Sally's Key West

Word On The Street

Sally,

I have been in KW for last 2 mos. I decided to sell everything.

Market bad but outlook bleaker and no recovery till end of 09 if then and when it does only 3% to 5% annually.  No more 10% to 14%  I am tired of being a landlord and want out.  Costa Rica is my home now.

A REALTOR® told me people are jumping out of windows as many many are upside down in properties.  People walking away.

Best regards to Hal....Jonathon

Letters On Home

Dear Sally,

I have enjoyed your site since finding it a few months ago and I want to thank you for the spreadsheet on recent sales.

I lived in KW for a year in 1986 while I was doing some writing - renting the first floor of a beautiful peach-colored Victorian in old town. I believe it could have been purchased for about $200,000 back then but that was $200K more than I had to spend at the time. After the year, as planned, I needed to leave KW to make a living again so I returned to the real world. I have rarely been so sad and have always hoped to return to live permanently in KW one day.

Now I have retired from practice and live in south Florida where I am again writing. I have been looking at properties in Old Town on the internet, hoping that some bargains would pop up due to conditions, but I don't see it. In fact, even if someone GAVE me a house like my old house, which I estimate would now sell for at least $1.5 million, just paying the taxes and insurance would be unaffordable! Unless the politicians do something meaningful about R.E. taxes and insurance or the prices fall through the floor which honestly I never expect to happen, I guess I will have to content myself with renting for a couple of months a year in KW and keeping my seaside townhouse, along with my low Save Our Homes - protected tax assessment.

Thanks again for the information,
Janet

--

Dear Janet,

You really touched me and I feel the same as you. I don't own real estate there and I'd like to again. Hal and I were talking about this last night. He thinks property will drop back to $100/sf... I think that's a stretch but he's the smart guy! We both feel, no matter where it drops to, that it will stabilize somewhere around where it was in the early 2000's and go from there. We'll see. Prices are falling now, though.

Insurance will have to drop - people just can't afford it. Also, I believe a new insurer will pop up that will take higher risk for lower money because there is a market for that.

Taxes will have to drop as well. They are ridiculous and are literally breaking the bank. The city will threaten getting rid of the fire department - always the first ploy to scare people into keep property taxes high. But it won't work this time: people are going to be too broke and feeling too much pain. You can't get blood from a stone and the city will just have to cut back on Code Enforcement! And free dental for city employees...

Thank you for being a reader. I look forward to owning a place in Key West again one day. Even Hal does and I thought he was really done... guess you can't ever be "really" done with Key West. See you there one day.

All the best,
Sally

Comments on Cramer

I posted the Cramer video on another blog and got this comment (among others):

"I'm probably a moron for not understanding the market, but it sounds bizarre when someone says that results from one company kicked off a wave of fear and selling (or something to that effect). It all seems like some sort of chicanery.

Also, how is the government going to do something about crappy loans that have already been made? Will dropping the interest rate a little magically allow people to not default on loans?"

Posted by Arp, 10 August 2007 at 08:39 AM

Excellent question, because at first glance, we think, "Of course, it will help." But Arp is right: how can it?

Hal [my husband], who does understand the completely incomprehensible market and banking, currency, etc., explained that Cramer has trust in a simple solution. Cramer has been the benefactor of the Fed's manipulation in the market. He's seen that work over and over in stimulating the economy.

Dropping the interest rate will only prolong the inevitable. The crux of the problem is rampant speculation driven by easy money. Up until just a few months ago, if you had a pulse, you got a loan for 100%.

People saw their neighbors make $50K on a spec condo or house or lot or whatever... so said people took out an easy (read crappy) loan (often against their primary residence) and bought a flip property NEVER meaning to hold it for long, usually no more than six months.

At some mysterious moment, the notion that "it didn't matter what you paid for a property, you were going to make money when you sold it" took hold and grew roots. True appraisals went out the window. Prices were rising so fast, comparable sales data was hard enough to come by. An appraiser had to stretch the adjustable items to make comparable sales work. And forget the cost and income approaches.

