Another Example of Why 2004 Was Bad Timing To Buy A Home In Key West

For the past 45 days or so, I have initiated the use of my own Excel spreadsheet in which I enter every newly listed property from the Lower Keys MLS. More importantly, I've also noted every single Price Change on every property in the Lower Keys.

Using my spreadsheet, I recently came to the obvious conclusion that today's Price Changes are now somewhere in the ballpark of the year 2003.

For the past month, I've been telling readers of this blog how my spreadsheet is showing over 90% of all current sales of homes which were last bought in 2004 are selling today at a loss from their 2004 price.

Then the very popular blogger Michael Shedlock in his post late yesterday confirmed (using different methods and data) that he sees the Case/Shiller 20 home index hitting 2003 prices at this moment. (See Mish's "Housing Update - How Far To The Bottom?")

Which brings me to today's illustrative example of a house bought in 2004 home selling just this month in 2009 at a much cheaper price:

Here's a recent sale which took place on July 9, 2009.

Please notice the difference in the selling price between 2004 and 2009.

This is typical of all the homes listing or selling in 2009 and when they were last bought in 2004, a year when almost every Realtor in town and all the hangers on in the FIRE Economy were assuring us that there was no Housing Bubble, that Key West and Florida were "isolated from a Housing Crash" and "that it was different this time" . We were told over and over by the FIRE Economy Kool-Aid sippers Housing was a sure fire Baby Boomer retirement plan or a way for young people to become millionaires by "investing" in Real Estate.

Anyway, here's the description of the town home and its MLS data:

Bring all offers. 3bd/3ba situated on gorgeous resort style pool in Coral Hammock. Licensed for transient use with a rental history & bookings to convey. Many quality upgrades include granite counters in kitchen & baths, tile downstairs double covered porches. Enjoy the convenience of modern construction complete with open floor plan, indoor/outdoor living with 4 sets of French doors to covered porches, private ensuite baths, soaking tub & walk-in closet.Gated entrance for security & privacy plus a beautiful club house for entertainment & exercise facility. This is a potential short sale transaction subject to lender approval.One of the owner's is a licensed Florida Real Estate Agent but is not the listing agent. (My note: If I had a dollar for every Real Estate Agent who drank the NAR Kool-Aid during the Bubble, I'd own this island now.)

MLS#: 104766 . . . .Sold
Address: 40 Coral Way
City: Key West
Mile Marker: 0.0
Original Price: $665,000
Listing Price $379,000
Selling Price: $319,000
Sale Price/List Price: 84.17
Price Per Sq Ft. $224.65
Listing Date: 7/22/2007
Days on Market: 710
Interior Sq Ft. 1,420
Lot Sq. Ft. 1,111
Year Built: 2004
Bedrooms: 3
Full Baths: 3.0
Property Type: Townhouse

Real quick, let's look at the price the "sellers" paid for this baby new back in 2004 when it was built.

On 10/19/04 this home was bought for $484,900.

Two summers ago (Spring of 2007) the owners put it on the market for $665,000,hoping to sell it then for a quick $180,000 gain in less than three years time.

Unfortunately for these owners (one of them being a licensed FL Real Estate agent), and despite the local and national NAR telling one and all that "There's never been a better time to buy Real Estate", the market was tanking.

Disregarded Internet bloggers saw the Crash happening and were reporting it blow by blow, doing the job much better than Alan Greenspan, Ben Bernanke, Hank Paulson, the Bush Administration and almost the entire Mainstream Media. Still, we find a Key West Realtor (and this Realtor was in the company of 100s of Realtor/Speculators in this town) in 2007 actually asking an exorbitant price for a house which was no longer "hot" in a market chilling like a South Pole ice cap during Winter.

Hence, in 2007 the year when the Housing Crash was definitely happening to alarm bells ringing, klaxons blowing, red flags flapping and Case Shiller waking up the Mainstream Media to a crisis which the likes had not been since the Great Depression, we had a local Realtor and partner(s) trying to unload a recently purchased townhome at a big profit.

