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Thursday, July 17, 2008

Fear Factor -- Key West Reality

It seems like Déjà vu all over again. Back in the 1970's we were in a war that would not end, President Nixon had been deposed, the American automobile industry was reeling, gas prices were making us change our driving habits and lifestyles, the stock market was in turmoil, President Ford was defiant over his pardon of Nixon and refusal to bail out NYC, foreclosures were up, and hope was down.

After we exited Viet Nam, I think everyone breathed a collective sigh of relief. Our terrible nightmare was over. We vowed "Never Again" and meant it. In 1976 the Democrats won both the Senate and House, many statehouses and governorships, and the big prize: The Presidency. Jimmy Carter took over and had his honeymoon with Congress and the public.

Fast forward 32 years. We are no longer fear the Commies. Now we fear terrorists. And rightly so.

The 1980's and 1990's were good for a lot of Americans. Reagan made most of the public feel good, even if they didn't agree with his policies. The Berlin Wall fell, Communism failed, the Baby Boomers made money in the stock market, the middle class went on a spending spree, and life was great once again. But September 11th changed all of that.

Our economy is in worse shape now than it was 30 years ago. The cost of fuel keeps going up, the price of groceries goes up or the size of packages shrink, American icons such as Anheuser-Busch and The Chrysler Building get sold to foreign entities, the threat of possible bank closings looms, and the housing crisis just gets worse. As the Baby Boomers approach retirement it looks like Social Security may not be as secure or as helpful as we once thought. It is not the Economy Stupid. It is the Stupid Economy.

There are a lot of busy Realtors in Key West this summer. We are all working with people who want deals. We send e-mails of new listings to prospective buyers who tell us what they want and what they are willing to pay. We drive them around town showing properties. Some people end up buying. Most express fear that prices will drop more and go back home hoping they do.

A real estate investor who owns a variety of income producing properties recently lowered the asking price on several. Several months after Hurricane Wilma, my client made an offer to purchase a commercial property the investor owned. The property was not used since Wilma. The owner bought the property in 2004. But his asking price was a $900,000 more than he paid for it. In early 2007 my buyer offered about $400,000 over the price the investor paid for the property. The investor said no deal. Earlier this year my buyer offered about $300,000 over the amount the investor paid. No go. Earlier this week, my buyer offered about $75,000 under what the investor paid. My buyer said "He should have accepted my price when I made it two years ago." My buyer is very pessimistic about the economy in general. He has cash in the bank and can buy without borrowing money. But he is reluctant to buy in the current market. He is fearful it will get worse. I understand.

We recovered after Nixon-Ford-Carter went away. We are going to have a new President in January. Bush will be history. I think the whole world will breath a very loud sigh of relief. And things will get better. I'm pretty sure all markets will re-bound right after the Inauguration. They may even pick up before the election. And when the rebound starts, it might just shoot up like crazy. Not everybody is poor and desperate. There are a lot of people waiting in the wings ready to buy. They just have to get over the Fear Factor.

If you think I'm full of beans, consider what Warren Buffet has to say about Market Timing: "Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

CLICK HERE to checkout the Key West Association of Realtors mls database of all current listings. If you see something you like please call me, Gary Thomas, 305-766-2642 or e-mail me at


Anonymous said...

Well articulated Gary but I don’t share your optimism. I believe the KW market is WAY overpriced. The only thing worse than the bottom feeders who are trying to steal properties are the greedies that saw the value of their properties shoot up well over 100% or more in a couple of years and refuse to settle for any offer now that nets them less than a 50% profit. They are having problems selling their property? Boo hoo. Sure, the economy will pick up, and the mortgage fiasco will eventually be back under control, but Key West is not the easiest place to get to, taxes are high, the cost of travel will never be cheap again, global warming is resulting in more hurricanes, bad storms and flooding and other options are opening up for people who want a home in a tropical location. Key West is a beautiful place but the market frenzy that created such artificially high prices in the past won’t happen again. Bottom line is that the number of people willing to spend $750,000 for a 900 square foot home built in 1930, which will cost a fortune to maintain and insure is growing smaller by the day. My thoughts anyway.

Henry said...

Annonymous, I completely agree, after a lot of looking around, I am going to buy somewhere else.

Anonymous said...