IF you wanted a sale to close, you could not use the cost approach ($/sf replacement costs). If it costs $200/sf to build a new town house that is selling for over $400/sf... can a bank justify that?

Nor could you use the income approach (possible rental income). If you can only get $1500/month for a ranch style 3/2 house in new town, how can you justify a $750,000 sales price? If you borrowed 100%, your mortgage payment with taxes and insurance, would be close to IF NOT MORE THAN $7,500/month. Show me the math that makes this a smart move.

It's only smart if you buy and sell as a speculator: quick in, quick out. For awhile this was working beautifully and people were hitting big. As word spread, more and more buyers HUNGRY for the hit started shopping for property. They were willing to pay more than ever before because a) "the guy down the street paid a million for a dump and made $50k in 6 months" and b) they were competing against other hungry buyers. Biggest offer wins. And...

C) If said buyer had a pulse, the money would be there.

Properties were being bought and sold at higher and higher prices based on nothing more than the fact that you could get a loan for any price. People were making that pot of gold - often just by selling it to the next speculator in line! I watched it happen. Property "values" were going up so fast, six months was long enough to make a quick $50k. The common denominator was that ALL these buyers meant to sell that spec for their pot of gold.

The problem becomes evident when EVERYONE is jumping on this bandwagon and inventory starts skyrocketing like prices have. It's not just speculators selling, but homeowners, too. Suddenly, regular homes are bringing sales prices higher than anyone ever dreamed. Homeowners are getting rich. It just takes one or two sales to get a neighborhood all fired up and pretty soon every house on the street has a for sale sign in front of it. And why not?

Here's why not: when inventory goes up, buyers have more choices and prices fall as sellers are forced to become negotiable to snag a buyer. Lowest list price wins.

As those sellers fail to sell and run out of money to keep paying that extra mortgage, foreclosures start to appear. As foreclosures appear, lenders get jittery - some of them in downright pain like Countrywide is today. So they raise rates to get more money on the loans that are paying, plus make it harder for the unqualified to get a loan hoping for fewer foreclosures down the road. To get a loan today, you need a pulse AND an income.

Tighter controls on lending has two immediate consequences (certainly more, but from my point of view, these are the two that strike me first):

1. Since the bulk of buyers these days are still inexperienced newbie speculators hoping to make their pot of gold, they are mostly unqualified. You and I would no more lend these people money than lend it to the guy sleeping on the street. Without easy money, these baby specs cannot buy. Hence, the pool of buyers is drastically reduced. NOW you have high inventory and fewer buyers. The fun is subsiding.

2. The people who already have these loans and can't sell their spec property, need to either walk away OR refinance. The rates they got two-five years ago are adjusting up and they can't afford them. Unfortunately, with tighter controls they CAN'T refinance because the truth of their creditworthiness comes to light. PLUS they now own a property that is no longer worth what it was when they got that 100% loan in the first place. Said loan being based solely on the value of the property.

Lowering the interest rate a little MAY delay the inevitable. But it won't stop it. We are already too far down that road.

What is the inevitable? Plenty of foreclosures. Banks owning plenty of property. Some banks failing under the weight. My hope and my prayers are that it happens fast, so recovery can begin. There's as good a chance it will happen fast as that it will be long and drawn out, like some of the more dour among us predict. I don't know. No one knows. If there's one thing we do all agree on, it's that timing a market is not possible. I'm going with FAST.

Response to Rock Re: Santa Maria

I don't know Rock but in his comment on the 4/12/07 post, he asked a couple of interesting questions about the Santa Maria project. For instance...

Rock: "Days on the market O? ...in this market?"
The units have been for sale since before the old Santa Maria was razed. But technically DOM is calculated from the day a property is listed in the MLS to the day it is sold. The Santa Maria project was never in the MLS until after the sale closed, hence DOM = 0.

