Saturday, April 28, 2007

Welcome to the Beginning of the Real Estate Crash

Bad news for those looking for a turnaround in the Key West real estate market.

The number of Key West residential properties for sale continues to increase. I've been keeping an eye on the number of listings on the Key West MLS over the past month.

For example, a March 28, 2007 search of the Key West MLS showed 1135 residential properties for sale. One month later (today), the same search showed 1173 residential properties for sale - a 3.3% increase.

Local realtors continue to beat the sales drum, claiming it a great time to buy a Key West property. But if one understands the laws of supply and demand, then further price drops are likely. Simply put, more sellers than buyers equals lower prices. This could be one of the worst times to buy - especially for investors.

This data comes at a time when national home sales are plummeting. Sales of existing homes in the United States plunged in March by the largest amount in 18 years - causing the National Association of Realtors to say a rebound in housing may not occur until 2008. According to data released by the National Assn. of Realtors, sales of existing homes in the US fell by 8.4% in March, a decline that was three times what was expected.

So how much will prices fall? It is tough to estimate, but given the irrational rise in prices over the past 6 years, a significant drop in prices seems certain. Historically, price declines lag behind downturns in sales by 12 to 18 months.

I'm going to go out on a sturdy limb here and say this: Real estate prices will not surpass what was experienced, at least in your lifetime.

The fallout for this, both nationally and for Key West, is likely to be immense. Key West is especially vulnerable, as our basic industry, tourism, has been gobbled up by the real estate monster. Hotels that converted to "condotels" and luxury condominiums are going to have a very difficult time finding buyers, and some of the projects may find themselves unable to survive. This could leave a big deficit in the number of hotel rooms available for tourism.
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Anonymous said...

One factor involved in the recent big monthly increase in listings is that a lot of folks who have been renting their place out waited until the end of "season" before listing their place...

Cayo Dave said...

I've heard that the MLS understates the number of properties for sale because the hundreds of units under development are not included. Anyone know more about this?

Anonymous said...

While I agree with much that you have to say esp about the inflated prices I would vehemently disagree with two things that you said. It may be a bad time to buy for investors but it is not a bad time to buy for people (esp first time homebuyers) who could not prev afford to get into the market. Interest rates are still low and the mortgage lenders are still being reasonably accomodating. Both of these factors will undoubtedly soon change. The other thing that you said about prices never reaching prev highs (in our lifetime). If you follow past trendws this statement does not make sense. It may take 10-15 years but prices will go up to where they were before. The old adage still exists. Real estate is a good investment because they are not making any more. There will always be a limited supply esp in KW. What really angers me are some of these local realtors such as the Spottswood group who insist on listing properties at prices that will never sell they are doing a big disservice to all realtors due to their ignorance and or greed. They are discouraging buyers and making the overall KW Market look even worse than it is.

Rock said...

Dave, I love your blog.

Real estate in Key West is still extremely overpriced. This is not a time for anyone, especially first time homeowners, to be buying a home.

Forget the interest rates being low as one responder said to your post.

Who cares if interest rates are low on a home which is still 50 to 75% overpriced?

That's like telling a stockpicker, "Here, we are going to lend you margin 10 to 1 at a low,low rate of only 1/2% per month to purchase more stock which is selling for $50 share, but in reality is only worth $10 a share."

That's a sure way to the poorhouse.

This is a time to be conserving cash. This is a time to be buying safe income producing stocks which will survive and thrive during the coming Recession.

I could lead you to many safe, boring, dividend paying companies which made profits during the Great Depression of the 1930s and which are still making profits and dividends, only much much bigger, 75 years later.

But housing is the very worst asset to buy in the world at this time. Okay, make that the second worst. The worst would be any stock in any company which lends money to sub-prime and Alt-A borrowers.

Housing is simply doing a "dead cat bounce" at the moment. This is a "psych" period of the Real Estate Cartel vs. their denial.

Real Estate is still un-affordable for most sane Americans who refuse to "speculate" on the biggest purchase of their lifetimes.

And your questions about inventory I'll address sometime in the near future on my blog.

All one must do is understand how inventory is comprised to realize it is way under reported.

All those condo hotel units for sale from Spottswood, Rodriquez and others? None of those units are carried on inventory.

Homes which slip into foreclosure?

None of them are listed on inventory.

Look at all the For Sale by Owner signs all over Key West.

None of them are part of the official MLS inventory.

There are new "affordable" homes (like two trailers glued, one atop another with no yard and about 6 feet of clearance between your house and your neighbor's) from Ed Swift up on Stock Island which are not official inventory.

The glut in Key West grows every week, it is under-reported, and while all this is happening, foreclousres are growing like a bad Red Algae bloom in the Florida Straits.

This is happening all over Florida. This is happening all over America. This is happening all around the world.

The most dangerous bubble of all, The Credit Bubble, is forcing the Housing Bubble to implode. And the pain will last for many more years. There are trillions of dollars of excess to bleed out of both of these bubbles.

Here is my take on the house I rent.

By the way, this house I rent for only $1900 a month was on the MLS listings for $1.7 million about 18 months ago. Fifteen months ago, the price dropped to $1.4 million. A few weeks ago, my landlord reduced the asking price to $1.2.

This weekend, he finally yanked this house off the market and he's hoping "housing" will make a come back in 2008.

It ain't gonna happen, Dave.

If you follow just the quotes from freaked out CEOs of the biggest homebuilders in America, you know this wipeout is going to bring down millions of Americans and take out a million or more jobs related to housing.

We are in some serious shit here, brother, and anyone suggesting that housing is "bottoming" is not paying attention to the news which the Key West Mullet Wrapper is not reporting.

Here is my take on my own rental versus buying. It's actually part II of Buying versus Renting in Key West, so I'll give you the first half too:


p.s. Did you catch the fluff piece from Regina Corcoran in this Sunday's Citizen? She is as bad as the analysts cheering on overpriced stocks during the Internet Bubble of the late 1990s until the fall came in March 2000.

Cayo Dave said...

Rock - Great contribution! Much appreciated. Yes, I did see Regina Corcoran's column this week and shook my head while reading it. Maybe she is like most real estate brokers - too young to remember decades-long bear markets in housing. Then again, she also wrote in her about what a good idea it is to load up a credit card to make the downpayment on a Key West home. Moronic, dangerous, and harmful advice.
Thanks again Rock...I've been checking out your blog and appreciate you obvious experience in markets.

Sally O'Boyle said...

I wrote a little about the MLS on my blog today, that it only includes property listed by REALTOR®s, that developers don't necessarily list in the MLS, that foreclosures never do... So it's impossible to know if there are hundreds of additional units for sale or 10's.

The other thing is that the SELLER chooses the listing price, not the agent. For every agent that is in denial about the market or ignorant or greedy, there is a seller ready willing and anxious to hear the magic number, no matter how outlandish. In some cases, the more outlandish the better!

I'm thinking when you refer to the Spottswoods, you mean Truman & Co? They are no worse or better than anyone else in this market. And, in fact, of all the REALTOR®s who are making sales, they are right in there. Right now, high-end and low-end are selling. Middle of the road is just sitting there.

Buyers are already discouraged. They are the ones writing the checks so believe me they are paying attention.