Looking Ahead to 2011

As the year draws to a close, economists seem to be increasingly more upbeat about the economic outlook for 2011 and there are certainly enough positive indicators around to suggest that change might be in the wind. Holiday retail sales were up about 15%, industrial production and factory orders are on the upswing, and new claims for unemployment benefits are trending downward.

However, it’s not entirely certain that anticipated improvements will be dramatic enough to affect the real estate market. None of the prognostications suggest they’ll readily morph into significant reductions in unemployment and, with concerns about inflation driving the bond markets higher, interest rates have begun to increase significantly.

In fact, it’s entirely possible that we’ve already slipped past the so called the “sweet spot” for home purchases.  That’s the point where the cost of acquisition is at its lowest when all factors, including the cost of financing, are taken into consideration. The reason for that assessment is that the 4.25% rates for 30 year mortgages that were available just a few months ago are now hovering around 5% and are unlikely to return, at least in the short term.  In fact, even if housing prices continue to slip a bit further or if we should experience the worst case scenario - a double dip recession, the cost of purchasing may never be cheaper than it is right now.

Incidentally, the assumption that prices in the Greater Phoenix market area still have a way to go before they reach bottom is primarily predicated on the foreclosure backlog. It’s generally believed to be “too wide and too deep” to expect that we’ll see any “market wide” equity growth in 2011. However, what I do expect is that we’ll see is some modest recovery occurring in more localized markets. The stronger parts of the valley like the Central Corridor, Scottsdale and more specifically McDowell Mountain Ranch should begin to differentiate themselves from the broader marketplace.

The reason for that contention is that, despite the fact that foreclosures are still a problem for these areas, they don’t dominate the market. Moreover, the employment outlook for residents of these areas is considerably better (unemployment among the college educated is only about 5% as opposed to the 9+% rate for the valley as a whole) and these areas will also benefit more quickly from the renewal of “baby boomer” relocations which are less dependent on employment  opportunities than the rest of the market.

The map insert should provide some perspective regarding which parts of the valley are being most deeply impacted by the foreclosure phenomenon. Each red dot represents a foreclosed property and the density of the dots pretty much tells the story. The boxed area represents a rough approximation of the 85255 zip code and demonstrates that the area, while not entirely immune to the problem, is considerably less vulnerable and likely to recover more quickly.

The economy seems to be on its soundest footing since the financial crisis started three years ago. Let’s hope that we see tangible change and a restoration of consumer confidence in 2011.

Housing Values in 2011

According to the National Association of Homebuilders, generally the most optimistic prognosticators around, homeowners can expect to see little, if any, increase in home values in 2011. In fact, Lawrence Yun, the group’s chief economist, predicts that it will take another two years just to clear the foreclosures and short sales on the market.

Still, he says that five years from now, when home values have recovered and mortgage interest rates likely are higher, people will look back to 2010 and say ‘I should have bought a home back then’. Clearly, not many Americans are thinking like that today.

Annual existing-home sales are expected to reach 4.8 million this year and Yun predicts existing-home sales will rise to 5.1 million in 2011, assuming that job creation continues to improve.

Yun also indicated that, although there are some indications that prices have stabilized (Editor’s note: our experience is more that the rate of decline has slowed), consumer confidence continues to be a problem. There are many people who still believe that prices will continue to fall and it’s uncertain how long it will take to restore confidence levels.

Interestingly, consumers typically have demonstrated increased confidence after elections, he said. However, with the country so philosophically divided, we might actually find that there’ll be legislative gridlock rather than orderly progress.

The worst scenario for the real-estate market, he said, would be if the economy were to begin to experience deflation as a result of that gridlock. That would lead to a “why buy now, I’ll buy one year from now, attitude” and cause the markets to spiral down dramatically.

The key motivator on the “buy now” side should be that mortgage interest rates have likely hit bottom already. In fact, Yun forecasts that the 30-year fixed-rate mortgage will average 4.9% by the end of next year. Not bad, but not as extraordinary a situation as we have now.

Owning May Now Be Cheaper than Renting

It’s actually a little frightening to consider but rising rents and falling property values are combining the change the rent vs. buy equation for thousands of potential homeowners.  In a sense, the world's turned upside down.

The statistical support for this contention actually comes from nationwide numbers published by Trulia.com which indicate that rents in the third quarter were up 2.6 percent over a year ago and that occupancy rates climbed sharply, to 93.9 percent (fueled in part by those displaced by the foreclosure crisis).

