Phoenix Real Estate: A Perfect Storm of Opportunity by David Elton

Bank-owned signs line neighborhoods like suburban grave markers.  New subdivisions have roads, but no houses.    People ‘walk away’ from upside down loans as they might a restaurant tab after bad service.

Tougher mortgage guidelines, unemployment, prolonged political ambivalence in Washington toward our $15,000,000,000,000 uh, ‘problem’, a European financial system on the verge and an overall ‘burn me once but never again’ attitude have conspired to turn about 8 million homeowners into tenants over the past year.  (48% increase according to the real estate site Trulia.com)  Pundits have piled on too calling homeownership a ‘must avoid’, not worth the risk, the headache or the heartache.  

Noted CNBC contributor, Venture Capitalist, James Altucher, earlier this year posted  “Why I Am Never Going To Own A Home Again” along with ten reasons in support of his thesis. (See reference guide below)

Yes, Humpty Dumpty has had one helluva a great fall.  If this were a championship fight, the trainer would have flung in the white towel years ago.  All of which is precisely why, as our housing bear market enters its 7^th year, I posit:  Has there ever been a better time to buy a house in Arizona?  Consider the following:

Interest rates are hovering just over 4%, historically low by any measure.  Phoenix median home prices have remained in the 120,000 range for the past 12 months signaling a bottom being tested.   Total REO’s (bank owned) closed sales during past 60 days vs same time last year, are down 21%.  Buoyed by the continued influx of technology jobs, Phoenix area unemployment fell to 8.2% in September vs 9% from a year ago and under the National Average of 9.1%.   MLS Inventory is pushing one-year lows.  From over 37,000 homes on the market last December we are now down to aprox 19.5k - almost a 50% haircut (only 3.3 month supply vs 6.6 months a year ago) Meanwhile, rent rates have pushed higher approaching $1/foot in many central areas.   Today, with 20% down, a mortgage payment on a median priced home is about $470/month.   The same house now rents for about $1100/month.  I’m no economic major, but why would I rent something I could own for around half the monthly nut AND reap any future upside?

Please allow me to indulge with one more and perhaps most important stat: According to the Cromford Report, a leading Phoenix area industry research database, just 339 new homes were completed in October as compared with some 4000 in September of 2006.   When you merge the lack of new construction with annual lows in inventory and a rapidly improving home affordability index (measures debt-to income-to mortgage payment ratio) you get someone like Doug Brien, former New York Jet place kicker, now managing director of Oakland based Waypoint Real Estate Group coming to town.  Doug has purchased 700 rental properties over the past couple years.  “At some point, there will be a shortage of housing.  Everyone is realizing that single-family buy-and-hold is the way to go.”

CNN Money caught up with 70 year-old rancher Mike Castleman, founder and CEO of the real estate analysis firm Metrostudy on his 460 acre Bar Ten Creek Ranch in Dripping Springs Texas just outside Austin.  Metrostudy has compiled new home sales data for over 30 years, covers 19 states, or around 65% of the U.S. housing market, including those hardest hit by the crash i.e. Arizona.  He’s seen his share of market cycles and claims this recovery will look much like the rest:  It will bring a severe shortage of housing.  One day, "we'll get a big surge in demand and the drywall companies will take a long time to ramp up, and it will take years to get new lots approved.  Buyers will show up looking for a house in a subdivision, and all the houses will be sold. Builders will tell them it will take six months to deliver a house. But those folks will be set on buying a place.  And they'll want it so bad they'll bid the prices up!" In other words:  Beat the crowd.

THE BIG BOYS AKA ‘THE SMART MONEY’ HAVE ALREADY LANDED IN PHOENIX

And helping to lead the charge – that’s right.  Oh Canada!   An October 2011 Wall St. Journal story attributes a whopping 23% of our nationwide foreign market to Canadians (up 11% from 2007).  Germain Villeneuve, former Montreal real estate broker/investor and director of the Living Well Homes Investment Fund has a tidy 50 million to spend in the Valley of the Sun.  Since October, he’s gobbled up 110 houses and two apartment buildings!

Mr. Villeneuve’s plan is appropriately simple.  Rehab and rent out for 5 to 7 years. “We know that when (the economy) recovers, the homes will appreciate in value and the US dollar will get stronger so when it comes time to move our money back into Canadian dollars we’ll make more money.”

The Cromford Report indicates our current market is 40 to 50% investor driven.   One large player, Carrington Property Services, LLC out of Santa Ana, CA., plans to purchase up to 5000 rental homes in Phoenix, Chicago, Las Vegas and Miami.

We have significant hurdles to be sure.   Distressed inventory will continue to hold down prices near-term.  The economy needs to begin expanding again and with that consumer confidence, job creation – all the usual suspects.   But the underlying indicators look good and the table appears set to allow basic laws of supply and demand to eventually move the market higher. 

Perhaps the Cowboy/CEO Castleman summed it up at its simple best, "I’m a dirt road economist who sees what’s happening on the ground, and in 35 years I’ve never seen a shortage of new construction like the one I’m seeing today.  The talking heads who are down on real estate will hate to hear this, but America needs to build a lot more houses.  And in most markets the price of new homes is fixin’ to rise, not fall.”