Why weren't these condos in the MLS? I can think of two reasons:

#1 At the beginning, the developer did not offer broker compensation (the delicate way to say "commission"). Without an offer of broker compensation, you can't be in the MLS. Most developments start out flying solo because they have so much success selling in-house. With enough money in marketing, you don't need broker participation. At some point, they started offering broker compensation, but still did not list in the MLS. Perhaps, as Rock suggests, to avoid the whole DOM thing. The sure-fire way to entice speculators is to convince them sales are fast and furious. DOM would have certainly revealed how few and far between these sales were happening.

#2 Also at the beginning, the marketing push was all directed at speculators (the delicate way to say "flippers"), instead of end-users. There's no MLS category for speculation sales. The Key West Association of REALTOR®s even considered creating a spec category and allowing contracts to be listed. I wasn't in on those conversations, but they decided against it. I think because what would be listed for sale would essentially be a contract, not a property. But I don't really know the details of that decision.

When my buyer and I were in the Santa Maria office she was sold on the idea that she could buy and flip the contract, making a quick $50K to $100K. She never intended to close on the property, she was not qualified to close on it, would never be able to get financing. The developers knew it, everyone knew it. But this situation was all part of the Master Plan. And why there was no financing contingency in the contract. Everyone knew most initial buyers were not qualified to get a mortgage of this amount and never intended to close, but the developer didn't want to be giving any deposits back. Not their problem. All most flippers had was the $130K to $260K to buy in and that was usually borrowed from the primary residence. Which might now be in jeopardy.

So the Santa Maria condos were never in the MLS to begin with, at the discretion of the developer.

As far as putting the solds in the MLS, that is S.O.P. in the real estate world even though we all know this practice skews the numbers. A sale can't close until the C.O. is issued when construction is complete. Which I think just happened at the Santa Maria. So, "legally" the zero DOM can stand.

There are at least three reasons a brokerage would list a property in the MLS after closing.

• One: to push up the numbers, both for that office's stats and for the market's numbers overall;
• Two: to make the project and the office look busy and successful;
• Three: to supply more data for appraising a property's value. Whenever a FSBO property is sold by a REALTOR®, that REALTOR® usually lists it in the MLS after the sale. Even though it skews overall numbers as far as DOM, I have found this information useful when helping a customer value a property.

Rock: "Selling price of $1,195,000 matched the asking price of $1,195,000?"
In a new development, asking price always matches selling price. I'm sure negotiating a developer's asking price is possible, but it is rarely done successfully. What the developer asks, the developer gets.

Rock: "Who bought those condos? Is there some kind of financial chicanery going on where two depositors walked away from their deposits, the owner kept the money for down-payments on the properties, and then he gave the deposits to himself and sold the condos back to himself at what appears full price, while pocketing $250,000 on each unit? I ask this because I've seen article after article of such tactics being used all around the country by freaked out developers and builders who are pulling out the stops to keep the giant Ponzi Scheme going."
Well, they say great minds think alike. In this case, totally paranoid minds think alike... I considered this scenario, as well, then dismissed the idea as too paranoid and evil. But apparently it happens! It doesn't surprise me.

In Monroe County, the buyers' names will show up on the property records online, supposedly within the next 30 days. We'll see...

Rock: "Follow the money."
Always true!

Rock: "I went online to the Key West MLS ... and nowhere can I find any of the foreclosed properties you see on Realtytrac, or the properties which have just canceled. And nowhere is there one single condo from the Santa Maria showing for sale..."
The MLS ONLY lists property for sale via a brokerage firm. So foreclosures would NOT be in the MLS unless a REALTOR® was involved with the sale. Not likely, because in a foreclosure, there is nothing left over...

Every seller who lists with a brokerage firm has the right to keep his/her property out of the MLS. The Santa Maria developers chose this option. I'm not defending this action, just explaining it.

Rock: "One more thing: by including these two...Santa Maria condo sales, the MLS is keeping the myth of average square foot pricing artificially high. Also, median prices will be affected in favor of the Bubble Blowers at Real Estate Cartel HQ. The local Chuckleheads from the Real Estate Cartel sure do enjoy trotting out these Santa Maria sales as proof the market is firming."
I should be offended, but I have to agree. I recently got a REALTOR®'s Monthly Market Report* via email from a friend. Everyone I know is pointing to the March numbers as proof that our market is recovering. But of those 22 March sales, 12 of them are Santa Maria's with DOM at 0 (although one did show DOM at 365... odd) and $/sf between $1,162 and $1,433. These 12 sales generously misrepresent the market's overall health.

