British investors have been buying real estate in droves in Florida over the past few years because of the strength of the dollar and the “can’t lose” proposition that real estate always goes up.

In fact, in some areas, foreign buyers were accounting for up to 25% of sales.

But like everywhere else, the real boom seems to have been in 2005- despite the dollar falling further against the pound in recent months. Fewer British investors are buying now- spooked by the stories of falling prices and the subprime contagion. Still, British investors dominate in Florida. From a recent realtor’s press release:

Florida is the top spot for the British buyers. Nearly half of the buyers from the United Kingdom purchased homes in Florida – more than any other state, the NAR survey said. Florida’s sunny weather and the direct flights from the United Kingdom to Orlando and Miami seem to be the key reasons for its dominance.

Orlando is ground zero for the British invasion- but it is also ground zero (along with Miami) for the housing bust. Orlando now has record housing inventory. From the Orlando Sentinel:

“I think we’ve got six months of serious bloodshed ahead,” said William Weaver, an associate professor of finance at the University of Central Florida.

The trade association also said the record-high inventory of homes for sale continued to grow, though the pace slowed, from 460 newly added homes in June to 95 last month.

According to the article, it would take 19.2 months to sell the record 26,000 homes and condos on the market.

As you might imagine, the foreclosures are picking up. According to the Orlando Sentinel, the volume of foreclosures has tripled over the last three months. Yet very few properties are selling on the courthouse steps because the homes are overleveraged. More is owed on the home than what it would sell at the auction so it makes no sense for investors to buy the property. The banks have to buy them instead.

Of the 12 properties up for auction Tuesday, a guy in shorts and sneakers and others paid to represent the banks bought all 12 back without a single opposing bid.

“This is the beginning of a pretty bad 12 to 24 months,” said Kraig Braeuning of Bay Hill Financial Group, who attended Tuesday’s auction. “It’s going to be pretty brutal.”

One tipster told me the story of one new subdivision in Orlando which reflects what is going on in the Florida market (didn’t tell me the name of the subdivision, but I’ll try and find out.)

He bought a $500,000 home two years ago in a subdivision with 500 homes. There are now 100 homes in foreclosure in the subdivision.

25% in foreclosure!

The tipster claims that most were owned by British investors who simply handed in the keys and walked away (realizing they couldn’t rent them out to cover their costs and that prices were declining.)

The homes are slowly slipping into disrepair. Weeds are sprouting. Windows are broken. The value of his $500,000 home has slipped $100,000 to $400,000- and he acknowledges it is only going to get worse.

Who will buy the 100 homes? There aren’t enough buyers in that market.

In the meantime, his subdivison has the look of being in the midst of some kind of depression- with the weeds and lack of maintenance.

I doubt his is the only subdivision in Florida experiencing this. How long will the banks hold on to these properties until they simply unload them for 25 cents on the dollar? (So that one of these homes ultimately sells for $100,000?)

The question about housing has always been- what will happen when the speculators and those buying vacation homes stop buying? We are seeing the results of that now.

I feel badly for the tipster and his subdivision. He uses the home as a second residence and has no need to sell it. But his story is not uncommon right now.

Got a story about foreclosures happening in your neighborhood? Or excess inventory? Or crazy housing prices? Tell me about it! I’d love to hear from the trenches.

Despite the Fed moving today to cut the discount rate (and the near certainty of future rate cuts on the fed fund rate), there is little that can be done to save the housing market. The damage has been too severe. There is, simply, too much debt and it can’t be paid back.

Stay tuned.