Shell Shocked in Key West

Following is a post from a friend living in Key West.
He posts under the name "FreeThinkerKW" on my board on the Motley FOOL, and rents a house in Key West. Here goes from FreeThinkerKW....

As longtime readers of this board know, I live in Key West where Real Estate tripled, quadrupled, and quintupled in the past 6 to 7 years.

I alerted this board to the most unprecedented "happening" in Key West in my 16 years down here which took place yesterday, Saturday: an attempt to sell 22 homes at auction in a stalled real estate market.

Last week in Key West, only 1 home sold. The week before, 2 homes sold. The week before that either 2 or 3 homes sold.

Mind you that we now have 1400 to 1600 homes on the market, depending on the source of your information. Know too that there are approximately 300 to 600 homes being sold by owner which are not even listed in the MLS.

If we sold 2 homes a week in Key West, this inventory would last, oh, about 14 to 19 years at this rate. And as you will read, the asking prices of these homes are so out of reach for most people that the sellers must now face either foreclosure or drop their prices even more rapidly than they have already dropped.

I am about to lay the results on you from yesterday's auction. I am hoping you will be able to read the entire article without the Key West Citizen truncating it. If you cannot read the entire article, let me know, I'll send it to Mish, and then he can post it on his blog.

Furthermore, I know someone mentioned in this article. I will not divulge his name as I don't want someone to google a reference to this auction and then they see my post come up alluding to his pain with his name prominently displayed. I don't want to add to his embarrassment and dismay. But I will say this: his remarks to the paper are not what he is telling me personally.

This builder is so underwater with unsold homes that he recently put his own luxury home on the market. He also has 7 brand new homes up on Stock Island, the next island up from us. Those homes, when first completed, were on the market for $550,000 to $700,000. They are on the market now for $400,000 to $500,000 with no lookers whatsoever. He might get lookers at $250,000. And he might actually get some buyers in the sub-$200,000 range, IMHO.

Anyway, this auction was the talk of the town for the last two weeks. Ads ran daily. People who wanted to be able to finally afford a house were excited. I kept telling these folks to curb their enthusiasm as this auction was set up with “reserve” prices that the homeowners pre-set. If the reserve asks were not met by a bid, the home would remain unsold.

The newspaper gives an objective accounting of the auction, but anyone from the Mish board will read between the lines here and tell you the 22 homeowners who tried to sell at auction are now in a state of shock. Even the one guy who sold is probably passed out at the big loss he ate between his asking price and his actual sold price..

The realtors who participated in this auction with bids now on public record probably wish they had never joined in this rude awakening. This is not the kind of thing Real Estate agents want their clients to be reading on the front page of today's paper.

Herewith, some of the most noticeable comments: And by the way, I met a couple from New York, well to do, who wanted to buy a second home at this auction. They told me tonight that people trying to sell were very disheartened by the bids. Their description of these locals who listened to bids way below what they valued their homes at was one word: shellshock.

Thanks FreeThinker.
Here is the article to which he refers: Auction yields disappointing results for sellers

The number of people attending Saturday's housing auction at the Doubletree Grand Key Resort was high, but unfortunately for the 22 property sellers, most of the bids were not.

Before the start of the auction, Slokumb had estimated 100 people would attend the event, but more than 200 showed up, with 58 registering to bid. Many chose to hang on to their bidding cards, and those who did bid were cautious. Absent were "bidding wars" with people vying back and forth for the highest bid while the price climbs higher and higher. Instead, most were content to let the property go to someone else for a lesser "bargain."

None of the asking prices were met. The closest bid fell $149,000 short, while bidding on the most expensive property, located at South St., fell more than $2.5 million shy of the almost $6 million asking price.

Jack Anderson and Kevin Broomell, the owners of a condominium at 1211 Olivia St., said the final bid of $495,000 did not meet their reserve, or lowest acceptable price, and so they would not be selling. All of the sellers had an undisclosed reserve price that had to be met for them to consider accepting the bid.

"We're disappointed, but excited about the buzz it might generate," Anderson said. "The battle's not over yet. Regardless of what happens, it's definitely created interest."

Like Anderson and Broomell, property owner Gary Burchfield said the $3,000 he paid to participate in the auction was worth the exposure he's received for his property at 816 Ashe St. All participants contributed $3,000 to a pool to help pay for advertisements and marketing leading up to the auction.

"To me it was a gamble, but the gamble was worth it," said Burchfield, who has other homes for sale. "The reason I did this house was because it exposed two others next-door. Plus, I wanted to see how this goes so if they do another one in February, March or April, I can decide whether to put more houses in it."

The highest bid on his 2,297-square-foot property was $1.3 million, well below his reserve price. The house was recently appraised at $2.15 million.

For those bids that did meet the reserve, it could be a few days before the buyers know if their bids were accepted, especially since several of the sellers have other homes out of town, said Terri Spottswood of Truman & Co. Real Estate Services. Spottswood said she was pleased with the turnout but that it was too soon to determine how successful the auction was or whether there would be another one held in the spring.

"All the appeals that Key West ever had, we still have them," Searcy said. "It's always going to be a destination."

There are 1,400 residential properties for sale in all of the Lower Keys, and almost 900 of them are in Key West, according to Resort Realty.

Well Key West will indeed always be "a destination" unless and until a hurricane or global warming wipes it out, but that does not mean greater fools will always catch a bid nor does it say anything about the desirability of Key West as a destination. Consider the following graph.



That graph and other stunners are available in this Key West Chamber of Commerce document.

As for the 2,297-square-foot property "recently appraised at $2.15 million" the market says it is now worth $1.3 million. Bear in mind that is what the market says it is worth today. Perhaps tomorrow someone will come to their senses and decide that a 2,297 square foot house in a hurricane zone is not worth more than $600,000. Then again perhaps another greater fool with money to burn will decide otherwise.

The messages here is that expectations about appraised values have a long long way to decline to get to realistic prices. In the meantime carrying costs on flippers are mounting by the day and the supply of houses is a mere 14 years not counting FSBOs. Those shell shocked and needing a quick sale to avoid foreclosure are in deep cereal trouble.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/