Latest Phoenix Home Sales Data -- March 2010

I can't help but be a nuisance when it comes to this kind of information: http://bit.ly/cU7dcm.  But seriously, the story could have been better reported.  And just in case the paper deletes my comment, here it is:

...Rather than seeing a detailed report that breaks out different price ranges, is it safe to assume the following:

Foreclosures are continuing to occur across the board with single-family homes and multifamily. This in turn disproportionately affects multifamily units, which almost always lag single-family homes in the greater Phoenix market. Add to this the fact that excess inventories are finally coming to market in the multifamily sector and it's a double whammy for condos/townhouses.

Meanwhile, stability in the employment market is bringing buyers back to the table, while at the same time having the unintended consequence of more short sales or strategic walk-away activity. Since the fringes of town already saw prices drop so significantly last year, they are now starting to stabilize. Thus, price volatility is going down in the burbs, but still not increasing like more established neighborhoods, as people simultaneously become more selective in terms of location. Thus, we can now all breathe a sigh of relief that the housing crisis is over, totally ignoring the fact that it's an asymmetrical "recovery."

And finally, how about the biggest elephant in the room, which is the federal tax incentive set to expire in April/June, combined with the end of the Fed's mortgage purchase program. It seems that there are plenty of reasons to lock in those purchases and mortgage rates now, rather than a few months from now, which means we'll probably see the same positive numbers for a couple of months. But what do 3Q and 4Q 2010 hold in store for us? I wouldn't be willing to bet on it.

Not at all factually based, but the article left us to guess what was going on...... How did I do? And if you really appreciate my perspective, then by all means, I invite you to check out my blog -- where I somewhat casually try to cover this kind of information: http://bit.ly/9YQJoe.

US Retail Property Gouged by Record Vacancies - CNBC

US Retail Property Gouged by Record Vacancies - CNBC

E&Y Says Distressed Acquisitions to Pick Up in 2011, Not 2010

I couldn't have said it better myself, although I will admit that in the last year and a half I thought that we would see an uptick in distressed buying by 3Q of 2010.

An important note on this activity is that, to date, many deals are still happening off-market and debt is slowly trickling back into play -- at least that's been my observation.  What are you seeing for the market?  Will transactions rise to any significant level in 2010, or are investors still waiting?  My guess is that it depends on the market, where truly undervalued deals in locations with high barriers to entry are already transacting again.  But 2011 fits my estimate of increased buying in speculatively developed suburban markets that are finally seeing their fundamentals stabilize.

Here's the Globe Street article:

Home Ownership and Community Wealth

Felix Salmon wrote an excellent post on Reuters today, regarding the rationale for a sustained bear market in housing and common public misgivings about home ownership:

http://bit.ly/buWCHt -- That's what I'm talking about, except to say that an increased rate of home ownership is detrimental to the economy, per se.  It all depends on how you prioritize different economic factors.  If you value productivity above all else, then a more mobile workforce is certainly better in our economy -- but this doesn't seem to matter nearly as much to most communities as it does to the ones where business is centered.

I'd also like to add that for many people, the anchoring effect of ownership is comforting when, in fact, we are taking ownership of our property rather than merely paying endless debt.   One question that I would add to the research is how many people realistically plan/want to stay where they are.  Not only can ownership help provide financial security for the individual home owner, but it can create stability in the regional market.  The latter effect is negated when people choose to move every 5-7 years, but perhaps that trend will also abate in the near future.  Thoughts?

Krugman, Palin, and the Real America

In Paul Krugman's recent post to his NY Times blog, he decided to take Sarah Palin's bait and react to her disparaging remark about the eastern U.S.  Following is my response, which I hate to admit serves to explain much of the Tea Party sentiment being embraced in the west.  Where I diverge from the Tea Partiers, however, is that I propose a different response (not to mention a very different outlook on most issues).

While I can't declare hatred against any region, I think that people in most of the western states should indeed take greater ownership of their states' economies and resources, rather than continuing to operate through the old guard on Wall Street.  Here's why I think we should become a little feistier and provincial out in Palin's "Real America:" We need to wean ourselves off of our absentee landlords.

So rather than snapping back at Palin for her crude lashing, I hope I can convince you to consider that our present economic situation (and commensurate rise in so-called populism) has several parallels to the outcomes of past eras marked by significant growth in the western U.S. -- most notably in the late 1800s (see "People's Party").

