Tuesday, March 01, 2005

Condo conversion craze impacts housing market

"KEY WEST: For those fortunate enough to get into Key West's real estate market, the rising prices have brought a windfall, at least on paper.

Condos have long been part of the island's housing mix, but until recently they were mostly confined to large waterfront developments in Truman Annex and along the island's eastern shore.

Now, the condo craze has hit the traditional residential housing stock, with large homes broken up into several units and former apartments selling one at a time. And just like the rest of the real estate market, the appreciation is spectacular."

Becky Iannotta is doing a series on condo conversions this week in the Citizen.

Imagine this. You take on an interest-only mortgage of over $2000 a month (plus condo fees) on a 400-500 square foot piece of Paradise at something like a thousand dollars a square foot. You struggle, work two or three jobs to pay for this for two or three years when, finally, it comes time to pay the piper, to begin paying on the principal of the mortgage, but -- what? -- "what do you mean it isn't worth what I paid for it? I've paid almost $75,000 to the bank, I have no equity in the property, condo fees have risen, interest rates are up, and my monthly payment is going up to $3,000 to cover the higher interest rates and to begin making principal payments. Taxes are going up as the City tries to make up the shortfall from the drop in cruise ship revenues and the overall drop in tourism that began when Castro died and the tourists began going to Cuba which, after all, has better beaches, lower prices, gambling casinos. The restaurants and bars that I worked in have either shut down, or cut back on shifts, lowered prices, and still the tourists aren't coming in the same numbers."

We thought about all these things in 1999, and used them to justify our decision to NOT buy into the real estate market then. We could be wrong again, but we still don't intend to buy here.

We ran into something similar to this nightmare scenario in Massachusetts in 1985. We bought a three-family property because "this neighborhood is going upscale, property values are going to rise, and the rent from the other two apartments will pay our mortgage while we live almost rent-free". By 1989, we were still waiting for the real estate boom to begin, and we had made a decision to move out of the house, in fact out of the state and region, to live in Pennsylvania to be near our first grandchild. We left the house to the care of friends who rented our eight room apartment, and who would manage the rentals of the two smaller apartments. We thought about selling it in the early 90's. A couple of appraisals showed that we could expect to realize, at best, almost 40% less than we had paid for it. That would have been less than we still owed on the mortgage. Since it was now fully rental property, there were some tax advantages to continue owning it, so we turned it over to a property manager (our friends had moved on to buy a place of their own), and waited. And waited. And waited some more. In 2002, we finally got an offer for a little more than we paid 17 years earlier, enough to pay the mortgage off and realize a few paltry thousands of dollars to put in the bank.

The "greater fool" theory is what fuels speculative frenzies, which may or may not be what we are experiencing here in the Keys, especially in Key West. The theory argues that it doesn't matter what you pay for real estate in a rising market, because there'll always be someone standing by to take it off your hands at a higher price. And if markets always rose, the theory would work -- in theory. But of course, markets by their very nature rise and fall, following the inexorable laws of supply and demand. The supply here is likely to be constrained for many years. There's only so much land, state and local governments constrain the rates of growth, some wealthy investors buy up chunks of the housing stock and rent it out as though it were a hotel, ignoring the laws that prohibit transient renting in certain neighborhoods. I heard of one such investor who owns thirteen units in the Shipyard condos next to Truman Annex. No matter that permanent residents of the Shipyard are annoyed, harassed, threatened, or assaulted by groups who rent these one and two bedroom units for a day or three, stuff them with their friends, and take over the parking, the pool, and party until late night. All that matters is the stream of income from the $500 a night rentals, the $3000 a week windfalls from disturbing the peace of the resident owners.

Conversion of more and more residential properties to condominium ownership, as well as the conversion of properties with transient licenses, like Watermark, Atlantic Shores, and many others in the works, can only deplete the stock of available rental housing for the people who live in the Real Key West, the people who make it run. It will change the very nature of the place. It will be time then to move on.

But not yet, not yet.

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