At the same time the median price of an existing home has continued to drop (homes in MMR have lost over 8% of their value this year and, as bad as that may seems we actually outperformed the market) and most observers expect them to continue to fall as high levels of foreclosures flood many markets and demand slackens.

The result is that many prospective buyers in more are finding that it is actually cheaper to buy than rent. The Trulia.com web site calculated the comparative costs of owning versus renting in the nation's top 50 markets and found that in 18 of those markets it is much less expensive to buy than rent. And, both Phoenix and Mesa ranked in the top five of the markets identified.  

As disconcerting as the numbers might be, it does point out the fact that there’s opportunity out there for those with the courage and foresight to take advantage of it.

Predicting the Future

For the most part, statistics are actually more useful in looking back at what’s happened as opposed to predicting what might occur. Unfortunately, that means that we’re virtually guaranteed to miss shifts in market conditions as they occur as well as the opportunity to profit from them.

Fortunately, the Arizona Regional Multiple Listing System has begun offering a new tool that actually does give us at least a reasonable glimpse of what’s to come. It’s called the ARMLS Pending Price Index™ and it uses the pending sales in the MLS system to forecast forecasts Average Sales Price and Median Sales Price in succeeding months.

There are, of course, several cautionary points to make. The first is that these are valley-wide numbers and that I expect that both Scottsdale and MMR will outperform the general market (certainly, their prices will be higher J).  

Next there is the hopefully obvious fact that the index is not a guarantee of what's to come and that the predictive value of the numbers declines as the index moves further out into the future. As with all forecasts, its real value lies providing a glimpse into the future to assist in "molding expectations and planning reactions to those expectations".

The latest version of the index (see chart above) suggests that the Median Sales Price in November will increase to $127,000, only to fall in December to $110,000, and then rally to $115,000 in January.

At the same time, the Average Sales Price for November is also predicted to increase to $171,400 only to fall significantly in December to $153,300, and then rally in January to $159,100.

Unfortunately, it seems that the short bursts of optimism experienced in the earlier part of the year have given way to some more regressive trends. However, as the index indicates, there is optimism for the first quarter of 2011.

Activity by Ownership Status

The sample for McDowell Mountain Ranch is really too small to make any serious observations as to trends but, by comparison to the valley as a whole, the statistics suggest it is a much more stable market.
For example, most of the activity inventory is still comprised of normal, non-distressed properties and the component that's actually lender owned is just a small sliver of what's available.  By contrast, the valleywide charts indicate that at least 30% of the avaialble inventory is lender owned and that almost 70% of the sales involve either lender owned properties involve short sale transactions.

Third Quarter Market Evaluation

The Valley wide statistics that were recently released by ASU Realty Studies indicate that there was little significant change in the marketplace in September as compared to the traditionally slower summer months and what change there was, was not particularly positive.

Foreclosures have continued to dominate the marketplace and, in fact, actually accounted for 46% of the sales valley wide last month. Although the picture in Scottsdale was somewhat better at 36% that differential wasn’t large enough to impact the most confounding aspect of the market -- the fact that values are still eroding.

The folks at ASU believe that the biggest immediate issue is the uncertainty in the market as a result of the evolving problems within the foreclosure process which could potentially impact moratoriums, availability of title insurance, the willingness of people to purchase foreclosed properties and the public perception and acceptance of the entire home financing process.

Personally, I think that’s like looking at an elephant and describing it as made of Ivory. It’s unquestionably part of the problem but, although it’s not a positive development, its impact should really be transitory and relatively minor. The real problem is still a combination of economic fundamentals and lack of consumer confidence.  

A strong move-up market is the key to any recovery and we simply won’t see that until there’s more optimism about our economic future and the first step to effecting that change is for the political parties to stop bludgeoning each other to death with gloom and doom assertions about debt, deficits and the economy. It may be an effective path toward gaining or retaining power but it’s forcing the public deeper into their financial foxholes and dramatically delaying the possibility of a recovery.

The truth is that any changes that occur after the election will likely be relatively minor. Sadly enough, our problems won’t be dramatically improved if we manage to trim a 100 billion or so here or there from the budget or elect to maintain our current tax levels.  However, the simple lowering of the political thermostat may actually offer some degree of relief.

Quite frankly, in past recessions when the political outcry was considerably more restrained the availability of mortgage rates as low as those we have now and the opportunity to acquire homes at fire sale levels would have been enough to jump start the economy. It’s confidence in the future that we are lacking. And that extends to all facets of our financial environment.