As a resident of Arizona, it's tough to ignore how the housing bubble was essentially the greatest transfer of wealth in my lifetime here -- in the end, most benefiting the bankers who facilitated the mortgage transactions, and with the most heinous acts (or lack thereof, i.e. oversight) occurring behind the scenes in our nation's banking capital far away from here.  From about 2003-2006, many homeowners foolishly bought into and helped contribute to the rapidly escalating housing bubble, thus trapping themselves into an unreasonable personal debt situation without any contingency plans for when the market abated or crashed (and now even being convinced by the banks that walking away from their overpriced mortgages is immoral, despite having legal protections to do so).  We generally acted like pawns who were convinced to ignore common sense and our own self interest, while charlatans took payments for services rendered and then turned around to the broker dealer community to unload much of the underlying investments on "qualified investors."  In this sense, there were two primary demographic groups most impacted: the young adults who traditionally enter the housing market at whatever time in life society deems them as having "arrived;" and then their grandparents who once had a nice nest egg in their pension plans or advisor-assisted/controlled accounts, until they or their fund administrators were convinced to invest in MBS assets.

[Note: The foreclosure crisis will likely continue, according to this article: http://bit.ly/cs1Lof]

Then there's the commercial real estate sector, where many developers ran into their own bubbles, whether in retail, hospitality, office space, or some sort of commercial mixed-use concept.  Ultimately, rental rates skyrocketed to a point that small local businesses could no longer afford to expand (or else, they too ended up biting off more than they could chew), regional banks collapsed (or at least some of those remaining after the S&L crisis did), and national retail chains pulled back on their expansion plans before getting into too much trouble -- thus helping to accelerate the decline of speculatively developed small retail projects, which were a favorite of smaller regional development companies.

Now that the market has crashed and it has become a buyer's/renter's market again, debt and capital investment sources are scarce and employment opportunities have systematically declined in Arizona (yes, thanks largely to a non-diversified economy and uneducated workforce).  The often overlooked entrepreneurs who start up little sandwich shops or dry cleaners can no longer borrow against their homes as was the norm, and accomplished professionals of the baby boom generation who might venture out on their own lack the resources and market opportunities to justify the risk.

[Note: This article provides industry-specific numbers for job loss: http://huff.to/9UTP2n]

So we now have an entire population that feels victimized and powerless.  Worse yet, most people paying attention will observe that, without drastic changes to business as usual, the ones most likely to get in on the ground floor of an economic recovery are again the established elite.  This means that some form of social unrest should have been highly anticipated (as called for by Ravi Batra in The New Golden Age).

[Note: McCain doesn't appear genuinely interested in helping his constituents, and he's beginning to attract greater attention from national press for his lack of sincerity: http://bit.ly/aWNnZ6]

While I can't vouch for 100% accuracy of the above analysis, I will say that watching the scenario unfold in historically independent yet transient and growing Arizona is very interesting.  My affluent and educated gen X/Y cohorts see entrepreneurial opportunities all around them, while others view the world through a lens of outrage and seek a place to direct it.  But our best bet is for the two sides to agree on the most pragmatic and proactive idea, which fundamentally boils down to "hey, let's avoid this sort of calamity in the future."

This means investing in a sustainable local economy by supporting local businesses over national chains, thus helping prove the concept and push more money through our local economies.  It means balancing our state/municipal budgets while still investing in long-term growth and education programs to ensure an educated workforce and future economic opportunities. It means economic diversification, better planning, value engineering, etc.

It's a lot of hard work to fix what's broken; Palin's approach seems so much easier.

Seriously? Still Talking Trash about the Phoenix Housing Market? Get Over It Already.

That's right.  I'm about to slam someone for spreading news about doom and gloom for the Phoenix market....  It just seems so 2008.  Meanwhile, in 2010, we have the power of good information and can take pleasure in the art of nuance and differentiation.

Here's the article, which gets it all wrong, in my opinion, with NY-based writers relying on an unnamed real estate professional from the Phoenix market.  Unfortunately, this "professional" does not know how to look up any of the available data sets about his market.  For if he did, he might choose to highlight the Phoenix area's lopsided housing prices, consumer spending, debt levels, employment information, retail trends, and other vital statistics for our vast metro area.

But he does have one thing right, which is that it's not as easy any more bringing in wealthy Canadian retirees and convincing them to speculate on high priced winter homes anywhere in the sunny burbs that an incompetent agent wants to sell them.  Beyond that silver lining, this guy's viewpoint illustrates little more than his own ignorance and self-defeat, since I'm sure that he once was the mortgage broker who could never say no.

