What Your Realtor Doesn't Want You to Know: Part III

Still think it is better, no matter what, to buy then rent?

Apparently some anonymous commenters to the Key West Chronicle blog believe buying is better, having said:

"I would also disagree with you that renting is advantageous to buying. That has never been the case before so why should that be the case now. "

and

"You are also forgetting other benefits that homeowners have ie: income tax deductions at the end of the year, and the pride of home ownership. There is also some worth in not having the hassle of dealing with landlords, many of whom do not take care of their rental properties. "

Sally O'Boyle and Rock Trueblood have done excellent jobs of refuting these ideas with sound reasons and numbers to back their comments on this blog and posts on their blogs.

Realtors in Key West (and the rest of the world) beat the sales drum announcing that is a great time to buy and admonish renters for foolishly throwing away money. But when it comes to markets, timing is paramount. This could be one of the worst times to purchase real estate. Currently, on a national level, 1 in 8 subprime borrowers are in foreclosure. Plus, over the next 6 months over $300,000,000,000 (that's three hundred billion dollars) in "teaser rate" loans will reset to higher interests rates.

For those not yet convinced, check out the Buy vs. Rent calculator that the New York Times created (I've included an image showing how a $1400 per month renter fared versus a buyer of an average priced home in Key West with a 5% annual price appreciation - a number far above long-range historical averages)

Also, here is an excellent article on the subject of renting by Jack Hough of Smartmoney.com, published May 2, 2007:

A contrarian's view: Houses don't appreciate any faster than the level of inflation over the long term, so forget about buying a home and put your savings into stocks.
By SmartMoney
I have something un-American to confess: I rent an apartment despite having enough money to buy a house. I plan to keep renting for as long as I can. I'm not just holding out for better prices. Renting will make me richer.
I normally write about stocks for SmartMoney.com, but the boss asked me to explain to readers my reason for renting. Here goes: Businesses are great investments while houses are poor ones, so I'd rather rent the latter and own the former.

Stocks versus houses: Returns

Shares of businesses return 7% a year over long periods. I'm subtracting for inflation, gradual price increases for everything from a can of beer to an ear exam. (After-inflation, or "real," returns are the only ones that matter. The point of increasing wealth is to increase buying power, not numbers on an account statement.)
Shares have been remarkably consistent over the past two centuries in their 7% real returns. In Jeremy Siegel's book "Stocks for the Long Run," he finds that real returns averaged 7% over nearly seven decades ending in 1870, then 6.6% through 1925 and then 6.9% through 2004.
The average real return for houses over long periods might surprise you: It's virtually zero.
Shares return 7% a year after inflation because that's how fast companies tend to increase their profits. Houses have their own version of profits: rents. Tenant-occupied houses generate actual rents, while owner-occupied houses generate ones that are implied but no less real: the rents their owners don't have to pay each year.
House prices and rents have been closely linked throughout history, with both increasing at the rate of inflation, or about 3% a year since 1900. A house, after all, is an ordinary good. It can't think up ways to drive profits like a company's managers can. Absent artificial boosts to demand, house prices will increase over long periods
at the rate of inflation, for a real return of zero.
Robert Shiller, a Yale economist and the author of "Irrational
Exuberance," which predicted the stock-price collapse in 2000, has recently turned his eye to house prices. Between 1890 and 2004, he says, real house returns would've been zero if not for two brief periods: one immediately after World War II and another since about 2000. (More on them in a moment.) Even if we include these periods, houses returned just 0.4% a year, he says.
The average pundit, planner, lender or broker making the case for ownership doesn't look at returns since 1890. Sometimes they reduce the matter to maxims about "building equity" and "paying yourself" instead of "throwing money down the
drain." If they do look at returns, they focus on recent ones. Those tell a different story.
Between World War II and 2000, house prices beat inflation by about 2 percentage points a year. (Stocks during that time beat inflation by their usual 7 percentage points a year.) Since 2000, houses have outpaced inflation by 6 percentage points a year. (Stocks have merely matched inflation.)

