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From Sunday’s Bend Bulletin:

Bend builder Cary Martinez has been issued nine notices of default this year by various lenders.

It’s a far cry from earlier in the decade, when Martinez formed a construction company, Abacus GC, and went to work building homes, including the modern townhomes on Newport Avenue in Bend. Riding the real estate boom, he said, was “wild” and “amazing.”

But the bubble popped and ever-increasing home valuations ceased. Martinez decided it was smarter to walk away from his projects rather than struggle to keep them afloat because he believes it will be two to three years before they financially make sense again.

Martinez said he’ll likely file for bankruptcy in the near future and has even stopped paying the loan on his primary residence, with the hope it’ll give him some leverage to refinance his loan with his lender. But despite his losses, Martinez says he has no plans to leave real estate. He chalks up the experience to an important lesson.

“(Real estate) started out slow for me as far as my involvement and with the gains we saw we got more committed and really weren’t prepared for any downturn because we hadn’t experienced it before,” he said. “I had an idea in my head that this could continue on and on. Next time around, I’ll be a lot smarter, but I went all in and risked everything I gained and now I’m at risk of losing all my gains from the last 10 years, and now I am starting over.”

Now I don’t want to pick on Mr. Martinez. There are countless numbers of others out there just like him. But his example is the perfect illustration of bubble psychology.

“I had an idea in my dead that this could continue on and on,” says Martinez voicing the exact mindset that propagates every asset bubble. Day traders did it at the turn of the last century. Real estate speculators did it over the past few years and, I believe, oil traders are doing it today.

What troubles me about Mr. Martinez’ remarks is that, despite his current troubles, he shows no signs of capitulation or despondency (see the chart above) – a necessary trait of market bottoms. Now I realize he is only one example but, just as his comments about extrapolating price gains into the future spoke for every speculator, I think it’s safe to assume many feel as he currently does.

Mr. Martinez believes prices will be back in “two to three years” and implies that he wants to start over in order to catch the next wave to real estate riches. Well I have some sober news for Mr. Martinez and his ilk: that just ain’t how markets work.

Stock prices are still below their peak of almost ten years ago when the internet bubble popped. Japan saw real estate prices drop every year for more than a decade after the late 80’s real estate bubble there peaked. Forget “two to three years,” prices in Bend may not see their 2006 levels again for ten years.

And we surely won’t see a bottom until folks like Mr. Martinez, who I sincerely wish all the best, (and Mr. Bratton) throw in the towel.

Default: The view behind the numbers
Andrew Moore
The Bulletin
July 13, 2008