He says there is no recovery.  In fact, the recovery/non-recovery in Phoenix is very uneven, favoring more established and unique neighborhoods with jobs/services nearby, while it remains far out of reach for others....  And if this guy thinks that the distant suburbs' fundamentals support a rise in prices to where they were before our housing ponzi scheme fell apart, then he's an absolute idiot (and I think this is the first time I've resorted to name calling -- but I had to, since he's unnamed).  That said, it's interesting to see that builders are in fact returning to some "infill growth areas," as I call them, like in where I live in Laveen; but as a side note to a tangent, the only ones I see building tracts are the national companies, which are probably operating at a short-term loss.

Here's the simple problem: New houses were severely oversupplied in the Phoenix market in the last 5-7 years, as home ownership rates rose within the existing population (meaning that more traditional renters suddenly could buy instead) and amongst newcomers (they practically received houses when they stepped off the plane, like receiving leis in Hawaii).   To make matters more perilous, virtually no one had any skin in the game because of the drunken sailors who sold and underwrote their mortgages.  Meanwhile, the economy remained almost entirely tied to our real estate industry, so that when jobs started evaporating from the market like dew drops in July, many nice new neighborhoods quickly became more like ghettos.  Some people left the state/country in search of better opportunities and others just stayed and floundered.  Still others are doing just fine, as always -- and this is the silent majority, by the way.

Not to mention, the people who "live" in many of those neighborhoods worst affected and on the outskirts don't really live there at all, except to sleep at night, and so the smart ones are leaving.  Think about it: what if you put $10,000 down on a McMansion in Queen Creek, Apache Junction, Maricopa, Suprise, or Buckeye, and then paid between $1,500 and $3,000 per month on it for the last five years, maybe even experiencing a huge spike in your monthly payment in the last year or two.....  Now jump forward to today, when you owe nearly double the market value of that house, you've hardly invested any of your own money into it, and your neighborhood is crumbling all around you.... Top it all off with the fact that market rents are cheap, and I mean really cheap, and you're legally protected against deficiency if you hand your keys to the bank and walk away.  What would you do?  Rent the identical floor plan across the street for half what you're paying?  Move closer to your job, if you still have one?

The answer is or at least should be simple to many people in such an extreme situation, as I've previously written here. This also accounts for our much discussed surplus housing inventory and empty strip malls, shopping centers, and offices.  They are generally located in suburbs outside of the city core -- especially in the boom towns of 2005-2006.  Meanwhile, the historic urban cores of Phoenix and Tempe are showing great signs of renewed vitality that hadn't been seen in 30+ years prior to now, and other areas are adjusting to a new normal or moving forward with long-delayed infrastructure plans and maybe even adding services.

So you tell me.  Do we really stand to gain any more by discussing the downturn at this point?  It seems to me that we should instead be carefully studying the fundamentals of specific markets and preparing for their recovery or re-characterization, whichever is most realistic and appropriate for a given area.  Those that can offer a more compelling reason that people should stick it out and invest in their communities will weather these times well, while the places offering nothing but big cheap houses may now want to reconsider their strategy.  Just as this is true nationally, it is true within our market too -- just on a smaller level.

More on the Ethics of Strategic Defaults

There is presently a great conversation among commercial real estate professionals in a LinkedIn group to which I belong, questioning the honor of those who choose to walk away from bad mortgages.  Here's my two cents (note that I reference my previous blog post at the end of the comment):

...I'm sure you know that Arizona is an anti-deficiency state, particularly regarding "purchase money" loans for single-family dwellings on 2.5 acres or less ( http://www.azleg.state.az.us/ars/33/00814.htm ). This means that homeowners in Arizona who find themselves in a negative equity situation have the right to reevaluate their financial situation and consider turning over the real estate that secures the loan. In so doing, the homeowner makes the obligation whole and the bank cannot pursue any damages due to changes in the asset's value resulting solely from market conditions (in most cases). This has been the law in AZ since 1971, and it is the environment into which banks decided to invest their money during our latest bubble, even when making loans to very risky borrowers and failing to properly account for market risk.