Stocks versus houses: Valuations

But though stock returns have come from increased earnings, house returns have come from ballooning valuations, not increased rents. The ratio of share prices to company earnings (the price-earnings ratio) has remained relatively steady. It's about 16 today, close to both its 1940 value of 17 and to its 130-year average of about 15. Not so the ratio of house prices to rents. In 1940, the median single-family house price was $2,938, according to the U.S. Census Bureau, while the median rent was $27 a month, including utilities.
That means the ratio of prices to annual rents was 9. By 2000, the ratio had swelled to 17. In 2005, it hit 20. We can adjust for the size of dwellings, but it doesn't make much difference. The ratio of single-family house prices to three-bedroom apartments is 19. In SmartMoney's hometown of Manhattan, where more detailed data is available, the ratio of condo prices per square foot to apartment rents per square foot is 22.
Video: Should you rent or buy?

Two main events have caused house valuations to inflate since World War II. First, the government subsidized housing by relaxing borrowing standards. Before the creation of the Federal Housing Authority (FHA) in 1934, homebuyers who borrowed typically put up 40% of the purchase price in cash for a five- to 15-year loan.
By insuring mortgages, the FHA permitted terms of up to 20 years and down payments of just 20%. It later expanded the repayment periods to 30 years and reduced down payments to 5%. Today, down payments for FHA loans are as low as 3%. Aggressive lenders offer loans with no down payments or even negative ones so that homebuyers can borrow the full purchase price plus closing costs. Some require little documentation of income, assets or ability to pay.
That means more Americans can win loans for homes, and they can win them for far more expensive homes than their incomes had previously allowed. Two-thirds of American households own homes today, up from 44% in 1940, even though the percentage of Americans living alone has tripled during that time. The ratio of house values to incomes has risen 260% in just under four decades.
A second event helped boost house demand in recent years. Share prices plunged in 2000. The Federal Reserve, fearing that the decline in stock wealth would cause consumers to stop spending, reduced the federal-funds rate, the core interest rate that determines the cost of everything from credit cards to mortgages, to 1% by summer 2003 from 6.5% at the start of 2001. Since most of the cost of financing a house over 30 years is interest, monthly house payments shrank and demand for houses soared. In some markets a string of big yearly increases in house prices led to panic buying.

Stocks versus houses: Conclusion

For house returns over the next 20 years to match those over the past 20, the government and private lenders would have to "up the ante" by relaxing borrowing standards further. Given the recent attention paid to swelling foreclosures, that seems unlikely. I suspect real returns will turn negative over most of the next two decades, but that house prices won't necessarily dip. Since 1963, they've done so in only two years versus 18 for stocks.
That's because homeowners mostly just stick it out rather than sell during soft markets. But if house prices remain flat, they produce negative real returns due to the creep of inflation. According to calculations made by The Economist in summer 2005, house prices would have to stay flat for 12 years with annual inflation at 2.5% for the ratio of prices to rents to fall from its 2005 perch to merely its 1975-to-2000 average.
So to sum up why I rent: Shares right now cost 16 times earnings and over long periods return 7% a year after inflation. Houses right now cost 19 times their "earnings" and over long periods return zero after inflation. And they look likely to return less than that for a while.

Questions and objections

In what follows I've tried to anticipate and address questions and objections:
"You can't live in your stocks" or "Renters throw money down the drain."
Rent is the cost of owning shares with money you would otherwise spend on a house. Houses have ownership costs, too: taxes, insurance and maintenance. Rent costs about 5% of house prices each year if we apply the price-rent ratio of 19. House incidentals often cost around 2%.
If you have $300,000 and a choice between spending it on a house or shares, you'll pay $6,000 a year in incidentals if you buy the house or about $15,000 a year ($1,250 a month) in rent if you buy the shares. But the shares will return $21,000 a year after inflation while the house will return zero. (My numbers work out even better than these. I pay a smidgen less than $1,250 a month for rent, while house prices in my neighborhood are far higher than $300,000.)
Note that houses and shares have transaction costs, too. Homebuyers pay around 1% in closing costs when they buy and 6% in broker commissions when they sell. Share buyers pay $10 trading commissions, which are negligible for buy-and-hold investors.

"Homebuyers get tax breaks."

So do share buyers, but both are a bad deal. The interest on loans for houses
(mortgages) and shares (margin balances) is tax-deductible. But the rates are almost always too high. A big house loan presently costs 6.1% interest, while a big stock loan costs about 9%. For the returns, we can forget about inflation because it helps debtors while hurting investors, making it a wash for those who borrow to invest. Still, nominal returns of 3% for houses and 10% for stocks aren't high enough to justify those rates. The tax breaks aren't really breaks at all. Moreover, a majority of homeowners don't claim them. Their incomes are low enough to make the standard deduction a better deal.