Anyone looking over this property in 2007 but who was listening to Internet bloggers saved themselves from being the "bigger fool" and purchasing this place in 2007. (It amazes me now how many properties on the market now at major losses were actually purchased in 2006 through 2008 . . . where were these people's reading habits?)

The Housing Crash was a crested roller coaster in Spring of 2007 when this 2004 purchased town home first went on the market to sell again. After all, it was just the previous Summer of 2006 (two years after the first buyers bought it) that Time Magazine had come out with it's contrarian cover (for us bloggers) "Home $weet Home" . . . "Why We Are Going Ga Ga For Real Estate", but which the NAR poobahs were creaming in their pants over:

Needless to say, there was not a lot of pent up demand for a $665,000 house in a nice development on Stock Island (the next Key up from Key West) in 2007, especially when it had sold for $484,000 just 2 1/2 years earlier.

As I just mentioned, Case/Shiller were just beginning to report that Housing was crashing in 20 major U.S. cities. Blogs from this town were talking about developers such as Cay Clubs were facing insolvency. And developers and builders I knew were all cutting back on Champagne Room visits at the stripclub where I worked in the Summer of 2007. The wide angle macro-Economic look was clear as HDTV if you only head your head out of the sand.

The Housing Ponzi Scam was up in 2007.

Those who were buying then were screwing in a sandstorm. Today, they all know they should have never have listened to the NAR in 2007 or local Realtor Cartel members who were only in it for the money or urging people in a local Newspaper column to "use your credit cards" for a downpayment as credit began to get tighter in 2007.

Let's get back to our example.

1. Sellers bought in Oct. 2004 for $484,000

2. Not even 2.5 years later in Spring of 2007 they try to sell at an Original Price of $665,000

3. It sat on the market with price changes for 710 days without selling.

4. Then it listed at the last most recent price change: $379,000.

5. And on July 9, 2009, the house finally sells for $319,000

Hence, Oct. 2004 SOLD price: $484,000

July 2009 SOLD price $319,000

This is the Bizarro World of Smith Barney where we lose money the old fashioned way, i.e., Buy High, Sell Low.

The above example is very typical of what I see on almost every 2004 bought property (most exceptions seem to be drastic expensive renovations) which is now selling or has already sold in 2009 at a cheaper price.

When someone loses $165,000 on a house when at one time they thought they would gain $180,000, it should be a lesson to all that Real Estate does not always go up.

As always,

Caveat Emptor

Rock Trueblood

Business/Economic News for July 15, 2009

Affordable Housing In Key West Is Facing A Pricing Crisis

I know you've seen the ads in the paper for Islander Village homes up on Stock Island. These are deed restricted homes whereby you don't own the land (the county has a lease on each home's plot for 99 years) and which can only be sold to buyers who meet county guidelines on income earned.

I'm not here to dis these homes's construction. In fact, I know of no modular homes ever built so well.

The homes are built beyond code. The windows, for instance, are impact resistant to 160 MPH winds.

I've toured one of the 3 Bedrooms 2 Baths models while cars were passing by and heavy machinery was being used outside. We enjoyed relative peace and quiet in the heavily fortified model home we walked through. (They are way quieter than Las Salinas condos built from poured concrete but which have thin window panes and sliding glass balcony doors which allows in noise from trash trucks, cars, and stereos).

Because of the above code construction methods (built on stilts, heavy duty straps, thick walls, etc.) the insurance for these well built homes only runs $1,200 to $1,500 a year. This is a steal when you consider Citizens Insurance (the last resort insurance company for Florida homeowners) just notified homeowners of Non-Affordable Housing they will double their wind rates over the next 5 years and still not be a profitable company.

Now, these homes are supposed to be workforce housing. And yet here is the line for maximum income prospective buyers can earn to be eligible to purchase one of these homes:

2 Bedroom Home
Individual: $93,982
Married: $125,309

3 Bedroom Home
Individual: $104,320
Married: $139,093

Let me say I know many a great bartender, DJ, county sheriff, cop, bouncer, waitress, cab driver and so on who are the backbone of our "workforce" in this town. I know none of them making the $93,982 or $104,320 cutoffs which would disqualify them from being eligible to buy one of these homes. So my guess is the majority of these homes will be sold to "couples".

