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Plunket’s Law

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I figured out how to tell when the market is about to turn.   By Robert Plunket     I have seen the bottom of the market! Of course, it exists only in Cape Coral and the news is not good, but it’s there. Finally. When will it get here?   I have the answer. […]

June 18, 2008


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I figured out how to tell when the market is about to turn.
 
By Robert Plunket
 
 
I have seen the bottom of the market! Of course, it exists only in Cape Coral and the news is not good, but it’s there. Finally. When will it get here?
 
I have the answer.
 
First, a little about Cape Coral, which you might not know much about. It is about 70 miles to the south, on the northern side of the Caloosahatchee River from Ft. Myers. It is part of the Ft. Myers metropolitan area – in fact, the larger part. In terms of area it is the third-largest city in the state, and with a population of 170,000, it is the largest city population-wise, in Southwest Florida.
 
In reality, it is mile after mile of new and almost new tract houses, arranged on a grid. Slightly outnumbering the houses are vacant lots. It looks like this:
                                               

 
There are no subdivisions with cute names. Just house after house. In its favor is an extensive network of canals, some of which lead to the Gulf, some to man-made lakes and ponds. For kids it would be great, providing they know how to swim and can identify snakes.
 
                                               

 
Here is the typical Cape Coral house.
                                               

 
It is 1,800 square feet, three bedrooms, two baths. The floor plan is excellent, and there are luxury home touches: a fancy, double-sink master bath, a separate dining room and a den. Although it seems well built, there are economy measures in the trim, such as Formica counter tops that look like granite, and vinyl flooring in the kitchen and baths. But all in all, it’s a very nice house.
 

 
This house is brand-new and being sold by the developer, Adams Homes. The price? $127,000. A month ago it was $177,000. The $50,000 drop has made all the difference. People are snapping houses like this up. When I was there Sunday, the model was packed with sales people writing contracts. And all over town, similar reductions have pushed sales up 41 percent. A little boom is happening. Multiple offers, the whole bit. It’s driven by foreclosures and short sales, of course, of which there are hundreds. (The foreclosed version of this house can be had for $90,000.)
 
What does all this mean? Well, I have extrapolated all the data and come up with an economic theory, which I call Plunket’s Law:
 
When a real estate bubble bursts, prices will decline until they reach half of what they were at the height of the bubble. At that point, things will suddenly start to sell like crazy.
 
The good news is that the end is in sight. The bad news is the horrible loss of equity. I think that in Sarasota we won’t fall quite as far as Cape Coral, for the simple reason that we have infinitely more amenities: golf courses, beaches, retail, culture, visual style and sophistication. We might want to think about biting the bullet and just reducing everything to half of its 2005 value. It will be awful at first, but things will sell and prices will rise. I can guarantee it – it’s Plunket’s Law.