Note to All Key West Realtors Who Say "The Bottom Is Here" . . . Get Ready For The Next Big Drop In Prices As DEBT Becomes The Ultimate 4 Letter Word

One of my favorite Key West Realtors who blogs, Gary Thomas, is sounding like my Realtor. My Realtor feels the "bottom" is here on housing prices in the Florida Keys or that prices are "firming".

(Note to the few mainlanders looking to move to Key West: you want to books Gary's blog and read every post he makes AND you want to book the very helpful and most easy to use Key West MLS pictorial put together by Seaport Realtors. )

I respect Gary because like a great "value" stock investor, Gary is an honest Realtor who is constantly searching for real value in certain Key West properties by weighing pros and cons of every house he assesses.

If Gary thinks a house is a dog, he'll tell you. And if a nice house is in a terrible location, he speaks his mind. If the house is hiding bad construction, he'll tell you that too. But most importantly for buyers, if he thinks a house is being overlooked and is "undervalued", he has no problem building cases to buy that house on his outstanding blog.

What I am saying pointblank is if I were looking only to buy quality property in great locations at a great price, I'd listen to Gary. Unfortunately, I don't have the money required for most properties Gary spotlights. Fortunately, I know I don't have the money and I also will not stretch myself too thin to "make a deal happen."

Recently, Gary Thomas has been sounding more hopeful about housing market conditions overall. And I don't want Gary, who saw the Housing Bubble forming and talked openly about it to the derision by other greedy NAR Kool-Aid drinkers in this town, to get caught in an unforseen downswing which I feel could be as bad as the one we've just experienced over the past two years.

Not for the sake of argument, but because I feel strongly we will continue downward in pricing of homes and rents in Key West, I want to explain my views to the very few Realtors I respect on this tiny island of Key West.

Why I'm back in the Key West rental market again

Update: For the second time in just one year I am moving out of a rental because my landlord (in both cases former Key West Realtors) did not pay his mortgage payments since December of the preceding year. (See my recent post My Second Notice Of Foreclosure For A Key West Rental In The Past 12 Months )

In the case of my former landlord of two years ago, Mr. X, he took my $1800 every month which I paid like clockwork and used it to live off. He quit paying his mortgage on my rental (and my two neighbor's rentals) in December 2007. In May of 2008 I was served with papers notifying me my landlord was being foreclosed upon. So, he took $10,800 in rent money from me and never sent a penny to the bank he borrowed money from for a mortgage on his "investment" property.

In the case of my current landlord (soon to be ex-landlord) this Realtor took my $1600 I paid for rent since December 2008 and never made another mortgage payment. In May 2009 (last month) I got the obligatory knock on the door from a Monroe County sheriff telling me the place I was renting was being foreclosed upon. Last words from the sheriff, so help me, were like the words of last year's sheriff: "Don't worry about moving out immediately. We have so many foreclosures clogging up the courthouse that we won't be getting around to formally taking this place away from your landlord for another six months."

(While I'm on this topic, I personally know three people in Key West who are or were basically "squatting" in their homes, not paying their mortgages. One of these guys, a bartender who was given $700,000 Option ARM from Washington Mutual via a local mortgage broker chop shop is living in a place which will now not even fetch $200,000. He hasn't made a payment to Countrywide and its successor in over one year.

Another of the guys, a real sharp college graduate and manager of a local eatery, just finished his "squatting" in his former house. He told me his bank told him they would not negotiate a short sale unless he couldn't afford to pay his mortgage any longer. So he quit paying his mortgage, and sure enough, three months after he did, the bank started negotiating a short sale.

The third "squatter" is a Realtor/Investor I know. He hasn't made a payment in over a year on his mortgage. He's got a real sharp Boca Raton lawyer who is fighting the bank which claims ownership to his mortgage and house. This new bank cannot produce the original paperwork on the loan he originally received from Countrywide. In essence, no one knows if this bank really owns the mortgage.)