"What about the pride of homeownership?"

It's not for me. I define ownership as no longer having to pay for something and being able to do as I please with it. I own my coffee maker. Homeowners must pay taxes each year even when their mortgage payments are done. In certain markets they can't even make changes to the houses they've paid for without seeking the approval of others. Personally, I feel the pride of ownership for shares of businesses, and I'm proud to occupy a nice place while leaving the burden and poor returns and maintenance to someone else.

"You seem to knock government housing subsidies, but they've helped many Americans afford homes."

My inner socialist agrees. My other inner socialist worries that the government has effectively raised prices to the point where the middle class can't afford houses or buries itself in debt to own them. My inner capitalist is too busy watching shares to care about house prices. My inner conspiracy theorist notes that while politicians tout the social benefits of homeownership, none mentions its tax benefits to the government. I pay no taxes on the overall value of my stock portfolio, just on my cashed-in gains and collected dividends. But Americans pay taxes on the full $11 trillion worth of housing they own plus the $10 trillion worth of it they're still paying
off.
Video: Should you rent or buy?

"Houses are bigger than apartments."

True, and both can be rented. A third of renters live in single-family houses. I prefer an apartment for now. I like not having to fill it with stuff. I like using a fifth of the energy of the average American. I like being 20 minutes from work and not having owned a car in 10 years. I like not stressing over whether to get the marble countertops or the imported tiles or the 52-inch flat screen. I'm not especially frugal; I spend a teacher's salary each year on restaurants and travel. But I guess I'm too busy or lazy right now to bother with a big house and its innards.

"Are you saying I should sell my big house and rent an apartment instead?"

No, unless you have more space than you need and moving wouldn't be disruptive to your family, and you want to cash in on recent housing gains, make more money over the next couple of decades, use less energy while simplifying your life, and you don't mind seeming odd to friends. In which case, yes. But really, I'm not trying to win anyone over. Strong demand for houses keeps my rent cheap.

"Renting is for poor people."

True. But it's for rich people, too. The average renter makes about $34,000 a year, but while the percentage of renters declines after incomes exceed $20,000 and rents exceed $600 a month, it jumps again once incomes top $150,000 and rents top $1,200 a month. In other words, poor people rent modest apartments for lack of choice. Middle-income people buy houses. High-income people, presumably with a dose of financial savvy, often rent nice apartments instead of buying.

"You say houses return zero. But I've made a fortune on my house in recent years."

I'm referring to inflation-adjusted returns over long periods, absent external boosts to demand. You're referring to gross returns over a short time period that combined lax borrowing standards and ultra-low interest rates. Over the next 20 years I believe houses will return zero or slightly less after inflation, and that stocks will return 7%.

"So you're never going to buy a house? What about raising a family?"

I might buy one eventually, but the longer I can put it off the more I'll get out of the shares I'll have to sell to afford it. I'm 34 now with a fiancée and a fish. I'm going to try to rent for at least 10 more years. If I have kids I'll probably move into a big apartment or a house once they reach running-around age. I'll rent, most likely.

-This article was reported and written by Jack Hough for SmartMoney.

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What Your Realtor Doesn't Want You to Know - Part II

Since most of the real estate advice you hear comes from realtors, I thought it would be of use to point out how wrong their advice is.

Local realtors have been running an ad in the papers boldly declaring: "It is a great time to buy a home". Certainly it would benefit the realtors.

But is the advertisement true?

Actually, the ad is misleading.

Here is where the ad is wrong:

First, the ad claims that the large inventory of Key West properties won't last. The ad has been running for months, and in reality the number of properties for sale has increased. And, the official numbers actually understate the number of properties available. Not included in the MLS numbers are the large number of homes/properties still in development, properties in foreclosure, and the many for-sale-by-owner properties.