And yet, even if anyone made $100,000 a year (and remember this would not be take home after taxes), they would still be stretching to buy a place priced at $265,000 (for a 2 Br/2 Ba) or $299,750 (for a 3 Br/2 Ba).

Moreover, these town homes have recently gone UP in asking price. I'm not kidding you. The developer just raised prices by about $6,000 to $10,000 on new Affordable Housing units which have been empty for over a year. They used to be $259,000 and $289,000 respectively (if my memory serves correctly).

So, as wages are cut, as hours are cut, as shifts are cut, as tips are cut, the number one Affordable Housing scheme for Key West workers has recently become more un-affordable. I don't care what HUD says about median income rising over the past year. You and I know it's a load of hooey, especially with 7 million Americans recently laid off from jobs during this current Great Recession putting pressure on wages.

Something else to consider was the former pitch of the saleswoman who gave us our tour of two of these Islander Village units: When we toured these new homes, we were told we could expect the prices of these homes to never rise faster than the rate of inflation. (I want to say the formula was something like LIBOR plus a point or two.) Thus, if the Housing Bubble were to ever blow again (I doubt it will happen again in the next 50 years), your new Islander Village home would not enjoy the insane appreciation we just saw in Key West Real Estate's go-go years of 1996 - 2006. By pegging Affordable Housing to match inflation, these homes are meant to be affordable to the next buyer down the line.

But here's the rub about these "Affordable Homes".

1. Three or four of them from an older subdivision but same style of model and construction are now foreclosed upon. Meaning, that even with all the breaks, middle class buyers of Affordable homes are being foreclosed upon.

2. These Affordable homes being foreclosed upon are not selling at their original SOLD price. In fact, the banks are arranging short sales for 10% off, 20% off and in one case one 3 Br/2 Ba bank owned home is being sold for $180,000 or almost 40% off. (Now keep in mind, these homes are built on public streets, not enclosed in a gated type community of Affordable Housing. Still, the construction is the same and it was put up by the same developer. And by giving up a community swimming pool, you are saving $119,500 buying the REO below which is the same size as the Islander Village 3 Br/2 Ba selling for $299,500)

This is a brand new home with a great back yard. End unit next to the park. Clean and easy to show. Unit is an affordable housing unit. All buyers must qualify based on the 2009 Monroe County Median Income Adjusted Income Limits and apply with a Monroe County Planning Dept Affordable Housing Application. Seller offering 3% seller-paid points towards a permanent interest.

Original Price: $229,900
Listing Price: $180,000
Listing Number 548356
Property Type: Townhouse
On Market: 2 Days
Address: 35 7th Ave
Key: Stock Island
Mile Marker: 5
Neighborhood: Subdivision:Lincoln Man Est. Amd
Building Style: Townhouse,Stilt
Bedrooms: 3
Bathrooms: 2.1
Price Per Sq. Ft. $141.29
Square Footage: 1,274
Lot Sq Ft: 0
Year Built: 2007
Taxes $1,625
Tax Year: 2008
Exemptions: Lender
Owned:Yes

3. Affordable Housing, as originally sold to the working class, was supposed to help workers get into a place where they could build some equity which would allow them to move upscale on the next move with a good downpayment. Nowhere did any sales rep for Affordable Housing ever mention the possibility Affordable Housing might actually lose value.

4. As sales stalled for Islander Village homes, construction of all the affordable units has stalled about half-way (just eyeballing the project) and all the expensive outer perimeter rich people's homes to be built on the water have yet to break ground.

5. If you as a prospective buyer who wants to do any type of upgrade to your unit, you are simply wasting your money. The sales rep made clear to us that we could install a whirlpool bath, granite or marble counter tops, new kitchen cabinets, etc., and we'd never get our money back from the upgrades as the homes are "affordable" and cannot appreciate faster than the rate of inflation.

6. Furthermore, as sales have stalled for the affordable units already built, credit has become harder to score. My landlord told me the ex-tenant who used to rent the condo I live in now moved into one of these Islander Village units on a "Rent to Own" program whereby half of his rent ($1,800 a month) accrues as a downpayment for the purchase of one of these homes. The problem the old tenant is having is this: he and his partner just hit their one year anniversary living in one of these units and now their bank of choice, Orion, refuses to lend them money to buy because they do not own the land on which this affordable unit was built. Will they have luck finding a lender in this town who will help them out? Stay tuned.

