Today's Picture From the Big Picture Blog

I want to thank Steve Barry, a regular reader of the Big Picture Blog, who took the longterm Case Shiller chart dating all the way back to 1890 and then adding his own projected red dotted line showing how much further would need to fall 'til it hits the "median" of 100 (where Case Shiller started in 1890). Click here to read the post on The Big Picture Blog where this chart is discussed.

Most mainstream media show Case Shiller lines dating back 50 years and sometimes all the way back to the mid-1940s. Unfortunately, this truncates the view back into the late 1920s and the 1930s when this country suffered through the Great Depression.

Why is it important to look back to the Great Depression? Look at the chart. The Great Depression was one of those "outlier" Black Swan events which wasn't supposed to happen. In fact, the Federal Reserve was invented in 1917 with one of its purposes being to prevent Bank Runs and Depressions, seven of which this Country suffered through in the 1800s.

The Great Depression should be your starting point on the Case Shiller chart. Snap one end of a trendline through the lowest point (1921) then run the line out til it hits the next lowest point (1942 during WWII) then run that line out to where it bisects the right axis on this chart.

If you do this (use a ruler or any straight edge and hold up to the computer screen) the real trendline for Case Shiller bisects this chart on the right axis at an area between 75 and 80. And this sounds very right to me. Whereas Steve Barry is projecting a run to 100 and then a slow fade sideways (like Japan), I am thinking we could see much worse. I am looking for another 50% to 60% drop in housing prices, whereas Barry is looking for 35-40% more to the downside. That's a bold prediction, and I hope I'm wrong, but when I think about the highest unemployment in decades, the largest amount of food stamps recipients ever, the insolvent banks hiding bad paper through bailouts, the insolvent pension funds, the insolvent municipal, county and state governments, and I see record defaults on housing, record credit card defaults, tightening credit, etc. etc., I simply don't see a miraculous recovery happening for years to come.

People can't afford these homes at today's 50% off. We need another 50% off. Sellers had better get real.

Shadow inventory grows like kudzu. In Calfornia the majority of real estate sold today is foreclosed sales, each one tearing a new a-hole in the theory that "prices are bottoming."

Again, look long term.

If you don't use long term History, you are blind to what could happen. Norman Cousins the great TV writer once said, "History is a vast early warning system". Use the wide angle view. Don't think the unimaginable cannot happen. It has already happened. It happened before. Look at the past to see how dire consequences can be for those who bury their heads in the sand.

As always, Caveat Emptor,

Rock Trueblood

Like Trying To Catch A Falling Guillotine

Today, I am going to post a couple of photos of comparable . . . damn near identical . . . town homes with data below them.

Then you panicked tire kicking "buyers" who believe the latest bullcrap from the NAR may compare the properties side by side and determine if the asking price of high end homes might still be a tad too high in Key West. Hopefully, this small lesson will help you cool the panic that the market is taking off again without you on board riding the new Housing Bubble Conch Train.

We are about to compare 809 and 811 Washington Street in Key West.

The first of the two (809 Washington Street) just sold. However, we will list it's photo and data secondly as we want to show the house which is still for sale. The idea here is to show the irrationality of sellers, developers, Realtors and certain lenders who are still trumpeting this idea that Real Estate is bottoming and "Now's the time to buy".

811 Washington Street in Key West is a big beautiful three story Conch Style town home in Key West. It is in a very desirable neighborhood in and around the Casa Marina and Louie's Backyard Restaurant. It was built in 2006, so we are talking newly constructed right at the top of the Housing Bubble.

This For Sale home was beautifully tricked out and apportioned on the inside and out. (To see all six photos of this house, click here.)

Below is an outside photo of 811 Washington Street with its neighboring town homes. Perchance, did you notice they are all the same size and look? (Duh). Anyway, after you look at this photo, browse the data below this For Sale beauty of a town home:

Beautiful 3 br 3 1/2 bath townhome with Viking appliances, custom wood floors,marble baths,and being sold fully furnished with designer furnishings.

MLS# 110326
Status: Active
Original Price: $1,595,000
Listing Price: $1,595,000
Property Type: Townhouse
On Market: 141 Days
Address: 811 Washington St
Key: Key West
Mile Marker: 1
Neighborhood:Casa Marina

Style:Townhouse,Three Story,Conch
Bedrooms:3
Bathrooms: 3.1
Price Per Sq. Ft. $841.24
Square Footage: 1,896
Lot Sq Ft: 1,754
Year Built: 2006
Taxes:$1,599.14
Tax Year: 2007
Exemptions: None

Now let's follow the above For Sale townhome at 811 Washington Street with the Just Sold townhome at 809 Washington Street:

To see all photos of this stellar town home, click here

Bank approved price! Perfectly situated in the heart of the CasaMarina district is this truly beautiful 3-story townhome. Cathedral ceilings and custom-cut Carlisle Lumber pine floors welcome you to this quality home perfect for year round living. Bright & open great room, gourmet kitchen with stainless Viking appliances & granite counters, spacious bedrooms with en-suite marble baths and private balconies. Fenced for privacy, this elegant townhome boasts a private bricked patio with native tropical landscaping, relaxing heated pool & a rear entrance. This townhome comes with one deeded, bricked off-street parking space. Close to Duval Street but in a very quiet residential neighborhood. Potential Short Sale subject to Lender approval.

