Notes On the Florida Real Estate Bust

* * * Boy, was I wrong. I was expecting a crowd of scruffy stock promoters and "financial PR" firms at last weekend’s Financial Publishers Roundtable. Instead, I met a group of long-time, independent, and honest newsletter writers. I didn’t know there were so many of us out there, including inspirational guys such as Steve Pepper, who has been publishing his letter in Canada since 1966. You don’t stay in this business for 40 years without doing a great job. We had dinner together on Saturday with the chief marketing officer of The Motley Fool. It was fascinating to watch the 30-something Harvard/Stanford graduate, who was using the latest marketing buzz words, like "mindshare," interact with the gentle, kind, and wise Steve Pepper: "You’ve just got to care about your readers, try your best to help them…"

* * * Jeff Carneal of Eagle Publishing was also a very impressive guy. Keeps himself in pro-athlete shape – he looks like an NFL safety. Apparently, he’s not afraid of anything in this world… the next book he’s publishing is called "The Truth About Mohammed."

* * * One of the few issues that divided publishers was refunds. Some of the publishers don’t grant refunds, under any circumstances. They argue their subscribers receive proprietary data and algorithms, not to mention a multiyear track record and a large recommended list. Allowing people to essentially buy the farm, harvest the crops, and then have all their money back is unfair. We know that about 12% of the folks who order something from us are actually planning to simply take our premiums, look at our recommended list… and ask for their money back. I see it has a cost of doing business; there are simply a certain number of people who are going to rip you off, whether you’re a publisher or a grocery-store owner.

* * * It’s my wife’s birthday. No matter what gift I get her and no matter what I do for her on her birthday each year, I always feel like it doesn’t come close to showing her how much I appreciate her and how lucky I feel to have her in my life. I married way out of my league. ’Course, that’s the only way to marry, isn’t it?

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I know you’ve seen her.

She’s the old lady at the slot machine in Vegas. Her hair is an unnatural shade of red, blue, or yellow. She’s wearing a blue poly suit and letting a cigarette dangle out of the corner of her mouth, in utter defiance of gravity and the laws of physics. She’s got a big paper cup of quarters in one hand and the lever of the machine in the other. And she’ll stand at the machine for hours, "playing."

On a good day, she might stand there for six hours, her quarters partially replenished on occasion by the machines. She’ll wonder whether the machine she’s pulling is a "winner." She’ll discreetly watch the other "players" in the room, waiting for someone to pull a machine without winning for an hour and then leave. Then she rushes over to play that machine, thinking it’s gotta be due for a jackpot.

Unfortunately, the computer and the algorithm that guide the machines’ behavior are built using discreet logic. Each pull is a separate chance to win, independent of any other pull. And the odds are set so that no one can win if they play long enough.

That’s why the old ladies run out of quarters eventually.

In Naples last weekend, on my way to the hotel, I made a wrong turn and found myself driving through a neighborhood maze. Naples is completely and totally flat. Every yard is the same size. And most of the houses look a lot alike.

More than 30% of the houses were for sale. I don’t have an exact figure… but mailboxes were only slightly more prevalent than for-sale signs. These were nice homes too, built on canals with access to the ocean.

Only six months ago, commodities were all reaching new highs and real estate was still booming. We sent our colleague, the intrepid Tom Dyson, to Miami to pose as a high-end condo buyer. He was offered a $640,000, 1,200 square feet, two-bedroom condo 10 miles from the beach (in downtown Miami). When he didn’t bite, he was told that he had "bubble on the brain" and that, like the folks who didn’t buy two years ago, he’d be sorry. "Miami is what New York was in 1945… Biscayne Boulevard will become Fifth Avenue."

Maybe he won’t be sorry.

The median prices of existing homes fell for the first time since 1995 last month. Housing inventories have reached a high not seen since 1993. A Miami paper revealed the pertinent facts of rising supply in the Miami market: Dating back to the 1940s, Miami had never added more than 2,000 new total housing units per year. Then came 2005, when the city added 9,000 new units. Miami is adding 14,000 new units this year, and is slated to add another 7,000 units in 2007 – if nothing else now in development is permitted. In the Miami city limits, developers are planning 40,000 additional units – most of which will surely not get built.

Maybe Miami will not be the next New York…

Maybe the billions of dollars mortgages have pumped into the global economy won’t lead to the profits the developers, speculators, and investors were expecting…

Maybe the engine of our economy for the last six years – real estate speculation has run out of quarters.

Good investing,

Porter Stansberry

Founder, Stansberry & Associates Investment Research

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/08/2013