7. Also, there are 3 Br/2 Ba condos popping up on the MLS which cost $100,000 less than many of these Islander Village homes. Granted, condo fees are higher than the $137 "homeowners fee" one would pay at Islander Village. But on the other hand, certain condos have water views, better parking, and are closer to town.

8. If you want land, there are houses all up and down the middle Keys now selling less than even a 1 Br/1 Ba Affordable Housing unit. There are even a few Key West houses pushing the $200,000 threshold when they finally sell.

9. While the Affordable Housing Developer (he's not an evil man in my book, the market simply has turned against him and has messed up his financing means) has recently upped his prices and is charging more for his "Affordable Housing" town homes, other developers or owners of higher end product are dropping their prices as the Housing Crash middle and high end borrowers face faster defaults than sub-Prime borrowers.

(See "Like Trying To Catch A Falling Guillotine" in which a new luxury town home listed for $1,595,000 sold for $775,000.) Also see "An Example of "Shadow" Inventory In The Keys Which Is Not Found On The MLS" in which a developer is trying to sell never lived in luxury condos by putting only one up for sale at a time after finally knocking $100,000 of his original price which stood for 758 days without a price change.)

Which leads me to say as always, do your homework and . . .

Caveat Emptor,

Rock Trueblood

Prime and Jumbo Loans Out Default Sub-Prime Loans For 3rd Month In A Row

I was just reading the Wall Street Journal and came across an interesting piece of news. Since many of you do not subscribe to the WSJ, I had to search through Google to find another outlet for the story.

Titled, "Pick-a-Pay Loans: Worse Than Subprime" the article begins:

For the third straight month, option adjustable-rate mortgages are generating proportionally more delinquencies and foreclosures than subprime mortgages, the scourge of the U.S.

Option ARMs were typically issued to creditworthy homeowners and allow borrowers to make a range of monthly payments. The payment options include a partial-interest payment that adds the unpaid interest to the loan's balance. On many such loans, balances have risen while values of the underlying properties have plummeted amid the housing crisis.

As of April, 36.9% of Pick-A-Pay loans were at least 60 days past due, while 19% were in foreclosure, according to data from First American CoreLogic, a unit of Santa Ana, Calif.-based First American Corp. In contrast, 33.9% of subprime loans were delinquent, with 14.5% of those loans in foreclosure, the figures show.

My note: This is the hurricane flag flapping straight out while the flagpole begins to bend in Category 1 winds. As this turns into a Cat 2, Cat 3 and finally a Cat 5 storm, real estate will be down another 40 to 50% from here in my opinion, and not the 5-15% which Case/Shiller believe is in store.

I've been making this point for months now that resetting Option Armageddon loans (ARMs) will begin their biggest flush sometime in the 2011-2013 time frame.

That many prime and Jumbo borrowers using these "Pick A Pay" loans are already tossing in the keys (36.9% of these loans are at least 2 months in arrears on payment while 19% are in foreclosure!) means with the worst to come, we are no where near a bottom in housing prices.

Anyone buying the NAR's same ole same ole, "There's never been a better time to buy Real Estate," isn't paying attention here.

You don't go through a Black Swan Housing Bubble Crash in just two years time when it took 10 years to blow. ( I recently read a piece on an Econmic blog which argues the bubble really began under Ronald Reagan).

We are at 2003 prices in most of the Excel spreadsheet averages I've put together. By this I mean over 90% of all homes for sale today and bought in Key West in 2004 are now listing for prices less than what they were purchased in 2004. So, we've adjusted the average pricing timeline back to 2003 as of this week.

We've got a long way to go to get back to 1996 prices, but I feel certain we'll see them again in the Florida Keys. It might take us another 4 or 5 years, but this is what happens in Bubbles: they blow big, and then they deflate. It took ten years to blow. We've only let 2 years of insane pricing out of the bubble. There's more to go.

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