MLS#: Sold July 1, 2009
Address: 809 Washington St
City: Key West
Mile Marker: 1.0
Original Price: $1,550,000
Listing Price: $795,000
Selling Price: $775,000
Sale Price/List Price: 97.48
Price Per Sq Ft. $413.11
Listing Date: 10/2/2008
Days on Market: 270
Interior Sq Ft. 1,876
Lot Sq. Ft. 1,900
Year Built: 2007
Bedrooms: 3
Full Baths: 3.1
Property Type: Townhouse

So we have two homes, nearly identical in every aspect (okay, one has a few more square feet outside, and they were completed construction in different years). They are smack dab next to one another and they look like every other town house in their luxury community.

One just sold for $775,000.

The other is still for sale at $1,595,000.

WTF?

Let's say for a minute I was ignorant of the recent 809 sale. And let's say I agree to buy 811 Washington Avenue at the full price of $1,595,000.

My potential lender and Buyer's Realtor should be calling an out of town appraiser (it's the new Federal law all local Realtor's are bitching about) who will come into town, do comps of recently sold houses in the vicinity of 811 Washington and will discover the nearly identical town house right next door at 809 Washington just sold at $775,000 . . . which I figure to be a 53% discount from the current asking price of $1,595,000 for the 811 Washington town home.

Question: do you think any appraiser knowledgeable about all the appraisers being jailed for fraud is going to tell a potential buyer, "Yup, that 809 sales price was an anomaly. It was a bank short sale. The house you want to buy is still worth $1,595,000."

It ain't going to happen.

Do you think any potential buyer out here kicking the foundations of homes is not savvy to the power of data mining the Internet on their own?

So why in hell is 811 Washington Street still listed for the obscenely insane (in my opinion) price of $1,595,000?

Who is in denial here, I the self-armed housing data hound, or, the members of the local Realtor's cartel who refuse to break ranks and tell it like it is?

And here's something else I'll toss into the mix: 811 Washington might just sell for less than 809 Washington just sold for if the current owner of 811 doesn't smarten up and realize the public is a lot more savvy and protected by better consumer laws (and more are coming) and that the market is still trending down. This is not the time to be dragging your feet if you are a seller.

(Were I a distressed seller, I'd do exactly as Sally O' Boyle, an honest local Realtor now living in Costa Rica once said: lower your listing price weekly by $10,000 until you finally have phones ringing off the hook. It's that damn simple.)

Loans are tougher to get. The pool of people who can afford a Jumbo loan are shrinking like plastic wrap in a hot oven. And more and more people continue to lose their jobs. Liars Loans are dried up. Very few people will ever buy an ARM front loaded loan again . . . especially with rates at some of their lowest of all time . . . because consumers have heard the horror stories of re-setting ARM loans. (And rates are so low, they only have one way to go . . . UP.)

And when all the current off-MLS foreclosures (stealth inventory), regular stealth inventory (e.g. developers's empty properties kept purposefully off the MLS) and coming foreclosures (especially those in the Prime and Jumbo loan classes) hit the market's proverbial inventory shit fan, where do you think prices will head? Up?

This ain't rocket science. It's Economics 101. Supply and demand.

Think about it. A 53% discount on a brand new home and the home next door is still priced to sell at 53% higher. Tell me again how foreclosures will not really affect this supposed housing bottom and how foreclosures will not continue to wipe out trillions more in what was homeowner/developer/speculator/REO equity. If you believe this, you are oblivious to what is in the pipelines of insolvent banks who are sitting on TARP funds as backstops to all the crappy loans they've set off books so as to make it look like they are hale and healthy.

Go ahead. Tell me again the market in Key West is bottoming now.

Here's something local readers of the Good Deeds should have caught a long, long time ago:

Original prices are not being trumpeted. Only the listing prices are. And those listing prices are then compared to SOLD prices to make it look like the fall in prices is stalling.

When 809 Washington SOLD on July 1, 2009, all the Good Deeds report in the local mullet wrapper show is the last "Listed" price (the price changed list price) and Sold price, thus, showing only a 2.52% fall in List Price to Selling Price.)

