A Lit Fuse in Key West

I have a new set of posts from a friend living (and renting) in Key West who posts on my board on the Motley Fool under the name "FreeThinkerKW". The first post is from a week or two ago, and the update to that post is from December 1.

A Lit Fuse

Every Friday in the Key West Citizen, Good Deeds (sales of homes and land in the Florida Keys) are listed. Last week, just one home sold in all of Key West.

Here is an interesting thing which just happened in the latest listings. The Good Deeds used to show you how much the previous owner of a property paid for it before he recently sold it to Buyer XYZ for a new price. [It no longer does.] I believe the local Real Estate cartel has put pressure on the Key West Citizen to stop showing the previous sale price.

When business was booming just two years ago, it was common to see eye popping returns such as a Home bought in 1991 for $90,000 selling for $1 million in 2004. You couldn't buy advertising that good for the Real Estate business in this town.

However, the last two years have not been good for those who bought. And many of those who've recently bought in the past three years when the lead car of the Real Estate Roller Coaster was just tipping over the tallest pricing peak have got to face reality i.e., the ARM resets are just about to kick in for many of the people sitting in the rear cars of that roller coaster.

To use another metaphor: many more homes are about to flood a market already saturated with homes for sale. A lot of homeowners are going to drown in their debt.

I say, it's easy to figure out inventory will continue to grow? Well, as I stated in my post about the auction [Mish note: See Shell Shocked in Key West], I'm only seeing one or two homes sell weekly in Key West. Just a few years ago, you'd see 30, 40, 50, 100 homes turn hands in a week. At the rate we are moving homes now, one or two a week, we have more home owners dying and their properties go on the market For Sale, adding more inventory than is being sold.

Inventory is growing like an Red Algae bloom in the Florida Bay. It expands by another 100 homes every 2 or 3 months now.

The new talking point from David Lereah and the NAR is leaking into local realtor's ads: "This is a Great Time to Buy Real Estate!" The "Easy Math" suggests otherwise. The easy math simply comes from observation and writing down figures. And then you paint in those numbers you collect and you get this Technicolor look at what is really going on.

Here we are in the Lower Keys: 1600 homes on the market. We just had 22 homes go to auction and not one minimum bid was met. Not one!

Interestingly enough, one house sold below the minimum bid. The person selling his home below his minimum bid was a Realtor. That's like an insider at Enron selling stock while he and all his boardroom buddies are emailing employees to keep loading up on Enron in their 401s and telegraphing "BUY ENRON" to analysts and investors in glowing press releases.

I can't see how any rational person with a modicum of math ability can agree to put their real money into a Key West home at this time. Even if you can't do an Excel spreadsheet, all you need is a pen and a legal pad. Buy a Key West Citizen. Write down some addresses of Homes for Sale with asking prices. Take 30 to 50 addresses. Come back every 6 weeks and watch how many thousands and tens of thousands are shaved away from the asking price.

Real Estate in this town is no longer escalating in price. No one can deny that. However, hundreds of homeowners still refuse to come down off their asking prices. And as more and more home prices drop below the $500k mark . . . I wonder . . . what in the world are these last people still sitting in their seats in a burning theater going to do when the market sees $250,000 homes again and incinerates their wishful thinking? Where will they be? Upside down on a mortgage, boat in the yard paid for by a refi-loan and they can't use the boat because everybody in the house is working a 2nd or 3rd job? I don't know. Everybody's got a different story. But so so many of the good people I know who got suckered by "Real Estate always goes UP," theory are living those lives of quiet desperation right now which Thoreau warned us about. I can see it in their eyes.

When the wave of ARM resets come, and the foreclosures roll, that's when the real estate selling panic will reach the epoch proportions of the real estate buying panic of just a few years ago.

The fuses are already lit. I feel 2007 will be the year that those who didn't run away from the Debt Bomb and Housing Bubble Bomb will realize they are trapped and will be in the blast zone come 2008. I think 2008 will be the mass carnage year for home prices drops in Key West. Yet, I think that's just the beginning. I think real estate will suffer into the middle of the next decade. I don't see a bottom happening in 2008. No way.

Keep an eye on housing inventory in your hometown, folks. If you can find the Good Deeds for your county, see if you can also find the data now missing from ours: how much the seller paid for the property. Sellers who are selling for less than what they paid and Real Estate Cartel members do not want to share that info in Key West any longer. For the blue collar seller who sells at a loss, it's embarrassing. Having that kind of loss printed in the local mullet wrapper is akin to saying, "Here's this week's sucker at Real Estate lotto."

This is a small town. We know you bought a place for $600,000 three years ago and just unloaded it today for $450,000. That's the kind of loss among blue collar workers which fires up the Coconut Telegraph for days. And that's not good because those who never bought are not going to buy anytime soon now that one of their own got burned so badly.

Still, the powers that be haven't covered up the asking price and selling price in the Florida Keys Good Deeds. That is an eye opening exercise in itself for anyone with an ability to see through the B.S.

The few properties selling are in 95% of the cases selling below the asking price. And some of the drops from asking prices are staggering. A $750,000 home recently sold for $625,000. And this is a home which easily could have commanded more than $1 million 18 months ago. Can you imagine sitting in on that negotiation and the seller keeps giving, giving, giving, because it's the first nibble he's had in a year?

