Apocalypse Now?

If you are like me you spent lot of time yesterday either watching CNBC or maybe checking in every few minutes on CNN.com or MSNBC.com 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.

Real Estate Market Cycles--Key West

I am an attorney by profession and still maintain my license in my native Colorado. I worked for the largest bank in Colorado and did "commercial loan workouts"-- I managed the collection of problem loans, bankruptcies, litigation, and the sale of bank owned real estate.

Denver was a "boom town" in mid 1970s until 1982 or so. Then the oil market crashed and the boom went bust overnight. Property values plummeted and there was a glut of homes to sell. The economy was also paying the cost of the Viet Nam War. The Prime Rate went as high as 18% and that made the cost of permanent residential loans almost impossible for new homeowners.

I then went to work for the RTC-- Resolution Trust Corporation. The government agency set up clean up the savings and loan debacle. The real estate projects got larger and the associated legal problems more complex. The economy still had not healed and we had to work hard to sell huge volumes of real estate without giving it away. Although the RTC did give away a lot of its assets.

Since traveling to Key West for the first time in 1984 I watched as prices grew on an annual basis--usually beating the national rate of inflation. In the early 2000's the rate of increase approached 20 - 30% per year depending on the area of town. I wrongfully believed that Key West was immune from the economic woes of up north because of the scarcity of real estate, the limitation on constructing new real estate, the height restriction on buildings in Key West, and the fact that so many baby boomers are always looking to purchase a second home in Key West.

But Hurricane Wilma occurred and caused a lot of damage most of which has been repaired, but the fact that we got hit scarred some people. And others reacted to the slowdown up north and that translated in to a major correction in the real estate market in Key West. The amount of homes for sale went up, and number of sales went down. The sellers who were used to pushing buyers to the limit met their match. Buyers stopped buying unless they perceived the property to be a deal. The sellers that had to sell, dropped their price or the property did not sell. Many "sellers" took their property off the market hoping that prices would rise again.

I don't know where the market in Key West is going to go this year. The number of properties for sale is not as large as a year ago, and the prices have been lowered pretty much across the board. But some sellers still have unrealistic expectations about what their homes are worth.

Numerous writers have discussed the Real Estate Market Cycles. So I am not creating any new theory here. Depending on which writer you cite, there are between 6 to 13 events that make up a market cycle. Here are the basic six:

1. euphoria
2. denial
3. recognition
4. panic
5. hope
6. capitulation

As the number of foreclosures rise in Key West, I think it is safe to say that our market is at least in the "panic" phase and may have passed into the "hope" phase. Some sellers have reached the "capitulation" phase and dropped prices or taken other actions to try to minimize their losses.

I have advised sellers who had to sell to set a realistic price on their property. The internet has made it possible for people to see in real time unfiltered information as to what is available at what price and what similarly property recently sold for. Buyers have turned the tables on the sellers and buyers are now in control. So pricing correctly is necessary if a seller has to sell in the near term.

Likewise, I have advised buyers (and they are out there) that now is an excellent time to buy. Location is still the critical value when picking a property. But price is now almost as important. And the term "price" is more than the asking price. It includes other considerations that make a deal acceptable to a seller such as closing date or being able to pay cash and taking out the "financing contingency". More on that at a later date.