Sources referenced in this blog:

1.  ‘Canadians Warm to Phoenix’ by Chana R. Schoenberger, Wall St. Journal - October 6, 2011

2.  ‘Big Money Gets Into Landlord Game’ by Robbie Whelen, Wall St. Journal - August 4, 2011

3.  ‘Phoenix Home-Price Puzzle: How to Rise from Ashes?” by Jim Carlton, Wall St. Journal – November 21, 2011

4.  ‘Why I Am Never Going to Own a Home Again’ posted by James Altucher, March 19, 2011.

5.  http://info.trulia.com/index.php?s=43&item=131

6.  CNN Money: Real estate: It's Time to Buy Again’  by Shawn Tully, senior editor,  March 28, 2011

7.  Smart Money Magazine: “It’s Time to Buy That House,” September 2011, by Jack Hough

David Elton is a licensed Realtor in Arizona.  Elton Realty is a 2^nd generation full service real estate company based in Scottsdale Arizona serving the Phoenix metro area since 1994.    You can listen live to ‘The Elton Realty’ show on KFNX 1100 AM Wednesdays at 12 noon or stream it at kfnx1100.com.  To listen to past shows please visit our site - www.eltonrealty.com.

Questions and feedback regarding this column are greatly appreciated.  My email is davidelton@cox.net. 

To Go ‘Long’ Real Estate, Try Going ‘Short’

She nudged a fall of hair from her eyes, signed and slid the page back.  “Anything else?”

“That’s it,” I said straightening what had become a thicket of paperwork.

“Maybe seven’s our lucky number, eh?” she said with a hopeful smile referring to her 7^th short sale offer.  

“Keep your fingers crossed.” 

My client Amy had a lot going on.  A Pharmaceutical Sales Rep, single mother of four elementary/pre-school kids, her day planner had something every 15 minutes.  Time was precious.  It was also running out.

We had to secure housing soon or she would be obligated to renew the lease on a cramped two bedroom condo she and the kids were piled into so they could be in her preferred school district. 

But it couldn’t be just any house.  

You may have caught a hint of Canada in her accent – Northwestern Minnesota actually near Moorhead.  She grew up on a farm and wanted her kids to experience animals and wide open spaces. 

Whatever we found had to be on at least an acre.  No track.  No HOA.  Mountain views.  2000+ sq ft.  4 bedrooms.  Oh, and under 250k.

We had seen everything new to the market for weeks.  Then, on a lark, I ran a ‘BACK ON MARKET’ search just in case I missed something that had fallen out of escrow.  This beautiful Santa Fe custom 4 bdrm, 2 bath about 2500 sq ft on 1.5 acres, with ‘calendar’ views of iconic Four Peaks popped up at 249,900 in Rio Verde, a rural area just east of N. Scottsdale. 

It seemed too good to be true.   Terrific price and it met all of Amy’s criteria.  One major red flag - it had been on market 400+ days?   With a price like that, there had to be something wrong with the house, right?

I called the listing agent and got the scoop.  The house had fallen out of escrow several times.  The main stumbling block had been the 2^nd lien holder.  They wanted an additional $17,000 to release their lien against the property.

“…And they won’t let the Seller pay it.”

“You got it,” the listing agent said, “That’s been our major hurdle.  And now the trustee date is only two days away.  Not sure we can save it.”

I had done a similar deal and had a good idea of what to do, but it had to make sense.  I knew with only two days until foreclosure the agent would be straight with me.

“What’s the minimum the 1^st will accept?” I asked.

“218,000.”

In a short sale the Seller must show hardship.  If the 1^st lien saw the Seller had additional funds ($17,000 for the 2^nd) they would cannibalize those funds toward the deficiency on their much larger 1^st.   That’s why the seller could not payoff the 2^nd.

So if we offered 218 for the house and Amy could come up with the 17K for the 2^nd, all-in we’d be 237K.  Incredible.  A little more cash out of pocket, yes, but with a FHA 3.5% down loan Amy’s total out of pocket would be just a shade over 10% - definitely within budget and worth doing to secure the big prize.

Under this scenario, the 1^st got their requested payoff.   The 2^nd got settled.  The Seller avoided foreclosure.  And most important for me, Amy got her custom home with views, wide-open spaces and at great price.   Everybody won.

Of the seven offers we submitted, this was the only one that went through.  On the others, we were either out bid (mostly because the homes were over our budget) or in a back-up position that would not have worked.

It takes a little perseverance and patience, but to take advantage of our distressed market, short sales allow you to put numbers on your side by submitting multiple offers with minimal risk.  It’s the law of averages.  If you throw 10 darts, one of them is bound to score, hopefully big.

On a side note – the appraisal, which notoriously tends to ‘gravitate’ toward the sales price, came in at 257K – 20K above Amy’s ‘all-in’ price of 237.   That’s what we like to see.

