No doubt Barry is one of the sharpest tacks in the box. I worked for him, and I can tell you first hand, his mind works like a computer. But you must take his comments at face value. Barry plays with the big boys in the big markets . . . New York, Chicago, and Los Angeles, as well as the hot international markets. The office space market might well be healthy in these markets. He noted the flood of hedge funds renting huge amounts of space. I just wonder how long that can last, but that is not my point.

The local commercial markets are not healthy. Once again, get in the car with me and drive around the areas surrounding the few healthy big-city markets. You'll see a tremendous amount of vacant office space and retail space. Get in the car with me and start counting signs for strip centers that are beautiful . . . but empty. These same markets were overbuilt based on rear view mirror data for the housing markets. The commercial boys saw the number of homes going up and decided these areas needed more office and retail space. But as these residential markets fail, so do the local office and retail space markets.

One final note on Barry's comments. He noted that the hospitality industry is now facing a cost of construction problem for new properties. Very true, so now it is better to buy existing rather than try to build new. That's something that will certainly play out as Starwood, Hilton and Marriott look for properties or companies to buy.

Inventory - Up, Up and Away

Land Impairments - If you still buy the Conference Call color that impairments will not matter, you truly need to spend a few days with me in the field.

WCI - Needless to say, the Conference Call was a non-event for those of us looking ahead. We saw a negative number for Tower Net Orders. That negative number will continue to grow. And since WCI books revenue throughout sales and construction, this becomes a big problem.

The biggest take-away from the call was the projected and unrealistic 15% default rate for 2007. They based this on rear view mirror logic. Mosaic and Singer Island skewed these numbers.

If Mosaic had to close today, the default rate would be 25%+. The ground zero from Singer Island is not rear view, but colored glasses. The buyers I spoke with were going to close because they expected to ride the coat tails of Barry Sternlicht's Starwood. Well, Barry's not there anymore and the Starwood Vacation Ownership program is one of the most profitable segments of Starwood's business model. It is not meant to generate revenue for the unit owners. The benefit to the unit owners is the lower cost of holding a unit they want to use during a part of the year. So for those folks that think they are going to generate double digit returns on their Singer Island units . . . they are in for a surprise.

Another problem at Singer Island for these owners, is the seasonality of the business. It's a December - March business, and there is a lot of competition at better rates, in better areas for vacationers. As you can see, WCI's 15% default rate moving forward is unrealistic. Look for the default rate on the towers moving forward to average 30%+. Just take a look at Lesina with only 77 of the 116 units sold, and just 31 of those closing. They've only sold 66% of the units! How about Lost Key with just 39 of the 70 units sold and only 20 closed. Here they've only sold 55% of the units.

At Oceanside they've only sold 67% of the units, and I can assure you more than half of these folks will walk away. Oceanside fails on location and value. A lot is riding on Bal Harbour. Even with 100% of the units sold, how do you explain more than a third of these units already on the MLS system for sale at prices now touching original sales prices . . . with no re-sales? As prices continue to fall in the Miami market, Bal Harbour fails with a default rate significantly higher than the 15% WCI projection.

Back to Singer Island for a moment to get some color on what you can expect at Bal Harbour. Only 12 of the 15 units at One Singer Island have sold. Although WCI claims to have sold 14, they can't seem to get two of the units to close, and they could not sell the 15th unit. This is a tower more comparable to Bal Harbour. They're facing a 20% default/non-closed rate here, and this was closed almost six months ago. The condo market has darkened considerably during the last six months, and it will grow much darker moving forward.

The Bright Spots

Florida East Coast - One of my favorite stocks was taken out this week. Florida East Coast (FLA). Fortress Investment is going to buy FLA for $84. A hefty 86% spike from it's 52 week low, and a 13.3% premium from the last quote prior to the offer. This has been a favorite for two reasons. Very sharp commercial property development, and they are the largest railroad in Florida. Castro will die, Cuba will open up and FLA will see a huge surge in rail traffic. The only thing that surprises me about this buyout, is that Buffet and Gates weren't involved, as they have announced rail purchases recently.

St. Joe - St. Joe is the largest landowner in Florida with somewhere around 800,000 acres. For years I have been keen on St. Joe and their potential . . . if they do it right. Getting into home building was not the brightest move. On the other hand, following the lead of the Griffin family, owners of Alico, would have made much more sense.

Alico is another company with large land holdings in undeveloped markets. Well, undeveloped until the Griffins realized it was smarter to put land in the hands of others to develop for an airport, university, etc. If you build it, they will come. And they did. Alico's land holdings are primarily in Southwest Florida. By nudging along the infrastructure, they were able to monetize their citrus and cattle land and handsome profits. The problem for shareholders, was three generations of Griffins. That's changed now, but so has the real estate market.

As for St. Joe, The New York Times hit the nail on the head this week with an article about St. Joe and the Florida Panhandle. For those of you that have been with me for awhile, you know I've said all along, St. Joe needs to build a destination or a city, not homes. So now, just as Alico did, St. Joe is offering 4,000 acres of land for an airport expansion. They've also promised 40,000 acres for preservation. But they need to take it a step further and bring in a University, a hospital with unique departments, maybe a state of the art convention center, and a few more bells and whistles to make the Panhandle something special. St. Joe is facing major hurdles from the environmentalists, but with 800,000 acres, there's enough for everyone. St. Joe has the ability to develop something very special in Florida, that has the potential to draw Baby Boomers, second home owners, convention traffic, tourists, and more. If they build it (right), they will come. Here's the link to the NY Times article A Bid to Bring in the Crowds.

1,000 Donuts - Back in October 2005, I made a statement analogizing the housing market to the room of 1,000 donuts. You walk in to a room full of 1,000 warm Krispy Kremes. How many can you eat? Two, three, maybe four. Any more than that, and you've got a belly-ache. But then they tell you, the rest of the donuts are marked down 75%. Wow, what a bargain. Can you eat any more? Not a chance. Can you take them home for later? Not a good idea. Well, it's the same thing with housing. How many homes can you live in?

Disclosure: Of the stocks referenced today, I have a put position in Toll Brothers. I also love Krispy Kreme donuts . . . and I can only eat two.

The Shadow

Thanks Mike.

Here are links to the ABC and NBC interviews he did in South Carolina this week. The first one plays nicely and presents Lennar's side of the story as well. I could not get the second link to play.

• Broker Posts Lennar Complaints on Website
• Number Of Complaints Against Lennar Homes Continues To Grow

More information can be found on his Defective Homes website.