Second, the ad claims that median national housing prices will post gains in 2007. But according to the National Association of Realtors, their official forecast predicts a drop in median home prices for 2007 (a first since they have been keeping track...which only goes back 40 years). Here is a chart from the National Assn. of Realtors website showing their official forecasts (click on the chart to see a larger version):

Third, the ad claims that Former Fed chief Alan Greenspan recently said that housing prospects are looking up. Mr. Greenspan said that 6 months ago. More recently, his tone has become more ominous. He most recently said there was a risk that rising defaults in subprime mortgage markets could spill over into other economic sectors. On March 15, 2007 Greenspan said: "You can't take 10 percent out of mortgage originations without some impact." "Subprime woes were "not a small issue," said the 81-year-old policy kingpin emeritus. Greenspan has put the chance of a US recession by the end of 2007 at 1 in 3.

Finally, the ad claims that "real estate is a great investment", and cited an 88% increase in national median home prices over the past 10 years. But don't mortgages last more than 10 years? Yes, they are usually 30 years. So lets look at other decades instead of cherry picking the very best period in the history of the real estate market. Going back to 1890 and removing the effect of inflation, only three out of ten decades saw an increase in median home values. Most times, real estate underperformed most other asset classes. (click on the following chart to see a larger version)

Also, I've also included a chart in response to the ad's declaration that since interest rates are near 40 year lows homebuyers have a once-in-a-lifetime opportunity. Click on the chart to see how the economy responded to rates rising off of low levels.

Maybe it is time for the realtors to stop misleading the public, update the ad, or pull it from publications.

Either way, it's NOT a great time to buy a home.

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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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Florida Keys Veterans in Need

Many complain. Few actually do something about it.

For those traveling along US1 highway, you may notice a raft just off the 7 mile bridge.

There, a decorated Vietnam War veteran, William Sampsel, has been living on the raft for nearly a month trying to bring attention to the plight of veterans in need in the Florida Keys.

He has a website with a live webcam located at http://www.veteranonaraft.com/

Here is a copy of the press release I received from his organization, Veterans Haven, Inc:

William Sampsel, a 2 tour 5 time wounded decorated Vietnam War Veteran, has been aboard a raft for over 26 days. His cause is to raise awareness and funds as well as gain support for his dream.

After returning from Vietnam in 1972, Mr. Sampsel struggled for decades trying to get help from our government run veterans system. He was turned away, ignored, and worse. He found himself homeless and depressed.

In the mid-nineties after struggling with alcohol and medications, he met his wife, Mary, and his life started to make a change for the better. He and his wife traveled the Caribbean and the Florida Keys. They spent their days boating, fishing, diving and just relaxing.
Along the way, they met many Veterans who shared experiences. The recreation of fishing, swimming, diving, and boating while sharing his experiences with fellow veterans and being surrounded by the relaxation offered by the sheer beauty of the Caribbean and Florida Keys finally put Mr. Sampsel back on his feet.

After their journey, they settled in the Florida Keys. Together they started a charter fishing business, Wild Willy Charters located in Vaca Key, Marathon. It wasn't until 2004, Mr. Sampsel finally received the Bronze Star of Valor. That was 32 years after he earned it for a mission in which a platoon member died in his arms. Remembering that fallen solder spurred Mr. Sampsel to dedicate himself to our forgotten veterans. Soon after Hurricane Wilma Mr. And Mrs. Sampsel took over management of Whispering Pines campground in Grassy Key.
At their own expense, they purchased two mobile homes and began housing veterans in need. He took them fishing, boating, sightseeing, etc. Sometimes he just sat and just listened to their experiences. It was just what he did himself to get it all together. Well fed with a with roof over their heads and a relaxed mind, Mr. Sampsel began helping these veterans find jobs. After spending well over $10,000 of their own money helping veterans in need, the Sampsels knew they needed outside support. Veterans Haven, a Florida registered non-profit organization, was born.

Mr. Sampsel has a dream. He wants to build a facility in the Florida Keys for veterans in need. This facility will not be a permanent home for any one veteran but a retreat for any veteran in need from anywhere in the United States. An eight week program is what Mr. Sampsel is envisioning. A program based on what Mr. Sampsel himself did to recover, and what he has done for veterans with his own money. Veterans Haven will temporarily house these veterans in need. It will provide them with the recreation of fishing, swimming, diving, and boating while sharing their
experiences with fellow veterans and being surrounded by the relaxation offered by the sheer beauty of the Florida Keys. Veterans Haven's goal is to re-acclimate our veterans in need so they can return to civilian life as hard workers or hard working business owners.

Mr. Sampsel is now living on a raft anchored just off the Seven-Mile Bridge.

