Sunday, July 15, 2007

Analysis of Key West Real Estate Chart

According to the real estate site Zillow.com and their metric "Value trends", residential Key West real estate saw a 14.1% decline over the past 12 months. (According to Zillow, "Value trends are based on Zestimate and Zindex values, not sale prices".)

I've included their 10-year chart of "market value change" - showing the market peaked in early 2006 at approximately $740,000.

Today's value, according to the chart, is around $590,000 - a BIG drop.

But if you believe in technical chart analysis, the bottom is still a ways off.

A fundamental idea of technical chart analysis (a.k.a. "charting") is the statistics concept of "regression to the mean". Basically, "regression to the mean" says that, in time, things tend to return to normal. No matter if you look at rolls of the dice, flips of a coin, stock market manias, or real estate bubbles. Most things don't stray from the norm for too long. And when they do, they'll need to do the opposite to balance things out.

For chart technicians, the "mean" is represented by the historic trend line. This is a straight line that touches as many low points on a chart as possible. This line is often called "support", because at that level a market bottom is usually seen.

Below is the same chart with the historical trend line drawn in black.


According to chart analysis, for today's market to be at the historical trend line, current values would be around $350,000 - a long way from today's value.

But in reality, a market does not have to go down to get back to the historical trend line. Instead, it can go sideways through time until reaching that trend line. To get to the trend line with today's values, it will take approximately 6 years.

Will the Key West residential real estate market go lower? Or will we go sideways? I suspect a bit of both. Lower, since there is a wave of foreclosures about to hit a saturated market. And sideways since interest rates are rising.

No matter what, if you believe in the laws of statistics, probability, and mathematics, we'll return to the mean - one way or another. And that means prices won't be rising for a long time.

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12 comments:

Mystic Greg said...

That’s an interesting thought. You got me thinking about the market in my area, Mystic CT, and it is a lot like that. Although the prices are not quite as high the chart looks very similar.

Sally O'Boyle said...

Brilliant. You should send this article to Nancy Klingenger at S.H. She says she wants real estate articles... Also to Dennis Cooper at KWTN (editor@kwtn.com). I have a hard time following the long technical discussions on the mean, etc. But this is short, to the point and even I can follow it. Hal's been saying this for awhile. He believes we will go below the mean: it went so high so fast and denial is still so strong that the fall will be very hard.

Cayo Dave said...

Thanks Sally! I'm glad I could get my point across without boring my reader to death.
Hal may very well be right about going below the mean. One thing that is usually true - market declines (bear markets) usually end with a sharp spike to the downside. Many times those spikes violate the historical trend line.

Anonymous said...

I agree that the return to the mean will happen with the real estate market. However, when looking at your chart I notice that you basically start the mean at the point the bubble started. I think a more accurate position of the mean is over the long run. I wonder what it would look like if you started your mean line at about 1975 for a more accurate long term appreciation rate.

Greg said...

Why why why don't you report, write, blog, analyze anything that is remotely positive about this island? It is mind boggling to follow you month after month and see nothing but "sky is falling" entries.

I think everything you write is more or less accurate, but for the love of God, man. Turn your blog around once in a while and try the sunny side of the street.

Anonymous said...

I agree with the above poster. You are right that the trend line will hit the actual line through either the actual dropping a bunch or going sideways for a long time (or some of both). But your trend line is nearly NARish in its optimism. The long term trend line is inflation+0.5%. And should start around 1996 or 1997.

Anonymous said...

For Greg.

I do not need positive/negative comments, emotion is what make a bubble bigger. I want hars fact and this blog it is about that.

Mathematic doesn't carry emotion, just numbers: is the way you look at it that will bring emotion to it.

Walter

Anonymous said...

If I want accurate, verifiable news, I don't go to blogs such as this. Dave isn't an unbiased reporter -- he's a cheerleader for a real estate meltdown.

Cayo Dave said...

To the previous anonymous commenter - what part of my writing do you think is not accurate?
Oh, and about the real estate meltdown, let me just say:
Woot Woot!

Rock said...

Dave is not a "cheerleader" for a Real Estate meltdown. He, like myself, is chronicling what has gone wrong, what is still wrong, what will get worse, and how to profit from all that we observe.

Dave's chart is brilliant.

I use longterm Japanese candlestick charts to beat the markets year in and year out. I use longterm trendlines and Fibonacci lines of supports to time my buy ins.

Dave makes more damn sense than a bar full of Realtors and Lenders.

Sally O' Boyle and one or two other Realtors in this town are worth their weight in gold. The rest of them, however, continue to live the Big Lie that "it's different this time."

Realtors like to slap out at Dave and me. They think they can cower us to shut up by sending us nasty emails or telling us our data stinks.

To argue, Realtors must come out of the dark and offer the same data they supposedly see which we mere lesser mortals cannot understand.

A Realtor who won't share with us "lesser mortals" is only prolonging the amount of time before any potential homebuyers will ever want to buy a home again. None of us trust anything coming out of the NAR's mouth. Somebody like the recently retired and longtime discredited chief economist of the NAR, David Lereah, is the stuff of nightmare relations with the public. Yet, the Key West NAR still continues to publish the NAR designed ad which is so totally dated with what are now lies, that the average homebuyer just laughs at how you we can be fooled all the time.

As it stands today, more homesellers and homebuyers are bypassing Realtors altogether as they don't feel giving up 3 to 6% in commissions is in their best interests. The gravy train has jumped the tracks. For Realtors to ever make a living again, they have to quit talking out their ass and learn how to earn our trust again.

Sally O' Boyle is the greatest example of how Realtors should be. She pulls no punches. She tells you what she sees. She's not mincing words. She goes the extra mile to help people understand the biggest purchase in their lifetimes.

The majority of Realtors talk the kind of drunk talk you hate in bars.

Blogs about the Housing Crash are so prevalent because average Americans all over the country are realizing they've been sold yet another Big Lie like Enron or Iraq.

Talk sense.

Talk the truth.

Stop the madness by opening yourselves up to accountability.
Bring the data out into the sunshine. And drop prices to the new reality which you still deny exists.

Anonymous said...

We know that the Key West real estate market sucks, but Zillow is a sham. The numbers are always way out of whack.

ClearwaterInvestor said...

Instead of all this "Limbaugh" like discussion where investors are ridiculed as stupid...let's pray that a miracle occurs...and soon! There are many fine, hard working people that invested in a beautiful resort. Most did not buy to get huge profits but instead to make a little something to put into their retirement accounts.
Let's hope that no one has to declare bankrupcy...

I'm certainly praying for that...Will you join me?