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Tuesday, October 7, 2008

Apocalypse Now?

If you are like me you spent lot of time yesterday either watching CNBC or maybe checking in every few minutes on or to see what in the world the stock market was doing. Yesterday was most troublesome. The DOW plunged 800 points. The good thing is it could have been worse. It ended up only losing 369 points. But that "good" news was diminished by the world wide cataclysm of stock markets everywhere taking a similar dive.

I'm no economist. My economic education is probably akin to that of John McCain. Hell, I keep urging people to buy now because a lot of properties are "bargains" by comparison to what they were priced at just two or three years ago. Yeah, the fundamentals of the Key West economy are as sound as anywhere else in America.

Except they are not. Right after I started my blog in late 2006 I began to profile new projects that were being built in different areas of Key West and hoped to attract a buyer for one of the projects. I reasoned that even though the real estate market had cooled there were new projects that were designed to provide the kind of amenities many would-be buyers want. I further reasoned that the financial guys behind the deals would not be putting money into the various projects if they believed the projects would fail. Some of the properties include the uber-expensive townhomes with water views known as Casa Marina Residences, the less expensive Casa Marina Estates, the Sea Isle Townhomes, Atlantic Drive (near the ocean), the Santa Maria Condominiums, Paradise Harbor, the Steam Plant Condominiums, the Key West Beachside Resort, and the politically and legally challenged Harbor House Condominiums. I did point out that the once planned demolition of Atlantic Shores Resort to make way for another high end ocean front condominium project was scuttled and replaced by the construction of more ocean front high end hotel rooms.

The one thing I did get right was my questioning of the business model that would permit the construction of so many high end units. Not counting the Key West Beachside Resort, there were about 150 units priced in the $2 million and higher price range. I don't know the number of units at Beachside that were or are available.

Potential buyers responded to the multiple offerings with a resounding a lack of interest. This past weekend the Casa Marina Residences put the land up for sale so that uber-project is toast. The Santa Marina Condominiums have not fared well and that's all I will say on that. Key West Beachside has had some closings. The Steamplant is not yet finished. Harbor House built a model unit on the waterfront. Prices were reduced on several of the units to attract buyers. I don't think it worked. Sea Isle Townhomes is being rented a vacation rentals. The Atlantic Residences only built two buildings and the remaining lots are vacant.

People still want to buy a place in Key West, but it seems like most would-be buyers have decided to take a "time-out" and wait until the market settles before they commit. I can't argue with that.

I recently received a gift from a client: a book entitled Timing in the Real Estate Market by Robert M. Campbell. I'm almost finished. I agree with almost everything I have read so far. He discusses predictable behavior in good and bad markets. He wrote about boom times and the emergence of speculators whose sole purpose is to make a rapid profit. (That happened here over and over again. It lead to the huge price spiral from 2003 to 2005.) Houses stopped being homes and became investments.

When the real estate market got really bad and sales activity slowed (on real sales as opposed to the new phenomena of short sales), the market in Key West became driven by fear just as Mr. Campbell posits. Some owners abandoned their homes. Others just abandoned their investments. Many of those properties became foreclosures. I think many of the short sales we have seen in Key West are investments gone bad as opposed to homes being sold by abused home owners. But I don't have any statistics to substantiate my theory however.

Mr. Campbell theorizes "real estate trends are influenced by a whole host of market forces -- interest rates, the expansion or contraction of the economy, consumer confidence, income levels, inflation, population trends, changes int he tax laws, and even war." Add in gas prices and hurricanes for extra emphasis (the Gary Thomas theory).

I personally think many Americans see the coming election as not just a choice of who will be President but more importantly view it as a referendum on the kind of country we want to be in the future. Our economy is broken. Big business took our jobs and moved them to other countries. Our economy became dependent on foreign oil and our wealth got shipped overseas just like our jobs. We have become a nation of consumers and service providers. Our stature as the predominant world leader has diminished greatly. I think the election is time for payback and re-assertion of the US as moral leader.

I don't know that the Wall Street crash has occurred yet or if it is still to come. But if it has not happened yet, it will. Using Mr. Campbell's theory of market forces that can predict real estate trends, I see that crash as the Apocalypse.

I wish the election were this week because I think the results would do a lot to remove a lot of the uncertainty in the American psyche and in the real economy. I think there is going to be hell to pay in Washington. People are seeing their lives being messed around with Wall Street types who cared only about enriching themselves and by the politicians who let them get away with it.

If the election and the "crash" are in fact the bottom of the current market trend, that means that good times are headed our way. That will be the start of the next recovery. And that is the first phase of a new upward trend. The phone calls and e-mails have slowed from would-be buyers. But they have not stopped. People are waiting to see what happens next. They are poised and ready to buy if only they know that the market has hit rock bottom. Mr. Campbell teaches that the smart investor buys now and beats the crowd as they charge uphill on the next price swing.


flipper said...

As usual, a very interesting and thought provoking posting Gary. I know I am sounding like a broken record but I can't imagine anyone thinking that the market is even close to an upswing. It will take months to determine the longer term impacts of the bailout and foreclosures continue to enter the system at an alarming rate. And even when the freefall we are now in appears to have hit bottom, smart investors and those with scars from the pounding they have taken will wait a few more months before jumping back in for more. No, in a best case scenario it will be a year before all this crap is behind us. Until then, my advice is if you need a house or condo, rent. If you want to buy a second home or something to invest in, wait. I know most realtors won't agree with my comments, for obvious reasons. But even in a bad market some property transactions must occur and so the good realtors (such as yourself Gary) will continue to do OK.

Gary Thomas said...

Flipper, I appreciate your comments.

When I woke up this morning and turned on CNN the regularly scheduled program was interrupted by CNN International to bring us the news of markets collapsing across the world.

I don't know if this signals we are nearing the end of the downward spiral.

I agree that the recovery (at least for real estate) will take time. I do remember it took the Japanese stock market years to recover from its wretched excess.

But my point about Key West real estate stands: now is a good time to buy because the market is down. We may not be at the absolute bottom. I watch the new foreclosures and more are coming. Some nice big ones. If you have money and want to take advantage of the market instability, do it before it recovers and prices go back up.



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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.