*Download apr_2007_monthly_market_report.pdf

My question is: How many Santa Maria buyers closed as end-users and how many closed because they had to?

Reader Question: Renovate or No?

Hi Sally,

I'm a great admirer of your blog [I had to leave that in!] and your take on KW market trends and the implications for today's buyers and sellers.

In early 2000, we bought a Key West house with a detached cottage on a 4000sf lot. We have rented out both structures successfully. No damage in these 7 years, no flooding.

We have an actual, old-fashioned 30-year mortgage, fixed rate, all that stuff, very manageable. We bought at $240k, and a year ago or so the property appraised at $700K (= funny money), maybe could sell at $500K-$550K today. But we do not want to sell, we want to live in Key West 9 months, up north for the summer.

Here's the question: we are looking to renovate and expand footage, spending about $300K. We can handle the financing with a fixed rate loan, monthly payments easily manageable.  In 10 years, we may sell and then who knows...move to Xalapa or something...more or less.

Should we renovate?
Bill
________________________________

Hi Bill,

Thank you for writing and asking your questions. I'm so glad you are reading and enjoying the blog! I'm sure enjoying writing it!

Ohmygod, a 30 year mortgage, fixed rate, MANAGEABLE? What planet are you from??? When I meet someone who didn't use their house as a credit card, I'm in awe. Congratulations.

Markets tend to be symmetrical, so the correction will likely be as deep and long as the rise. If money were your top priority, if this were solely an investment and you were looking for my financial advice, I'd say sell now and rent a house. But it doesn't sound like that would meet your needs.

If it were us and: we had the money, we knew our income would not change (money in/out would stay manageable), we had good insurance for health emergencies (because the house won't be liquid for quite some time) and it would make us happy... we'd renovate. We aren't going to live forever. If we don't allow our money to buy us a comfortable lifestyle and a few pleasures, what good is it?

I would not put TOO much into the house, I wouldn't rebuild. But I'd make it nice and comfortable. $300k seems like a big number for a renovation, but then, I'm not familiar with your property. We've done a couple of renovations in the $30-$90/sf range, doing some of the work ourselves. Not rebuilds by any means, but including pools, new kitchens, central air.

By the way, an excellent gauge of value has always been cost to build. Home prices used to keep pace with construction costs. It was rare you could get more for your house than it would cost to build. The last few years have seen a serious departure from this rule of thumb: houses you could build for $200-$300/sf selling for $1000/sf. But we believe that will come back in line with sanity.

Does that answer your question? [He said it did!] If you have others, please ask. Questions make me think about topics from a different perspective, food for thought and blog! Thank you for asking, and thank you for reading! See you around,

Pura vida,
Sally

Email With Buyers

From: Sam
Sent: Wednesday, March 28, 2007 10:09 PM
Subject: Market Report from another REALTOR® (attached to the email)

FYI and thoughts.  He says the market has bottomed out.  Do you agree?  I'm not sure.

Sam

---------------

Hi Sam,

Both of the guys who send you reports have only been in the real estate business since the market has been going up. I believe I've been selling only a few years longer than both, but I have the advantage of being married to a man who reads everything on the market, who understands banking and how it works, mortgages... the whole nine yards. Without Hal yakking at me, I would most likely believe exactly as these guys do.

They are in denial. NO ONE in the Key West market (except really those who lived thru the depression) has seen real estate go down significantly. During the most recent correction (in '89-'91) it only did for a short time. There was a 25% correction, then the market started back up. I was not a REALTOR® then, nor were most of my brethren. In fact, there are very few REALTOR®s still in our market who were around then.

The prevailing belief, among those who are left and the newbies, is that THIS MARKET WILL NOT GO DOWN; it may "soften," they will admit, "but never, never go DOWN. Key West is different. Special. Isolated."