Enough digression. Okay, so I have to move again to another rental. No sweat.


Rents are falling all over Key West

We see many rentals cheaper than what we are paying now and which are as big.

Just down the hall is an exact duplicate of this condo I am currently renting and going to vacate at the end of June 2009 or mid-July 2009. Instead of $1600 a month for the 2 BR/2 BA where I currently live, the prospective landlord of the vacant 2 BR/2BA just down the hall (a female Realtor) said we could pay $1400 a month.

We passed on this "deal" because we learned this woman bought her condo for $450,000 in 2005. Doing the math and knowing that her condo fees are $440 a month, I realize she is way upside down on her mortgage. And I know from the experience of the last two rentals that real estate agents who were "masters of the universe" back when housing was hot are many of the former "owners" playing jingle mail with their keys when the pain is no longer sustainable. (Look at all the short sales today with "Realtor Owned" by the listing in the Key West MLS. It seems like Realtors drank more of their toxic NAR Kool-Aid than anyone.)

I am seeing many great rental units all over town (craigslist is loaded with units not advertised in the Key West Citizen or anywhere else on the web) at incredibly lower prices than what we are paying now.

Is it time to buy a home in Key West?

I definitely do not think so.


Making the case for another major downleg in Housing prices using data from T2 Partners graphs and charts

Please read the following T2 Partners pdf written a few weeks ago and just released on the web yesterday. I have had the pleasure of reading Whitney Tilson on Motley Fool message boards and I've read one of his books. He is one of the powers behind T2 Partners which released this fascinating fact filled look at what is about to happen with Option ARMS, Jumbo mortgage and prime borrowers of big houses with big downpayments and who bought during the last three years of the Bubble.

At this moment in time, 24% of all Americans with mortgages are "underwater" or upside down. That's one out of four Americans with mortgages now owe more than their homes are worth!

That's mind-blowing because we were told for years by the NAR that housing always was a solid asset which appreciated. (In Key West, I can't tell you how many times I heard a Realtor say with assurance that Key West Real Estate would double every 3 to 5 years because the island is only 2 by 4 and "everybody wants to move here". )

Other problems facing housing cheerleaders: Americans' credit cards are tapped out. Credit card companies are cutting lending lines. Credit card debt has skyrocketed so much along with delenquencies that Congress just stepped in and passed new laws against the usorous fees and rapacious interest rates. (Some posters on Motley Fool who were used to 11% rates and who missed their payment dates by one day reported being socked with 28% new APRs sending their minimum payments through the roof). Credit card companies are in deep trouble. Some are reporting losses, not profits.

HELOC loans are drying up. When you read this T2 presentation you will see how dependent car manufacturers were on selling cars to consumers who used HELOCs like runaway Housing ATMs. Ask anyone of the 24% of upside down borrowers whether they can get a HELOC loan today and you know the answer is "NO!"

The American Consumer is saving money for the first time in a long time by not being a conspicuous consumer. Savings rates, for the first time in years, are above normal. This is even going on with upper class people who didn't squander savings on big downpayments on mansions which are fast depreciating in price.


Even the rich are beginning to default while shadow inventory grows and is kept out of the MLS

At this very moment in Key West (according to Realty Trac), there are 17 holders of mortgages worth $1,000,000 or more who are now in default by 2 months or more. (And you don't even want to know how many borrowers with loans less than a million are ready to throw in the towel.)

This tsunami coming in "good" credit risks walking away from their money pits and turning into foreclosures is definitely going to continue the downward pressure on housing prices. The only question is how much further will prices fall?

Another point to consider is 70% of current foreclosures (not defaults which the majority of turn into foreclosures) are "shadow inventory" in the USA not even showing on MLS databases. This means banks are carrying these losses in their off book accounting, hoping they will be able to unload these losers at a good price.Unfortunately, the banks are playing a loaded craps game with taxpayers money banking their losses.