The live webcam can be found at http://www.veteranonaraft.com.

"Please carefully consider how you will support our vets and do so."

Veterans Haven, Inc,
P.O.Box 501803
Marathon, Florida 33050
Phone: 1 877 743 4801
Fax:
305 289 1606
http://www.veteranshaven.com/

I encourage you to visit his site and support his efforts.
And THANK YOU Mr. Sampsel. We all owe you a debt of appreciation for your service and continuing support of veterans.

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Back from Sailing the Bahamas

I haven't posted the past week (or so) because I was sailing from the Bahamas to Key West - a wonderful and restorative thing to do.
At sea, with the wind, waves, and sea surrounding you, land-based problems seem as distant as Pluto. Time, which often comes at us too quickly or too slowly, seems to steady itself and come at you at the right speed...just as it should be appreciated.
I've attached a few photos from the trip. At times, I couldn't help but feel like I was in a painting, surrounded by a level of beauty that one would orchestrate if one could.


Here is a photo of the approach to Andros Island. The sandy bottom that surrounds the island causes the sea to look like an immense swimming pool.
Andros is a large and mostly undeveloped island. I'm amazed about the number of people who flock to the Atlantis on Nassau - a seething theme park and completely devoid of anything authentically Bahamian. But, to each his own.
Next is a photo of cannons that "guard" the Fresh Creek on Andros.
Next is a photo from an allnight sail. With no moon, I cannot remember ever seeing more stars.

Our last night before the crossing to the Keys, we were treated to a spectacular sunset. The deep red of the setting sun was caused by the smoke from wildfires in Florida.

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New Statistics Confirm Tourism Slowdown

Statistics released by the Key West Chamber of Commerce confirm what many have been saying: Key West tourism is down.

Here are some highlights of the data:

• Over 20,000 less cruise ship passengers arrived in Key West in January 2007 compared to January 2006 - a 21.4% decline


• Over 12,000 less cruise ship passengers arrived in Key West in February 2007 compared to February 2006, a 14.6% decline


• Cruise ship port calls declined 18% for January 2007 and 13.6% for February 2007


• Number of tourists arriving by plane declined 8.1% for January 2007 and 9.2% for February 2007 (a total decline of 5000 fly-in tourists for the two months)


• Bed tax "3rd penny" collections were down 5.6% (approximately $20,000), the first decline in 5 years

The past few years tourism has faced many new challenges including the hotel to condo conversions, hundreds of hotel rooms offline, doubling of room rates, lack of affordable housing for workers, and a city leadership that looks mostly pleased that tourism is taking a backseat to luxury development.
The tourism industry here should recognize that their businesses (and much of the island economy) are in jeopardy.

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What Your Realtor Doesn't Want You to Know

There is an only saying on Wall Street: "When the doorman starts giving you stock tips, it's time to sell your portfolio."

I'm often reminded of that when I hear real estate agents' rational for why you can't lose buying real estate. A local advertisement from the realtor association gives many reasons why it is a great time to buy real estate (all of its reasons are incorrect - something deserving of a post all by itself). This mornings radio magazine had a mortgage salesman saying he couldn't understand the press stories about how bad the real estate market is. Over at Conchette's excellent blog an anonymous poster contributed:

"But over the long haul, more Americans have generated more wealth from home ownership than any of their pure investments."

As they say, "patriatism is the last refuge, to which a scoundral clings."

But lets look more closely at the facts.

I have included a now-famous chart of US home values from 1890 to last year (click on the chart to see a larger version). This chart is in real terms - meaning that inflation has been removed from the equation. Therefore, the chart is truly relecting the value of homes over the period studied.

According to the data, if you purchased a home in 1950, the value of that home had not increased until the turn of the century. Or maybe worse, if you bought at one of the peak periods in the 1950s, at the time a small housing boom, you were at a loss for the next 25 years. And there were plenty of other periods where housing was a bad investment - for example if you bought at the end of the 19th century. Then, you would have to wait 50 years before you could sell your house for an actual profit (again, in real terms). According to the chart, real estate values spend most of their time doing nothing - for decades at a time.

Maybe even more interesting is looking at each of the spikes that are on the chart - noting the huge price appreciations of short periods of time. Notice that the next move is down - nearly as sharply - then a long "sideways" period (often decades).