My view: real estate will continue to decline in Key West next year. In 2008 the roller coaster will jump the tracks, and the old wooden rails will catch fire and burn to the ground.

This sounds crazy, but the more I observe, the more I believe this is going to take 10 years or more to squeeze out the excess. What Key West Real Estate went through is akin to NASDAQ at 5000. And instead of Mark Meeker and Henry Blodgett on the sidelines screaming for Amazon 600, Qualcomm 1000, and so on, we've now got David Lereah and $40 million worth of National Realtor ads and talking points telling us, "There's Never Been a Better Time to Buy Real Estate!"

I think 2008 will see everybody accepting a brutal new reality. And then I see everyone lowering their asking prices for years to come. But then again, all bets are off if we have some unseen event like a Category 5 Hurricane that wipes most of this town off the map. And then again, a good old fashioned recession would kill tourism and then we'd see the last linchpin of real estate . . . commercial real estate . . . begin the decline which housing is seeing now. Yes, a lot of things could happen to explode the bomb earlier than 2008.

Years ago, in the 1970s, the military left Key West in a big way. That took thousands of jobs in one fell swoop. Back then, back in the days of Jimmy Buffet living and dying in 3/4 time in Key West, you could rent a decent size apartment for $75.00 a month. Beers were .50 cents a bottle at happy hours. Square groupers (bales of pot) washed ashore regularly, and smuggling became our No. 1 big business in Key West.

I think we could go back to a time when this town is beat again. It has happened 4 or 5 times in our history. And that's something most people don't pay any attention to: history. Hell, Hemingway wrote off Key West and moved to Cuba in the late 30s. That was after the great Hurricane of 1935 knocked out Henry Flagler's railroad all the way to Key West. Thirty years before Hemingway left, another hurricane chased the Cigar business out of Key West and up to Tampa. Each time, this town suffered, real estate prices dropped, and people lost small fortunes by buying at the top when they should have been selling.

Here's my synopsis, my shot in the dark prediction for Key West Real Estate.

• 2007: last alarms for "Run, Forrest, Run," as first of the ARMS reset. Meaning some of these loans at $3000 a month will adjust to an ARM which takes the loan payment to $4500, $5500, and higher. A lot of people I know are not going to be able to do it, even with a 3rd job. I expect many people to "disappear" from social scenes simply because they are too exhausted or broke to show their faces.
• 2008: ARM reset time bomb goes off with a big bang and takes out all unreal asking prices on Key West real estate.
• 2009-?: Key West veterans who left town start sauntering back into town after hearing the speculators and rude Northerners who stopped us from having fun and relaxation are moving out in droves like frightened wild dogs running from a T Rex. Key West veterans who lost it all in Real Estate toss in the Keys and run away in shame.

Is this the way it will turn out? Stay tuned. I may stick around. I may leave myself with my cushion of cash, gold, and good investments. We shall see what we shall see. Meanwhile, I'm taking my time finding work I want to do with love and passion. Wish me luck in that quest to "follow my bliss."

December 1 A Lit Fuse Continued

Here is an update to last week's post about the Good Deeds in the Monroe County Property Transfers. I am looking at last week's property transfers: Three houses sold in all the Florida Keys. Zero homes sold in Key West.

Just to be absolutely clear about this, I called Brian at Investor Title Service) which lists these good deeds and sells Realtor banner ads above the deeds.

He confirmed that For Sale By Owner sales . . . if there were any last week . . . would not be covered by the Good Deeds he lists as his listing is associated with the MLS. So, that skews the sales of homes in Key West and the Keys as I would need to go to the county and get the exact amount of property transfered.

Still, using what I've got, here are the three homes sold with asking price and what they fetched:

1.List Price: $4,500,000
Sold Price: $3,800,000
15.6% difference between list and selling price

2.List Price: $599,000
Sold Price: $525,000
12.4% difference between list and selling price

3. List Price: $399,000
Sold Price: $365,000
8.5% difference between list and selling price

I also would like to print an outstanding article in the Solares Hill Weekly Newspaper. Unfortunately, the paper is not online. The article would shed a great deal of insight as to what insurance rates are doing to people in this town.

A representative for Citizens Insurance, the last insurer of choice in the state of Florida . . . and whose rates are set by the government, not by their quasi-governmental agency . . . got verbally jumped by a group of angry politicians and citizens from the Lower Keys in a meeting a few nights ago.

To show you what some of these folks are going through 14 months after Wilma, one representative of a Condo down here whose roof was blown off and which has now been replaced for $3.5 million, has yet to receive its first check.

Another man stood up and told the audience about his ancient house constructed by shipbuilders and which has withstood every hurricane since it was built years and years ago. His wind insurance payments to Citizens this year jumped from $3,900 to $18,000.

Mind you that Citizens is bragging to the governor that "average" rates have only gone up 57%. And that last story is not a lie. My old roommate is paying $20,000 premium for wind with a $30,000 deductible. He wants out of the Keys so bad he's losing his mind.

Again, if you want to live in the Keys, rent. DO NOT BUY.

This is only going to get much, much worse.

Thanks FreeThinker!

Almost no one living in Key West thought this could possibly happen. Even after reading this most will discard this story as "Florida Thing" thinking it can't possibly happen to them. Well it can and it will happen in many other places (and the entire state of California is pretty much one of my prime targets). The worst is clearly yet to come.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/