Monday, March 13, 2006

A Few More Canaries Gently Fall From Their Perches

This from a doctor who currently lives in Key West, Fla.:

"My landlord died two weeks ago."

"There are four apartments and three rooms renting in an old decrepit building he owned. He had it on the market 'for sale by owner,' for $2.8 million.
Last Thursday, his son came down to take care of his estate. The price dropped to $1.95 million.
I know the attorney who is working with the son. The price will soon drop to $1.8 million."

"Across the street, a former homeowner took a similar sized house to the one I am living in. He spent hundreds of thousands to subdivide it into three condos. The cheapest was $900,000, the most expensive was $1.3 million, and the third unit went for $1.15 million."

"Those three condos were on the market for over a year. Four months ago, some guy finally bought one of the two more expensive condos. I found out yesterday that this new owner had already folded his tent. He couldn't make the second or third payments on his new condo. He sold his condo for an immediate $400,000 loss."

"Now he doesn't have a place to live in Key West and he still owes some lender $400,000. Wow!"

"Next door, there are five condotels. They were formerly part of the great White Street Inn, which stayed fully occupied most of the year.
Well, the White Street Inn owners wanted one big payday. So they closed down the nightly rentals, renovated the place into five condos, and opted for the condotel designation, which meant renters had to rent for a week. But the benefit is the new owner of the condotel had to pay no bed taxes to the city for infrastructure in return for not renting the place out nightly."

"A funny thing is happening to all of these condotels: They are not occupied more than 25% of the time. Most of the time, they are dark and vacant."

"Those units initially sold for $1.2 million. Two of those units are on the market now, today, for $750,000 and $800,000, respectively. We can only speculate that the sap investors who were assured that 'Key West is HOT, HOT, HOT and you'll never have a problem keeping this place rented out,' are now deep underwater carrying mortgages that their sparse rentals can't possibly cover, so that they were forced to drop the prices on their places to meet new realities."

"Anybody buying a house in this town at this time is trying to catch a falling guillotine."

"There was a young respected realtor in Key West who last year at this time was quoted as saying, 'You will never see another house in Key West sell for less than $600,000 again.' His reasoning, like most of the herd: Key West is a very tiny island, land is at a premium, real estate prices are finally catching up to 'realtor vision'. Real estate will continue to double every few years."

"Last week, the newspaper resurrected his quotes. There are houses not only under the $600,000 mark, but at this moment, there are 11 houses in Key West under the $500,000 mark.
I looked at two of them yesterday. One was a 'cottage, 284 square feet,' and the other was a 'cute little condo bungalow' of 300 square feet. These two 'investment properties' listed for $390,000 and $395,000, respectively. In former years, they were basically toolsheds. Those two toolsheds will be back to reality before this is all over."

"The MLS listings down here do not include 'for sale by owner' properties, which have sprung up everywhere in Key West. All these homeowners, upside down on fast-depreciating homes, are now trying to save the commissions the realtors would have gotten, by doing it themselves.
If you averaged in the 'for sale by owner' prices, the fastest falling on the island, prices have easily fallen over 25% in six months. But the MLS only averages the MLS listings. They don't want to mess up the cartel pricing with reality. That could cause a bigger rush to the exits than what is just beginning now."

"Things are much worse in Key West real estate than the real estate cartel, i.e., realtors, appraisers, mortgage shop owners, builders, et al., are letting on."

"If you want to buy a Key West home, here's what you do: Keep working. Save your money. Come down here several years from now. Buy while there is blood in the streets."

Another sign:
The St. Joe Corp. (NYSE symbol: JOE) is a giant bellwether of U.S. real estate stocks. The developer is the largest private landowner in the state of Florida.
St. Joe's stock price is having a very bad 2006, sliding to its lowest levels since 2004.

This is either a great chance to buy land cheaply, or a bad sign for Florida real estate.
Long term, I'm guessing the former. 78 million Boomers are going to create a huge demand for southern homes over the next 25 years, even if only winter residences.

9 Comments:

Blogger Harry Eagar said...

Why buy in the hurricane belt?

You will soon be able to plunk down $1.5M (or more) for a condotel on Maui.

Well, not you. You're already too late. But somebody will.

March 14, 2006 10:19 AM  
Blogger Oroborous said...

If Dole is going to stop growing pineapples on the Hawai'ian islands, won't that free up a lot of land for development ?

Or is it all in the wrong places for real estate development ?

Given the year-round balmy climate of the Hawai'ian islands, (or so I've read, please correct me if that's wrong), it would seem as though there's an opportunity to sell inland cottages to retired folk who wouldn't be going to the beach much anyhow.

March 14, 2006 1:04 PM  
Blogger Duck said...

I wonder how the market is in Miami and San Diego. The Phoenix market has already cooled off. My wife tells me that there are already vacant homes on the street. There were too many speculators buying rental properties over the last 3 years for it to be a healthy bull market.

March 14, 2006 4:50 PM  
Blogger Harry Eagar said...

