This morning, my wife Sally and I received some kind words from Key West blogger Rock Trueblood about our past in Key West real estate. Having people praise Sally as knowledgeable and honest is always appreciated, but nothing new. A reference to me, however, as anything but an extremist nut-job is such a surprise, I was compelled to send a note of thanks to Mr. Trueblood.

Because real estate is still of more than passing interest to Key Westers and us, I'll expand on my reply to Mr. Trueblood here. And for those who were less than dazzled by O'Boyle's economic foresight in the past, or unaware of it, I'll give you another chance to point and laugh.

You will find below a free OFMP (O'Boyle's Fearless Market Prognostication) worth at least double what you will pay for it. Don't cheat and look ahead or you may be turned into a newt.

Rock mentioned the return of a marketing method for which we became notorious, or infamous, depending on how you look at it, during the go-go years. According to Rock, what we called the 'Fast Dutch Auction' is coming back into vogue. That's where a seller starts at the dream price and reduces it weekly in big chunks (we used to recommend 5% or so) until it sells. You advertise your plan. It gets a lot of attention from buyers. 

The method sprung from a great faith in free markets, and from our experience that 'the good deals sell first.'  Sally and I also never forgot the words of Key West's real estate Yoda, Curtis H. Wild:

"There is a price at which that house will sell today."

That price is, by definition, the market price. In a rising market, which Key West enjoyed for so long that people thought is was an immutable law, the sellers would get their fantasy prices if they were willing to wait long enough.

In this falling market, finding the market price quickly is more urgent. A Fast Dutch Auction does just that.

The market price will most likely still not be the number in the seller's head (it almost never is) but it will be all that the market has to offer. And, by the way, at this point it will probably be lower than any price paid during the frenzied bubble years of '04-'06.

I was glad to see that at least one of Rock’s readers had caught on. Diana wrote a comment about being a tire kicker in Key West real estate. She plans to sell a house in Tampa and move south. She plans to rent in Key West until the market realigns with the value of shelter.

She better hurry selling that house in Tampa. Bubble markets tend to be symmetrical. That is, on a graph, bubble prices go down about as fast as they went up. I recall something like 30% a year was the  climb rate when the champagne was flowing.

And here, as I promised, is your OFMP on where the market will bottom.

Housing prices in dollars are impossible to predict, simply because the dollar is a meaningless unit that changes at the whim of bankers and politicians. The truth is in the traditional ratios. Dollar prices change with the number of chits in circulation, but key ratios remain constant over time.

The real estate Price/Earnings ratio has been used by investors for as long as people have bought and sold real estate. That is the ratio of the rent a property generates to the property’s price.

For many years in Key West, the ratio was about 100 months' rent. That is, a house that rented for $1000 a month would sell for about $100,000. Of course there were variations from sale to sale, but rarely more than 10%. In the big picture, the ratio was stable.

Early in this decade that ratio started to change. By the middle of 2005 or so, which I reckon to be the peak, there was a dancer on every table and a lampshade on every head. Houses were going for over 500 months' rent. A pulse was all you needed to get a jumbo mortgage.

I don't have to remind anyone the party is over. There are a lot of headaches to prove it.

For the market to return to the 100-month mean, the ratio will have to overshoot on the downside for a few years. The down-price period will have to last longer than the up-price spike, because prices can't go down far enough to correct to the mean in a short time. The value of land, lumber, nails, and concrete forms something like a floor on prices. As we have seen in recent years, the ceiling is set only by the limits of delusional optimism.

So here it is, the OFMP: at the bottom of this down cycle, houses in Key West will sell within spitting distance of 50 months' rent. This number represents a slight low-end adjustment of the traditional commercial pricing ratio of 60 to 70 months' rent. In real numbers, that would mean that a house that rents for $1000 a month will sell for $50,000. Financing will be hard to get. Condos will probably be cheaper.

Other indicators of a bottom will be that no one will talk about real estate at cocktail parties anymore, and if you tell someone you are going to buy a house they will assume you've lost your mind.

Let the pointing and laughing begin.