Most REALTOR®s are isolated-thinkers: we think only in terms of our market, never considering its relationship to other states and definitely not to the world. On top of that, most REALTOR®s are not financial wizards by any stretch of the imagination. Nowhere is this required or even mentioned in training or from brokers.

As we proceed along this correction, I'm beginning to believe that REALTOR®s should absolutely have a grasp of banking, mortgages, markets, how they spin each other... I am flabbergasted we are let loose on the world to advise anyone about spending/making 100's of 1000's of dollars - God forbid, millions - without even the most rudimentary financial training. This is my official disclaimer.

Rudimentary training is what I have, quite by mistake and often against my will. I married well, what can I say? Plus, I'm watching the correction happen here from the sidelines in Costa Rica. I have to say, the bubble is as transparent as air when you know what to look for.

Your question "has the market bottomed out" has been bugging me for sometime now. Especially as we prepare for a shopping trip to Key West. The true answer is, I don't know. But I sure don't think so.

I KNOW you want to buy a house in Key West, you are ready. I know the feeling. You may be disappointed... for the most part. In years past, people who have heard my point of view go next door to buy. I know that won't happen with you all. even though I don't have a crystal ball, I know you appreciate my being frank. I have Hal who is by ALL measures, long-term bearish. Loooong-term. Here's how bad Hal sees it: "It took 15 years for Japan to correct." We don't think it will take anywhere near that long in the U.S. because the correction is worldwide and the U.S. is full of Type A personalities: we want whatever it is NOW.

A trip to Key West now might be a waste of time and money to buy a house in old town now. Old town has not really begun to correct. I believe if you buy a house in old town now, you will see too much depreciation before you see appreciation.

There are still so many houses on the market - actually up 60 or so houses over January. And listing prices are still so far off selling prices: selling in the $500/sf range, listing in the $800/sf range (I'm looking at all median prices). Still quite a bit of wishful thinking going on there. This is the biggest indicator to me that we are nowhere near the bottom.

The other thing is that the rise in prices was so unprecedented and so miraculous: 30% to 40% every year for 3 years? That is staggering. Did Key West real estate suddenly get all that much more glamorous? It certainly wasn't getting more affordable. No. I think it was the easy money, the subprime mortgage market and predatory lending.

Predatory lending was just a term to me until I saw it in action and I saw plenty of it, looking back. While I was watching it happen, I didn't know what to call it... I didn't like it but I wasn't doing the lending and my buyers were happy with the deals they were getting. But we are just beginning to see the backlash, just the tippy top of that iceberg. Visit a couple of the websites I put up on my posts this morning... like I Can't Sell My House and I Am Facing Foreclosure... as you start to surf from those, you start to get a scary picture of at least one side of the picture!

Here are questions I would like to ask you:
  --  Do you have to buy at the bottom? Everyone wants to and I KNOW you do - I would, too.
  --  BUT - and here's my second question - if the bottom is 15 or ....2 years away, how long do you want to wait before making a move? Again, I don't think it will take that long. While I am a novice at understanding the global financial scene, I consider myself an expert on the Key West market. Here's how I think Key West IS different: having seen such widespread speculation and incredible rise in prices, I think our bottom will come rapidly and I think we are well on our way.

I also believe real estate will come back and I think it can be bought "right" today. If you want to get in on the new ground floor of the Key West real estate market, I would concentrate on buying a bottom of the market property, get your foot in the door, move into it and bide your time. To take advantage of what is happening/going to happen there, you need to be there, you need to personally have your feet on the ground there, to learn that market, and you need to be ready to act fast. If you buy something today, you will see some depreciation, but you'd buy in a price range that could withstand a bit further depreciation without losing your shirt. Any depreciation you see in the short term would be made up in the long term by other good deals you'd be able to take advantage of. Your chances of being in the right place at the right time would sky-rocket.

As far as your continued shopping once you are there, I have some ideas and we can talk about those. I'm sure we will have much more to say to each other in the next few days...

Sally

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