It complicated, but
in general
you don't want to
live in an ex-pineapple
field. (I do, mine used
to be a Libby, McNeil, Libby
field.)

There's plenty of
land and plenty
of water, except
that the unions,
environmentalists,
crystal gazers,
and developers
(how's that for an
alliance) have
banded together
to declare the land
and water that
would make the
most sense to
develop off
limits.

So we end up
with the lowest
home ownership
in the country (outside
DC), although
everybody who
does own a home owns two.

The least
expensive house on the
market right now
is priced at about
$450,000.

I could go on.

But, yes, part of what
you say could be right.

There are people who would
cheerfully buy cottages away
from the beach.

We just don't let th

March 14, 2006 8:11 PM  
Blogger Harry Eagar said...

Got my tax assessment yesterday.

The county says my lot is worth $200K more than it was last year, a gain of 80%.

According to Orrin, that's savings. Funny thing, though. My consumption will be down this year by about $800, which is how much my property tax will go up.

Overall consumption will remain as was, since the county will spend it all.

There are a few places, Maui, Aspen, Monte Carlo, that are so desirable that no matter what happens, you will always be bidding against the richest honest or dishonest people in the world.

The first month I was here, my boss, owner of tens of thousands of acres of Maui, was interested in buying an oceanfront lot near his hotel. Not to build on, just to have. He was willing to bid a million.

He lost, to the guy who owns the Indonesian tobacco monopoly. Where kids start smoking at age 4.

In truly primo areas, it is going to be impossible to lose money in real estate long run. Short run, easiest thing in the world.

March 16, 2006 1:07 PM  
Blogger Oroborous said...

That's the worst kind of way to be right - vindicated in the long run, but bankrupted in the short run.

Like all of those short-sellers in tech from '97 - '00; they were right, but too soon.

Unrealized capital gains should be counted as "savings", but at a deep discount.

In your case, you could potentially sell now for a nice profit, but probably won't.
So, what happens if the market for Maui real estate drops for awhile ?

The Fed did a study awhile back of peacetime real estate crashes around the world during the 20th century, and they found that the mean drop in value was 30% from the peak.

If in five years your property was worth only 70% of what it is now, that would still be 25% more than its market value in 2004 - 2005.

March 16, 2006 8:29 PM  
Blogger Harry Eagar said...

Well, Maui is a weird market and nothing that happens here is generalizable to the real world. But as an example of extremes, it might stimulate useful thoughts.

After the Gulf War, Hurricane Iniki and the demilitarization of California, Hawaii tourism (at least half its gross product) took a big hit.

Real estate declined. My tax assessment, which might or might not have reflected what I could have gotten, never dropped much more than 5%. But it was modest housing.

Drops in resort areas were considerably more, and it didn't take much to wipe out the equity of the latecomers.

But here's the point I want to make. Bonner mentioned that only 1 of 35 householders in L.A. could afford a median price property.

That matches a phenomenon I have been worrying about for years on Maui. In fact, at the end of this month, when I do my quarterly real estate report, I have told my editor that I am abandoning average and median prices. Instead, I intend to emphasize lowest offering prices -- currently around $450K.

I am not concerned about the supply of buyers for "optional" housing. Intrawest just sold several hundred oceanfront condos at prices starting at $500K for a studio, and I got a flood of e-mails from people complaining they were unable to even make an offer.

Most high end properties here sell for cash.

But take a couple that work with me. They recently paid something over $400K for a modest house. I know exactly what they make (twice what I make; we're in the same union but they get two checks), and they are just about able to make their note.

Now their double income is about as much as you're going to get in this county if you're working for somebody else.

So who would pay them more than they paid for their house?

I am assured by real estate agents that there are plenty of Mainlanders willing to pay more than $400K just for real estate on Maui, anywhere.

Well, maybe, but the working people have got to live somewhere, too. Maui is not Aspen, you cannot commute 120 miles to work.

At a lowest offering price of $450K (say, $300K for a condo), almost no one who works on the island can afford anything.

This is not sustainable.

March 17, 2006 12:20 PM  
Blogger Oroborous said...

One wouldn't think so, but "unsustainable" situations often stagger on for an amazingly long time.

Long ago at BrosJudd, you said that the situation was "a failure of the marketplace", but it seems to me to be a failure of the political market.

As you said, there are people who wouldn't mind living more cheaply inland, but by and large they aren't allowed to do so.
That's the gov't talking, not producers and consumers.

(Except in the sense that you say that the big developers have teamed up with other anti-growth groups, to ensure that they can get premium pricing).

My guess is that the situation will continue as it is, with the bottom tiers of the labor force living in ever-more-cramped conditions, until they get fed up enough to start moving to the mainland en masse.

If they stay and take it, where's the incentive for them to be better-paid ?

Even then, their places might be taken by immigrants who are used to living in small spaces and being poorly-paid.

Would society on Maui accept that ?
Or would it cause turmoil ?

March 17, 2006 7:00 PM  
Blogger Alicia Bennett said...

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April 08, 2006 6:05 AM  

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