The Captain says:

Some may say I spend too much time in blogosphere, but permit to reprint a portion of a post from JimiH3ndrix on the Motley Fool blog:

It was clear for so long that buyers were stretching to get into the largest & riskiest mortgage they still couldn't afford.
Buyers were complicit.
Lenders were complicit.
Assessors were complicit.
Wall Street was complicit.
Bush doesn't encourage return to responsible real estate markets.
Bush doesn't propose pursuit of the complicit who broke laws.
Bush wants to punish responsible American savers who might otherwise purchase a distressed home through a market transaction. He prefers short circuiting the ability of individuals through such a market transaction from solving the problem in both the short and long run.
In the short run, distressed assets pass from weakly capitalized parties to more strongly capitalized parties.
That is how it should be.
Those who lose their homes were never "home-owners": they were leasing it from the lender who owned the note on the home. In many cases, borrowers were using interest only instruments that established no additional homeowner equity beyond the wager that house prices would continue to escalate.
They made a bet, and they were wrong.
They need to leave the chips on the table and walk away.
Not get bailed out by bloated government.
In the long run, market transactions bring discipline back to lending standards. If the speculators and the liars-on-loans and the lenders get bailed out, there's little reason for them to change their practices.
And if you're struggling to make good on your mortgage today, Bush has just increased the incentives to you to skip some payments so that you, too, can qualify for the handout being proposed.
This is known as "moral hazard."
I rent.
I have saved responsibly.
I have a wife & son in search of a home.
I stand at the ready with liquidity to purchase a home.
I am one of the responsible saving individuals who can help solve this problem. That free markets rely upon to step in to solve the "problem" of distressed assets.
They are not a "problem": they are the natural result of markets acting freely, and they reward those who save.
Bush's proposal punishes me.
Punishes my wife.
Punishes my son.
It punishes markets.
It punishes taxpayers
It rewards the liars, the gamblers & the irresponsible,

Captain's note: You can substitue Bush for Obama or McCain.

Gary, you are way too optimistic. When the price of stock in GM drops to the level it was in 1954, we got problems.

Captain out.

Gary Thomas said...

What is the alternative to optimism and hope? Doom and gloom.

Some people want to keep harping on the profiteers. Well, some of them took their profits and ran. Like some of the Conchs who sold their long owned "family homesteads" and ran up to Ocala where they retired with mucho denero in the banco.

I'm surprised nobody scorned the real estate investor who was so greedy that my buyer is now offering less than the investor paid for his prize property. The owner is a nice guy. But being nice does not pay a mortgage on a piece of property nobody will buy in this market.

Several months back I wrote about another investor who used to own the space once occupied by Club Body Tech. The rent was so high and cost of operations so high that the gym owner shut down. The property owner put the space up for sale at $1.2 million. He got a very close offer and turned it down. He sold it for $600,000. The new occupant (opened for business this week in fact) is Beach Club Brokers. They are located in the same complex as our office. There is another real estate company here as well.

The greedy investor took his licks. He at least made a few bucks on his investment.

I think the real estate investor I mentioned in the piece may lose his. I'm not hoping it. I'm just thinking that may come to pass.


Anonymous said...

Gary first let me say that in my first posting I WAS scorning the greedy investors.

But anyway, I think that how you define optimisim is a matter of perspective. Sure, from a realtor's or investor's perspective it is optomistic to believe that prices (and commissions) will continue to escalate beyond what is logical and that properties will be snapped up within days of being listed. From a buyers perspective, and I would submit from the perspective of the "average joe", it is optomistic to believe that prices will stabilize at a level that is based on something more than panic, greed and emotion. After all, these are the things that helped create the mess the real estate market is in right now.

So I am hoping, am optomistic, that prices in Key West drop another 30 to 40% and then stabilize at that level with more normal annual increases of 6 to 8%.

Gary Thomas said...

"Gary first let me say that in my first posting I WAS scorning the greedy investors."

I know you were. I was referring to the real estate investor I singled out. He is also a Realtor. I suggested he seek the counsel of a commercial Realtor to help him work through the offer my buyer made. He scoffed. He was angry at me for suggesting such a thing.

I used to practice law. When I get in trouble, I hire a lawyer. I don't represent myself. The one time I did I didnt' fare well.

Realtors need to be detached from their investments as well. The guy I mentioned has his umbilical cord attached to his investment property.



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Key West, Florida, United States
I first read about Key West in a magazine called "After Dark" sometime in the mid 1970's. But it wasn't until March 1984 that I made my first visit to the island that would become my home. I had two weeks for a vacation and reserved a room at Colours Guesthouse (now Marrero's Guest House) for one week. I thought that if I didn't like Key West, I could always go back to Miami or Ft. Lauderdale for the rest of my trip. But after a couple of days in Key West, that was no longer a consideration. But when I wanted to extend my stay for the extra week I found there was no room at the inn. The guesthouse owner did find me a room at LaTeDa, the infamous guesthouse/restaurant. That's a story I'll write another day. But those two weeks in Key West gave me the realization that I had found Paradise. Key West has been my home since 1993 and my only regret is that it took me so long to get here. I am a full time Realtor at Preferred Properties CRI. Let me help you find your new home or business in Paradise. Living in Paradise is not a slogan, it's a way of life.