Sunday, July 15, 2007

Analysis of Key West Real Estate Chart

According to the real estate site 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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Wednesday, July 11, 2007

Less Cruise Ships Visiting Key West

The number of passenger arrivals to Key West via cruise ships declined dramatically in May, down 28.1% compared to May 2006.That decline marked the 6th consecutive month that Key West saw a drop in cruise ship passenger arrivals.Less ships are coming to Key West: May 2007 saw a 27.6% decline in the number of port calls compared to May 2006.
Data from Key West Airport arrivals also showed continuing weakness. May 2007 passenger-arrival numbers were down 4.9%, the 7th consecutive month of declines.
Not sure what is going on here. The room rates at Key West hotels have steeply risen - especially with the number of rooms offline. This has likely contributed to the decline. Also, the bursting housing bubble has tightened purse strings for Americans - something showing up in the latest sales reports from our nations largest retailers.
Some tourism businesses are doing fine. But Duval Street businesses have been complaining that things are slow. With nearly 20,000 less cruise ship passengers wandering Duval Street than last May it is no wonder. Notably, the May cruise ship passenger numbers are down 40% from 2003 levels.
This may be a good thing - especially since Key Westers were fed up with too many cruise ship arrivals spoiling the quaintness of our town for the valuable and desirable land-based visitors.
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Friday, July 06, 2007

Why the Federal Reserve Can't Bail Out the Real Estate Bubble

The real estate bubble was mainly a result of record low interest rates followed by a complete relaxing (forgetting?) of sensible lending standards.

Basically, the entire real estate bubble was dependent on lowering interest rates.

Without lowering interest rates, properties no longer rose in price. Once prices began to fall, banks closed the spigot of lending money.

So, if you want to know the direction of the real estate market, then look at interest rate trends.

Which way are interest rates headed? Clear signs point to higher rates.

And here is the reason: INFLATION.

Inflation is the number one concern of the Federal Reserve. Why? Inflation robs everyone of the value and purchasing power of money. Think of it this way - you may think you have a good amount of money in the bank. For example, maybe you have enough to buy a new car. But if inflation increases, your money will buy you less as the price of cars rise. So it is the Federal Reserves job to keep inflation in check - otherwise the wealth of our nation and population rapidly deteriorates. The primary tool the Fed has in its limited tool belt is controlling short term interest rates - the rate charged to banks to borrow money. To slow inflation, the Fed raises interest rates thereby causing the economy to slow down. This relieves demand and causes prices to come down.

So where does inflation come from? It comes from too much demand. With too much demand, you have inflation since too many people/organizations are competing for a limited supply.
Think of it this way. Every product you see - cars, televisions, clothes, appliances - have 3 major input costs: labor, energy, and raw materials. (there are other input costs, like machinery & facilities, but they usually don't fluctuate in price once established).

Today, all three major input costs: labor, energy, and raw materials, are all rising - some at near record levels. And historically, the Fed knows that once these inputs move higher, they get more and more difficult to control.

Here is how the inflation-making components currently look:
  • Labor: Unemployment is near record lows causing wage costs to rise. Wages are a huge cost for all goods, and when they rise too quickly everyone suffers as inflation removes the purchasing power of money.

  • Energy: Oil is currently trading above $72 a barrel - a number previously thought devestating for the economy. If prices rise much higher, the markets may panic as they digest this impact.

  • Raw materials: Commodities continue to climb in price as world demand increases. And with China and other economies rapidly growing, this trend will likely continue.
    With all three major input costs rising and at record highs, inflation should continue to be the primary focus of the Fed.

The next move by the Fed is likely to be up. With the current backdrop of economic numbers, there is little choice for them.

And with higher rates, there will be no relief for the declining of real estate.

So for those looking for the real estate market to turn around, you have a long wait, especially with the massive glut of properites on the market.

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