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.