Like the old Lays Potato Chip hawker, Joe E. Ross from "Car 54 Where Are You" TV show (were he still alive and were he a Realtor) would say, "Oooh, oooh, look at that, the market is bottoming. That house sold for only 2.5% less than its asking price. Oooh, oooh!"

But I've just shown you the previous owner of 809 Washington got a great deal less than what he originally wanted . . . and now his nextdoor neighbor/owner of 811 Washington, be it the developer, a Realtor, a speculator or a homeowner, is left wishing in one hand and crapping in the other. And what do you think they are going to find once they quit their denial of which way the market is trending now?

If you watched friends and family members get badly burned during the Housing Bubble by believing 99% of what Realtors, Lenders, NAR Schills, Appraisers, Mortgage Brokers, Insurers, etc., were pumping non-stop 24/7 around the clock, you know you cannot believe anything the FIRE Economy teat suckers tell you now.

Again, study the data. The truth is in the numbers.

Read people on the Internet such as Dr. Housing Bubble, Mike Shedlock, Patrick at Patrick.net, Ben Jones of the housing bubble blog, etc., who aren't in the pockets of FIRE Economy interests.

Read the data coming out of the Federal Reserve. Read Case/Shiller and do not just accept what Case/Shiller tells you. Read iTulip, the Big Picture, Option Armageddon and all the great links at the bottom of the http://www.a1anews.com/ blog which I've taken time to set off from actual news sources and which will help you interpret Housing Stats and BLS (Bureau of Labor Statistics) stats along with Case/Shiller's seminal work in housing charts.

Anyone buying a house now is betting that prices will go up from here and soon. (I feel the only way you can assure you won't lose a lot of money now is by not settling for anything less than 1996 prices, but that's just Doomsayer me)

Look, I could show you several examples of homes bought earlier this Spring of 2009 which have just this month and last month come back on the market at asking prices less than what the current bagholder paid just 4 months ago. That's insane. That's not a bottom.

What is the purpose of buying a home in Winter 2008 or Spring 2009 only to put the sucker back on the market in Summer of 2009 for a price 10 to 15% less than what you paid? What does that tell me? The market is bottoming?

No, it tells me there are too many people still gullible about Housing and that there are too many people trying to catch the falling guillotines of mis-truths which the National Association of Realtors and the National Association of Mortgage Brokes keep tossing out their SUV windows after the do another drive by on American consumers who haven't done their homework.

As always, Caveat Emptor.

Rock Trueblood

p.s. Sometime this week I hope to have a short eye opening look at so called "Affordable Housing" being sold by developers throughout the Keys. You don't want to miss this one as I'm going to show you current "Affordable Housing" prices vs. some Affordable Housing homes which are currently in foreclosure or bank owned. If you think prices have discontinued falling in the sub-$300,000 range, you are wrong. I feel Case/Schiller will blow through it's too short trendline of "home prices" and that the biggest future losses will be in Prime and Jumbo loan properties. (This new trend started just a few months ago and is really picking up speed. Wait until the biggest bulk of ARM loans reset from 2011 through 2013).

Also, I'll have to put my hands on some recent work done by an excellent blogger who took Case Shiller's work out beyond 100 years. (Case/Shiller's famous trendline does not contain information from the Great Depression . . . which is a huge, huge mistake on the parts of the Good Professors, IMO).

Lastly, since the Housing Crash of today is beyond any "outlier" Black Swan event which any major FIRE pooobah saw (Alan Greenspan, Hank Paulson, Angelo Mozilo, Lawrence Summers, the whole Bush Administration) back as it was blowing it's bubble, I will also write about two other outlier events which property owners in the Keys need to begin thinking about in earnest today: Global Warming and a Japanese style recover which might turn worse than Japan's tepid recovery. And by the way, Japan's property prices have not returned yet to their 1990 peak prices. In fact, Japanese land prices are starting to go down again as the effects of the Great Recession continue to deflate the Japanese economy. But don't take my word on it. Dig. Google it yourself. And read the links of other folk who have no vested interest in the FIRE Economy.

Business/Economic News for 7 July 09

An Example of "Shadow" Inventory In The Keys Which Is Not Found On The MLS

Developers, for the most part, have lost their asses in the Keys during the Housing Bubble.

At this moment, we've got rows of new and used empty houses, town homes, and condos all throughout the Keys where the lights and water have never been turned on or where the once lived in unit hasn't seen a living soul in months. (The condo unit next to my rental has never seen a human being for the past 13 months and it is in foreclosure. This next door condo, for whatever reason, is not currently listed on the Key West MLS.)