On an individual basis, borrowers often feel guilty about exercising their legally granted right to walk away from a deed of trust secured debt for personal gain or preservation. This is largely due to the reasoning that you provided -- that it breaks down our system of trust that makes our debt-driven economy hum along. Or even more extreme, your comparison to wife-beating. But these premises are both wrong because they assume a falsely placed sense of morality as it relates to one's treatment of legal documents and investment agreements. In fact, while our society has a duty to be moral, our economy is fundamentally amoral, and economic transactions can only be as moral as the law declares they must be (where laws result from society's moral and ethical views).

If you believe that those laws need to be changed, then so be it. But also please recognize two related facts: 1) Bankruptcy protection laws have been significantly weakened in recent years, and the negative effects of bankruptcy are perhaps a tad extreme for many of the cases where homeowners should walk away; and 2) Bank notes are not the equivalent of handshake deals between two equal and trusting parties, which is why they must be loaded with lengthy descriptions of recourse and other contingencies. If you truly believe that we need to take greater measures to compel people to pay their debts, then I recommend that you take a step back in our legal history to the times before England's signing of the Magna Carta. Those were the days....

By the way, I've logged several other online discussions about the morality of walking away on my personal blog (not regularly updated). Feel free to take a look: http://bit.ly/aHyrcO .

Also, there's a discussion on ABC 15's website to which I couldn't help but contribute my personal views on the matter: http://bit.ly/ctMhHW:

This should not even be considered a moral versus immoral choice, but an amoral financial one. Arizona law provides for efficient breach of contract, which means that a party can breach a contract when that contract becomes an excessive financial burden. Further, Arizona is a non-recourse state: if your loan is collateralized by an asset, then that asset shall serve to make the debt whole in the case of a default. These rules were created with a moral compass in mind, for without them imagine how much the powerful could take advantage of the powerless and how the economy could stagnate by forcing people to honor bad contracts for their whole lives. But since when is it considered a moral choice to take advantage of legal protections that benefit us all....

 ...

 How do you decide to walk away (different than foreclosing, btw)? Easy! When your mortgage payment is double market rent and your house is valued at less than 75% of what you owe, then there's a pretty good case for pocketing the extra $12,000-25,000 per year that you are throwing at a poor investment. "But then I can't buy again for 2-3 years..." Lucky for you, there's still about five years of inventory on the market. "But what about my credit?" Keep all your cards and other accounts current, and it'll rebound in the next couple of years. Plus, with an extra $25,000 on hand, maybe you should consider paying cash for the next family car or big screen TV. "But what will my friends and family think?" They'll be jealous, even if they say otherwise, because it's the right choice. "But what about my neighbors?" If you walk away and leave an intact home to the market, you're doing better by them than if you fall into serious default involuntarily and they must watch you go into financial and personal ruin. If you can afford to buy again and have cosigners willing to help, then buy the place across the street and you've actually helped the market (and you would want to move across the street if you really care that much about the neighbors, right?). "So what's stopping me?" I don't know -- maybe you've bought into the banks' PR plan to guilt you into padding their pocket books rather than yours.

 ...

 For anyone questioning the decision to walk away, I would recommend that you seriously analyze your financial situation and the pros/cons of doing so, with the assistance of a financial calculator (or ask a friendly accountant, financial analyst, or upper division college business student for help). First, what are all your current monthly expenses related to the house you would consider leaving? There's your status quo.... Next, do you plan to rent or buy a new place (or rent, and then buy in a couple years)? If so, what is your initial investment, when will you make that investment, and what will your new expenses be? Here's the financial comparison you must consider..... And finally, why do you feel compelled to walk away? If it's purely for financial reasons, then you must consider the above calculations above all else. But if it's because of work opportunities or some other reason, then you will need to reconsider your priorities and consider the above calculations helpful references in helping to make that decision. (And if it's for a new job, you could even consider the changed income/expenses into the calculations pretty easily).

 ...

lender, thank you for the compliment [a mortgage lender, with the screen name"lender," thought my above comments summed up the situation well]. I would love to see a little more common sense on this topic and a little less of the emotional zeal that surrounds our rough housing market (and the supposedly negative impacts of one course of action versus another). If you resent the family down the street for "damaging your property values" by foreclosing, then you really need to reevaluate the situation and consider the fact that the damage was done years ago -- before anyone talked about walking away. It seems rather counterproductive to kick others while they're down, just as it is to fixate on having once made a costly decision for which you continue to pay. People should seek to make the best decision today, based on their current situation, and then move on. As soon as we the public can move toward rationality, the better our chances for an efficient recovery.