The Banks Have Stopped Lending
By Tom Dyson
August 16, 2007
The phone rang yesterday. It was Iowa Hal, my agriculture contact...
"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 in Florida...
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 discount.
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. That's why Iowa Hal's interested in Florida property. It's also why four other people have asked me to refer them a realtor in Florida in the last few weeks. It's also why so many British and European investors are starting to consider Florida for vacation and retirement homes.
Act fast and you could end up with a beachfront property and a large profit, too...
Good investing,
Tom
P.S. Florida has the weakest housing market in the nation. Next week I'm going to Fort Myers and Miami to find cheap property. Are you in the construction, development, or sales business in the Fort Myers or Miami areas? Do you have any real estate contacts in Fort Myers or Miami that might help me? I'll buy you dinner if you can help. Please contact editorialfeedback@dailywealth.com.
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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