Out here on the north end of Key West, there are dozens of brand new condos built in 2005 which have never been sold. I've driven by these "ghost" condos nightly and wondered who in the world is going to buy one of them at 2005 prices? After all, the high end of the market is only beginning to fall now.

If these expensive homes did not move for the past four years, who in their right mind would buy one now just as Prime and Jumbo borrowers have begun to default on their loans at faster rates than the sub-Prime borrowers? As more Prime and Jumbo borrowers default on their old homes, the pool of prospective buyers of such expensive homes as this town home grows smaller.

More so, what bank is going to lend anyone money on one of these unless they have the full $220,000 down payment? Lending has changed drastically and you won't see cab drivers being able to buy (I know a cab driver in Key West who bought two of the smaller Seaside condos by using Option ARMs. He's now trying to short sale one of them) these type of townhomes on less than $100,000 a year family income any longer.

Thus, it is no surprise to see the following "reduction in price" entry . . . finally . . . on the MLS a week ago:

Luxury three level town home with ocean views in a gated community. The home features 2 master suites, 3 full baths, large rooms, vaulted ceilings, two car garage, private rear yard, elevator and hurricane/wind resistant doors and windows. Upgraded finishes include tile floors, granite countertops in the kitchen and baths, stainless steel appliances and security system. There is a rooftop observation deck with spectacular water and island views. The home is being sold furnished and the community includes pool and clubhouse.

Listing Date:6/7/2007
Original Price:$1,200,000
Listing Price: $1,100,000 (Price Change on June 26,2009)
Property Type: Townhouse
On Market: 758 Days
Mile Marker: 4
Building Style: Townhouse,Three Story
Bedrooms: 2
Bathrooms: 3.0
Price Per Sq. Ft. $603.07
Square Footage: 1,824
Lot Sq Footage: 1,702
Year Built: 2005
Taxes $7,029.00
Tax Year: 2008
Exemptions: None

Ouch. Check out those taxes.

Please note that this is the only one of these 3 story town homes currently listed on the MLS. That means all the other ones still sit on the developer's inventory where they (the developers) are waiting to drib and drab these empty town homes onto the MLS one at a time, hoping that the slow approach will artificially keep these homes high prices propped up.

The problem with this developer's method of stemming potential home price drops is this: the pool of investors who can afford this type of place at the new listing price of $1,100,000 (woo-woo, you save $100,000 off 2005 prices) is quickly shrinking like a puddle on hot asphalt.

The fact that this home was marketed at $1,200,000 for over 750 days with no price change tells us this developer has been in denial for much too long and is now beginning to realize . . . much too late . . . that this market ain't coming back any time soon.

Indeed, all one must do is follow the burgeoning price reductions on expensive homes in Key West (as I do with my own Excel spreadsheet) to see the trend to the downside is strong and picking up steam.

More about this later, but just keep in mind the "low" inventory which Realtors keep harping upon as a good sign that Real Estate is bottoming in the Keys: Realtors are neglecting all the defaults and pre-foreclosures in the pipeline (where seventeen $1 million and higher homes are now in default in Key West), plus the inventory as shown on the MLS is not showing all the empty homes such as these townhomes in Seaside Court.

Watch the prices on expensive properties fall, folks. When the upper end crashes, it will put even more pressure on people with tiny cottages, condos and townhomes who are still living in la-la land and asking $350,000 upwards for places which sold for $90,000 less than a few years ago.

Keep the powder dry (cash) and don't buy 'til the next leg of the crash begins in earnest with the Prime and Jumbo borrowers beginning to default in numbers that will make the sub-Prime crash look like peanuts.

Whereas today there is usually one or two deals where the house is at 1995 prices, sometime in 2011-2015 there will be dozens of these bargains.

As always, caveat emptor,

Rock

p.s. I just checked Realty Trac, and three of the smaller 2 Br/2 Ba town homes in Seaside Court North (these are on the backside with no direct view of what used to be Houseboat Row and most of them border the street into Las Salinas/Ocean Walk) and two of the 2 Br/2 Ba town homes in Seaside Court South are now in some stage of foreclosure. None of these five are currently on the MLS as possible short sales or REOs, eventhough some of them have been in some stage of foreclosure for more than 6 months. That's five homes where the current owners are in such arrears they haven't made a mortgage payment for at least 2 months and some have not paid in over 6 months.

Just for the record, the condo (2 Br, 2 Ba) I live in has had three price drops in 30 days by my landlord who is trying to negoatiate a short sale with his primary lender. He and I just had a chat as I was writing this blog post. I told him there are two units in this same building offering one more bedroom than this condo he's trying to short sell and they are $25,000 cheaper in their listing prices. Lastly, my landlord just shaved another $100 off my rent.

Rents in this building keep dropping as more of the units slip into foreclosure.