There will be no "Return to Normal" anytime soon as the Housing Bubble and Credit Bubble were not normal in the first place

In my opinion, this next downleg in housing will sail right on through the Case Shiller longterm trendline. As T2 Partners show us, Case Shiller is nearing its longterm trendline for median house prices (we are only 5-10% away) As you are about to see in this 62 page PDF from T2 Partners (see slide #51) there are numerous types of asset classes which over the recent 100 years have gone sailing right through their trendlines (or went way below "normal").

What we are going through as a country is not normal. This is one of those “Black Swan” events which not even the Best and Brightest thought ever possible.

This is the biggest financial crisis since the Great Depression and as Paul Krugman so amply points out today in his NY Times piece "Reagan Did It", this thing has been building not for just a few years of the Housing Bubble (which most experts claim went from 1997 through 2007) but since Ronald Regan deregulated S&Ls in 1982.

There is so much artificially propped up housing excess to bleed from the system, that it will take years to get rid of it all. Try unloading a property you are upside down on, and which is still unaffordable by the growing legions of the newly unemployed or the worker drones whose credit lines have been cut to shreds no matter their high FICO scores.

Also to consider: students of the Great Depression know the worst years took place following the 1929 stock market crash. It took decades for the Dow Jones to return to what used to be its "normal" median trendline.

Bear Stearns problems with derivatives based on toxic loans did not come to light until just two years ago. I firmly believe we are in the early innings of a search for a housing bottom. And then when we reach bottom, there will be no return to the insanity of "Buy Key West Real Estate, it always doubles every 3 to 5 years," as we were hearing back in the early years of this new decade. Those days are gone forever. (Especially when you discount land which will be under water due to Global Warming in just a couple of centuries.)

When you think about two other great financial storms on the horizon, credit card debt and commercial real estate implosions, one must consider the ramifications these two blow ups will have on consumers who lose jobs or credit lines they were living off, and big time developers with commercial properties that need high rents or refis to cover their insane mortgages. (And don't even get me started on insolvent governments at the state and local levels.)

Banks are cutting credit card limits on many people I personally know. I know many young people who cannot get credit cards today. Nor do they want them. This financial crisis is making even the youngest rethink loans and debt. (Just ask any recent college grad about his rapacious terms for his college loans.)

Debt has become the ultimate four letter word. Cash is king.


Commercial Real Estate begins to crack

Take a stroll down Key West's main commercial thoroughfare, Duval Street, today. Locals are all talking aabout how one vacancy after another has popped up. The vacancies are so noticeable that even the usual late to the news Key West Citizen recently gave coverage to these vacancies.

Always, the merchant couldn't meet his rent. The landlords refused to negotiate cheaper rents. (The art gallery in the Key West story hung a sign on their door saying they were moving their art from the storefront for "carpet cleaning". In actuality, they moved out over night. The Citizen missed this part of the story.)

Rents for commercial Real Estate are beginning to fall. Just today there was a news story about Starbucks Coffee demanding 25% reduction in rents from their commercial landlords. They have to. In a deflating economy, people are cutting out frivolous expenses such as $5 and $6 lattes. (And besides, McDonald’s is now offering the same cup of coffee at a better price.) There are thousands of Starbuck's across America which will soon turn the screws on their landlords. If the landlords do not meet Starbuck's demands, Starbuck's will move to cheaper digs and the landlords will regret having lost such a former great tenant.

As my friend Michael Shedlock constantly points out in his writings, America is contracting. We don't need another Taco Bell, Chicos, GM Dealership, Pizza Hut, or any other of the numerous chain stores which dot the fast emptying exburbs of this country. We are in deflationary times with wages contracting, unemployment and under-employment rising, consumer prices falling, S&P 500 earnings at 80% less than they were just one year ago, and car dealers closing by the hundreds as they are not able to give away cars with 0% down and $6,000 off.

