It's a mad, mad world by gimleteye

There is a lot of grumbling among South Florida developers about the media spreading “bad news” and worsening the real estate crash in condos and single-family homes.

If only reporters would accentuate the positive—like the attractiveness of Florida real estate to Europeans, everything would be OK.

Indeed, if you go to a bar at an expensive Miami Beach hotel these days, you are more likely to hear a foreign language backed by the Euro than any other currency.

But the notion that a strong Euro is going to absorb the over supply of condos or single-family homes built by Florida developers is plain wrong, even at the high end —like plans of the Related Group’s Jorge Perez to build condo towers overshadowing Vizcaya, the historic Miami landmark, starting at a few million and up.

Vizcaya is from the Spanish, or Basque (Bizkaia) meaning something like a cliff. That is how Coconut Grove’s coral ridge appeared from the water to Spanish sailors who named Biscayne Bay in the late 16th century. (And what a cliff it was, festooned with garlands of orchids and flowering trees and waterfalls seeping fresh water from the Everglades.)

In recent years, Miami developers have formed strong links with commerce in Spain, built around respective construction booms and overlapping interests.

Since 1997, home prices in Spain have risen 170 percent. According to Forbes, “So enthusiastic are the Spaniards about their booming market that they last year constructed around 800,000 houses, more than France, Italy and Germany combined.”

Last week Spain’s biggest property stocks fell sharply on fears that the same kind of fraud that is bubbling up from the late stages of the boom in Miami and other hyperventilating property markets in the United States.

The mainstream media is reporting the fraud—and it’s not their fault—but, for the most part, the urgency and depth of economic distress is not being highlighted and for good reason: these sniffles feel like the onset of flu.

As dozens of high rises in Miami near completion and hundreds of empty production-built houses sit in former farmland in South Miami-Dade County, businessmen and investors are running and re-running financial models to see how long they can burn cash before cutting their losses.

It can’t be forever. As much as the economic elite complains about hysteria and hype in the mainstream press, the severity of the losses is undeniable.

On April 24th, Bloomberg reported, “Bond investors who financed the US housing boom are starting to pay the price for slumping home values and record delinquencies in subprime loans. They will lose as much as $75 billion on securities made up of millions of mortgages to people with poor credit… Some of the $450 billion in subprime mortgage-backed debt sold last year is down 37 percent in value, according to Merrill Lynch & Co. Inc.”

What is holding back a sharp decline in property values is the fact that the world’s largest financial institutions have not yet marked to market the value of their broader mortgage backed security portfolios.

More than 50 lenders in the subprime mortgage market have closed their doors. But the fracture lines in the system of mortgage lending and securitization is not confined to subprime. There is no wall insulating higher quality borrowers from the same distress as poorer people experience in making their monthly mortgage payments.

Wealthier borrowers can hang on a little longer, or can absorb the loss. But not forever. It is the pendancy of these borrowers—to reduce prices or to sell at a loss, or not—that marks an uneasy springtime in 2007.

The answer is intuitive: why would foreclosures mount in the mass-produced, production homebuilding sector and not spread upwards?

While many Americans are absorbed in the question whether our troops will come home from Iraq before the presidential election, or if the changes in the global climate mean that springtime is going to vanish, the nation’s bankers are urgently meeting in Congress to reduce the risk to a flu in the economy.

On Wall Street and in Washington, the nation’s largest financial institutions, insurance companies and pension funds are holding hands with the credit rating agencies, like Moody’s and Standard and Poor’s, in a death grip: if you don’t lower the ratings of the bonds we hold, we won’t tell the public how much we have really lost in the value of assets.

The way the bankers propose to alleviate the pressure is a form of economic trepanation: drilling holes into the hard wall of covenants between lenders and borrowers to provide a way through the turmoil. How to spin it, is the question.

Criticism by Florida developers about the mainstream media in press releases and sound bites about “negativity” in the mainstream press are regurgitated from the Long Term capital crisis, or, from the savings and loan debacle of the 1980’s.

There is also a certain feeling of staged performance in the hand wringing of Congress and the Mortgage Bankers Association and the National Association of Realtors and the Federal Reserve about what to do, to prop up home building markets and the ownership society.

The builders and lobbyists and lawyers and consultants are outwardly confident and inwardly shaken.

Corporate profits may be rosy—accounting for the high Dow Jones Industrial Average—but the American consumer is exhausted and anxious. The Wall Street Journal reports today that “U.S. consumers, wary of rising gasoline prices and falling home values, pulled away from new-car showrooms in April, depressing new light-vehicle sales to the slowest annual pace since 1998.”

During the building boom, many home buyers and lenders threw out the window benchmarks for affordability—based on the premise that home prices would always go up or at least be secure enough to retract one’s equity in the case the cliff proves higher and the fall sharper than expected. The newspaper didn't make them do it.

The developers and homebuilders can complain all they want about the mainstream media fomenting consumer anxiety. But in the end, people aren’t stupid. When trillions of dollars of non-performing mortgages are marked to market, it will become clear how the building boom was used by an economic and political elite to engineer a massive wealth redistribution, sold as a public benefit.

It is amazing the extent to which the game is still on. In the state legislature, homebuilers and Chamber of Commerce lobbyists are pressing forward to diminish wetlands protections and insulate changes to the constitution from citizen petitions by ballot. In Miami-Dade County, yet another assault on the Urban Development Boundary is preparing to seed more production homes and suburban sprawl in farmland edging to the Everglades.

It is a ferocious struggle to persuade voters and taxpayers that we (elected officials and the economic elite) are just doing what is best for you. But you can’t cure the flu with a pneumatic drill, anymore than you can save the dollar with the Euro.