The Great Deal vs The Great Value

by David Elton                                     

The voice tinged with rasp on the line was that of my client Henry from New Jersey, ‘New Joizee’ to some.

“Dave,” he said, “I’m done.  Can’t do it.  Sorry if I wasted your time on this thing.”

Henry was a cash buyer.  I’d been sending him 50 to 100k rental property options for about a month.  Originally, he had it in his mind to buy “4 or 5”.   “Find me some great deals, “ he had said.

 “How ‘bout a bank-owned 3000 square footer with a pool and three car garage for 100k?  Just came on.  Does that work?” 

Henry wasted no time.  “Did you see the market, Friday?!  Down like a gazillion points.  Who knows where this thing is going?!   I think I gotta keep what I still got!” 

Then in the next breath, “I dunno.  Do you think they would take 60 grand?” 

And so it began and apparently ended just as fast: the quest for next the mythic ‘Great Deal’. 

I remember a time not too long ago cars lined neighborhood streets when new homes hit the market.   Think Super Bowl block party – that’s what it was like.  Agents wrote spur-of-the-moment offers on car hoods, in spare bedrooms, bathroom counter tops.  It was truly surreal.   My point - back then paying 50,000 OVER ASKING was apparently a ‘Great Deal’ to some.  And for the few who sold prior to 2006 – it turned out to be quite the windfall indeed.

Thus, we learn the quest for the next Great Deal is essentially about timing, which is about the future, which as far as I’m aware, is unknowable.

The reality is that the vast majority of people stayed away from 2002 thru 2004.  By 2005, prices continued to rocket higher.  In some areas prices increased 10, 20, $50,000/week!  Finally, the masses could not take it any longer.  They had to ‘get in’ and ‘get in’ at ANY PRICE.  In their minds ‘ANY PRICE!’ became the definition of the next Great Deal.

Sadly, as in all climax runs, those folks who ‘got in’ late were taken out to the wood- chipper. (This columnist included)   There’s a word for that – greed - the rocket fuel of capitalism.

Which brings me back to the present day and a much different market climate.  9% unemployment, Europe on the verge of collapse, the first truly Global Recession/Depression depending on which ‘expert’ you listen to.  Why, I bet if I showed Henry a house today for $10, he would undoubtedly offer $5.  Can you blame him?  It’s not just him.  It’s the majority of us.   There’s a word for that too – ‘fear’, the kryptonite of capitalism.  

When the stock market finally bottomed in 1932 – it was on one of the lowest volume days in the history.  There were literally no more buyers.  If not for a consortium lead by a banker named E.F. Hutton providing emergency liquidity, (not unlike Buffet today) the financial system may have collapsed. (Sound familiar?)

Turns out if you had bought along with Mr. Hutton at the deepest darkest depths of the abyss you would have tripled your money by 1935.  If you had bought after the crash of October 1987 you would have captured a 10-year bull run in stocks, one of the greatest in market history.

Here’s the brutal, gut-wrenching irony of it all.  Most of us would not take a Great Deal if it showed up gift-wrapped on our doorsteps.  We’re either too afraid prices will go lower (fear) or, when we finally do take the plunge, it’ll be when prices have already spiraled out of control. (greed) 

The result – most of us never win! 

So, is this a good time to find a Great Deal you ask?  Don’t know.  As my broker/brother likes to say, our crystal ball is in the shop – so rather than focus on the unknowable, what we prefer to do is look at empirical data, breakdown the numbers to give us clear perspective and see if we can find – a Great Value – today.

Case-Schiller just released housing numbers for August.  Phoenix showed a .01% decline in housing prices.  More data:  Phoenix median home price has remained in the 115k to 120k range for most of the past year.  By comparison – Houston is 159k, the Northeast 200k+.   Today, we have one of the most affordable housing markets in the country when compared with other major metro areas.  Current prices are now below pre-bubble levels in most areas.  Early in 2010 our MLS inventory reached over 60,000 homes –now we are under 20,000.  Combine that with the lowest interest rates, solid growth projections and the highest rent rates in our history and some extremely motivated sellers and you have the recipe for what could be some Great Values today and possibly Great Deals tomorrow and beyond.

There’s a reason large investment firms, (aka the smart money) have been gobbling up properties here by the thousands.   Wonder why?   I’ll tell you.  The smart money always exploits fear.   Which brings me back to yesterday.

The phone buzzed, my ‘Joizee’ client Henry. 

“You mentioned those short sales.  How does that work again?  Don’t they take forever?  They fall apart.  Then what?!”

Wait a second.  Was Henry back in the game?  Was he actually going to take that leap of faith during this, one of the blackest periods for housing in recent memory?  I masked my surprise in an overview about why short sales are perhaps the best game in town for buyers to obtain great value on their purchase.  (Henry had heard this before but was so focused on ‘The Great Deal’ he was after he had missed most of it.)

Silence on the other end.  “I dunno, Dave.  It sounds good, but I gotta think about it.  I”ll get back to you if I’m interested.   But hey.  if they’ll take 50k for that house lemme know.”

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