Time to Short Florida
I generally don’t sell stocks short, due to unlimited downside and exposure to speculative bubbles. You can be right in the long run, yet get killed by a margin call in the short run.
That said, if I were to sell something short now, it would be the entire state of Florida.
Regional real estate wipeouts all tend to repeat a certain trajectory:
- Buyers vanish, but sellers are unwilling to drop prices.
- Consequently, the number of sales collapses.
- A year or two goes by.
- Sellers start giving up and reduce asking prices.
- Buyers see prices falling, and decide to wait it out.
- Sellers are forced to reduce prices further.
- If seller’s equity falls below zero, they stop paying mortgages.
- Bad loans proliferate.
- Banks with geographically concentrated loan portfolios start going broke.
This has happened several times in regional markets in the U.S. — Houston is the most flamboyant example of the last 30 years.
In Florida, we have arrived at Step 2 (see above) with the recent report that the number of sales in Broward County in south Florida has fallen 34% from last year. Median price fell less than 1% — we’re now waiting to complete Step 3.
This problem may extend to other states as well. But Florida looks particularly bad, because:
- The state’s economy is unusually dependent upon real estate.
- There exist many vacation communities with little or no underlying economy.
- Rampant speculation, including the infamous CondoFlip.com.
- Prices rise at 30% per annum from 2000 to 2005.
- Insurers flee the state on fears giant hurricanes will be common.
- Even Bush’s EPA puts south Florida under water in 100 years.
- South Florida will suddenly run out of water within 20 years, as seawater invades the aquifer supplying most of its drinking water.
Now, it’s possible Miami will become a charming, windblown Venice, connected to the mainland by a 100-mile, hurricane-proof causeway, giant desalination plants humming 24/7. Then again, I wouldn’t bet my own money on that.