Competition at retail is so fierce that numerous names of American iconic brands such as Sharper Image, Crazy Eddie's, Circuit City, CompUSA, Levitz Furniture, etc. have gone belly up. With all the new vacancies coming at retail, commercial developers will play the bidding war game for renters just as we are seeing in this giant condo where I live today.

And if they don't play ball with retailers, then they too might turn into ghost malls. (Check out this link to deadmalls.com on which American consumers are adding names all the time.)


I don't think all Realtors are scuzzballs

Honest Realtors in Key West are few and far between. I'm just passing on my opinion as food for thought. I really don’t want to see honest Key West Realtors to go out on a limb and pronounce a bottom is here, not when the few of them were dead right about the Housing Bubble.

I caution anyone in the Real Estate profession, especially in Florida, to look over the landscape of diminishing jobs, GM - the former largest company in the world - going bankrupt today, the shrinking middle class, the debt owed by governments and consumers. I feel buyers of properties today are like the buyers of internet stocks which lost 80 to 90% in 2000. The wish for the “cheap” stock to go back up was met by thousands of dotcom and tech bankruptcies. The real heartbreak were the people who bought heavily into Enron, Worldcom, Global Crossing, Sirius Satellite Radio, etc., after the 2000 fall. They've all been wiped out if they held on to these "sure things".

After Enron, housing was the new "sure thing." The bubble burst in housing. And the credit crisis burst just as big. Housing and credit are the fuse to the bomb which is killing trillions of dollars of wealth. This Great Recession is going to take years and years to work out, in my opinion.


Looking ahead . . .

I look for a bottom in Real Estate sometime later than T2 Partners (they are saying late 2010 or middle 2011). As much as I love Whitney Tilson's writings, I think he's not looking at this with a wide enough angle view. Nowhere does he really consider what the coming credit card blow up is about to do. Nor does he give enough ink to the coming Commercial Real Estate crash. (I think he drew wrong conclusions . . . which are not dark enough, IMO . . . from his own data too, and I will express my opinions likewise on a Motley Fool board sometime this week.)

I don't know when or where the bottom will come, but I am very sure of this: hitting bottom will not be the start of a "V" shaped recovery. I think it will be a long "L" shaped recovery. Any Realtor who thinks of a “V” recovery (meaning prices will skyrocket back to 2007 bubble top pricese) needs to drummed out of their Profession. Realtors cheerleading any positive bits of news (slowing foreclosures in December, but not acknowledging the moratorium on foreclosures for 60 days) are looking as foolish as those Realtors who cheerleaded Real Estate during the Housing Bubble's rise.

Regardless, here is an outstanding presentation on why Housing is about to suffer more losses. For those of you reading this who do not have an honest Realtor's or lender's understanding of loans, loan modifications, foreclosures, shadow inventory, etc., this 62 page pdf does a great job explaining why Option ARMs are the worst financial product to have come down the pike in this insanity called the Housing Bubble. And it also explains why this Option ARMegeddon will take down housing prices even more.

It's not Sub Prime which will do in the middle class. We have a growing pool of Option ARMs and Prime mortgages which middle class and upper middle class mortgage borrowers are now upside down.

Aerosmith needs to recut "Walk This Way" under the title "Walkaway" because that's exactly what former Upper Classs, Upper Middle Class, and Middle Class homeowners are doing today all over America. And their numbers are about to grow faster in the coming 3 years as ARMs reset.

Call me a doomsayer. I hear it all the time. I think of myself as a Realist who doesn't see the need of being "first" to call a bottom which I see as only a temporary lull at this time.

Yours truly,
Rock Trueblood

p.s. If you didn't click on the embedded link for the T2 Partners pdf report on housing and credit, here it is long form that you can copy, paste to an email, and send to your friends and loved ones:

http://moremortgagemeltdown.com/download/pdf/T2_Partners_presentation_on_the_mortgage_crisis.pdf


p.p.s. Maybe later this week I'll address some of the things which Whitney Tilson and friends are investing in. I have differing views here too.