Also notice how large the housing boom of the past decade was. The gains are completely unprecedented. Therefore, I expect the fall will also be unprecedented in magnitude.

Don't believe you realtor into believing that real estate is a "can't lose" situation.


You most certainly can lose - and if this chart is any indication - the chances and effects will be signficant.

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Say Hooray for the Life of the Manatee!

Two days ago a friend phoned and said "You should see how many manatee are around my boat right now. I don't think I have ever seen this many." He had just returned to Garrison Bight after a morning of fishing and discovered a large group of manatee swimming around Garrison Bight Marina.

I headed over and saw at least 12 majestic manatee slowly swimming around the basin. There may have been as many as 15. One had noticeable boat-propeller scarring on its back, but otherwise they looked happy and healthy. I snapped a few photos and am posting them here to share with you.
Then yesterday it was announced that the manatee population in the state of Florida has improved to the point that the animal may be removed from the endangered list and instead put on the threatened list. This years manatee count numbered 2800 in Florida - a large improvement from just a few years ago.

No wake zones/manatee zones have no doubt improved the manatee population. I hope that the manatee continue to improve. Officials have claimed that downgrading the manatees designation will not remove protections - such as the Marine Mammal Protection Act. Lets hope so.

Above all, laws or no laws, it is humans that can do the most to protect manatees. Boat SLOWLY AND BE ON THE LOOKOUT in areas that manatees are likely - especially marinas and nearshore waters. And do not feed manatees water, lettuce, or anything else. Otherwise, you will be training them to visit the most dangerous places for them.

Say Hooray for the life of the manatee!

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Video: Global Warming Submerges Florida Keys

It has been said that Key West (and the Florida Keys) are on the front lines of the effects of global warming. Many are debating the causes of global warming, but few can deny that it is happening.

The National Environmental Trust, "a non-profit, non-partisan organization established in 1994 to inform citizens about environmental problems and how they affect our health and quality of life", has put together a video showing the effects in the Florida Keys & Key West of a 1 meter (3 foot) sea level rise.

The first part of the video shows what would happen to Key Largo and the Upper Keys: all would vanish.

The second part of the video focuses on Key West and shows two scenarios if our sea level rises 1 meter higher: 1) effect on Key West coastline, and 2) storm surge flooding in Key West caused by a Category 2 storm. The effects are just as devastating.

See for yourself by clicking on the play button on the youtube viewer I've installed into this post.

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Santa Maria Condos Raise Question of Fiduciary Responsibility

This week it was reported that the Santa Maria condominium developer and real estate agents are being sued for fraud.

The plaintiffs in the case are admitted "flippers" - purchased pre-development units while planning to sell them before closing. The plaintiffs had to put up close to a quarter-million dollars for a unit and now are about to lose their deposits since they are unwilling to close on the property.

The plaintiffs blame development delays and incomplete work for not being able to sell before closing. They feel they were defrauded by the real estate company and the Santa Maria developers who they allege promised them a huge return on their investment.

Most local reaction has been against the flippers - saying, as in today's Citizen's Voice, "I have no sympathy for those who bought the Santa Maria condos. Come on...a fool and their money are soon parted."

I'll admit, my initial reaction was the same.

But maybe we should look at what realtors in general have been saying, and questioning if they have been irresponsible in their "buy at no limits" pitch. I've pointed out more than once Regina Corcoran's (a realtor) foolish advice to load up a credit card to purchase a house.

There was a time in the US that purchasing stocks was considered a gamble, and if an investor lost his or her money then tough luck. But that attitude changed in the late 1980s - when courts, states, and regulators began to look at stock brokers as fiduciaries with a responsibility to the financial welfare of their clients. Maybe it is time for realtors to be treated as fiduciaries and not be allowed to bury a client in an investment. And what about the idea that the realtors and developer may have actually committed fraud by promising gains to these plaintiffs, knowing that these purchasers couldn't afford to close on the property?

So, how bad were the Santa Maria purchases? Apparently horrible.

It is no wonder why the plaintiffs cannot sell the units. They are priced at $1401 per square foot! With the crash in the condo market, these units are priced at more than twice what nearly any other condo costs.

Seriously, $1.3 million dollars for a 907 square foot condo? (and for another $200,000 you can own a "larger unit" with an extra 38 square feet. That works out to $5263 per square foot for the extra 38 square foot area).

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