I know that explanations and observations like this won’t please any technically oriented readers but markets are as much about “crowd psychology” as they are about yield curves and tax breaks.

Let’s hope that we can lower that thermostat quickly enough after the election to improve the retail climate for the holiday season.

Real Estate Related Myths

We live in the era of the internet and the 24 hour news cycle and the combination of the two can either be an amazing blessing or a genuine cause of concern. On one hand, we certainly get information quickly --- on the other hand the actual source of that information is getting harder to determine and the quality of the reporting is becoming more and more questionable.

It’s no longer possible to assume that what you see in “print” is accurate and honest. It’s unfortunate but articles from secondary sources might very well contain carefully researched and thoroughly vetted information but they could just as easily contain conjecture or deliberate misinformation that’s being disseminated for reasons completely unrelated to the subject at hand. 

At the moment, there are two major myths involving the real estate industry that the National Association of Realtors is working hard to refute.

The first claims that the “Cap & Trade” energy bill that’s working its way through Congress will require home sellers to obtain an energy audit and retrofit their properties before they can sell their home. The reality is that the bill only requires new construction to be “energy-labeled” and actually prohibits states from requiring new ratings when a house is resold.

The second myth claims that the new health care bill contains a transfer tax on home sales. The truth is that the bill does impose a 3.8 percent “Medicare tax” on some high-income households with investment income. However, the tax, which goes into effect in 2013, doesn’t even specifically apply to real estate.

It’s a tax on “investment income” that will only be applicable to households with an adjusted gross income of more than $250,000 ($200,000 for individuals). Moreover, courtesy of the capital gains exclusion rule, the tax would only apply to real estate if the net proceeds of a home sale exceeded the exclusion amount of $500,000 ($250,000 for individuals). Even then, it would only apply to the portion that exceeded those levels. Sadly, that’s a threshold that few people need worry about in our current market.

These myths have obviously been promulgated by those specifically opposed to either the energy legislation or the health care bill but the reason that National Association of Realtors has been working hard to refute their claims is because the strategy only adds to the uncertainty and confusion about the marketplace and can potentially retard an already wobbly housing recovery. 

Why North Scottsdale doesn't get quite as many Canadian buyers ....

In recent months, we’ve been regaled with stories about how Canadians have finally surpassed Californians as the primary out-of-state buyers of valley real estate and it’s easy to understand why that might be the case.

After all, our receding housing prices, their strong dollar and the winter temperature differential make for an awfully compelling rationale for buying here. In fact, although it might be a little unsettling for us to realize, they probably look at buying here the same way we used to look at opportunities in Rocky Point (Puerto Penasco).

The fact is that the members of Helene’s Team saw this trend developing more than two years ago and we began an extensive outreach program to create referral relationships with Realtors in such Canadian cities as Winnipeg, Vancouver, Calgary and Edmonton. However, while the results have been positive and while we certainly get our share of attention from our northern neighbors, there is no question that other parts of the valley have had much greater success than North Scottsdale in terms of finalizing sales.  

The reasons are really quite straightforward. At the top of the list is the cost of housing in our area and that’s followed closely by the limited availability of financing and the costs associated with it. 

The price issue is largely the result of the fact that most Canadian buyers are either looking for second homes that will only be used a few months out of the year or for rental property that will be easy to keep occupied consistently.

Either way, the East Valley cities generally offer many more interesting opportunities. Not only were their prices lower than ours to start with, but they have actually dropped more significantly. Moreover, those towns are also home to a huge pool of potential renters who were, until very recently, homeowners themselves.

Then there’s the fact that it’s very hard and very expensive for Canadian buyers to obtain financing and that often limits their selection to what they can afford to buy for cash - a fact that generally precludes consideration of the higher priced North Scottsdale market.

This problem is the result of many lenders concluding they needed to limit their lending practices to absolutely risk-free bullet-proof situations (i.e. the kind that don't actually exist) and electing not to offer financing to Canadians because they have not established "U.S. credit" or by requiring that they pay much higher origination fees, settlement costs and even asking that they set aside six months of "reserves" (monthly payments) in a separate US based account.

Unfortunately, this appears to be another one of those counter-productive policy decisions we’ve seen lenders make in the last year or so. By adopting these restrictive policies, they are effectively saying "no thanks" to one of the better resources we have for extracting ourselves from this morass.

Of course, they’re not alone in fostering this situation. Canadian Lenders will not lend on US property either. However, in their case, it’s because they are worried about their unstable neighbor to the south. That I understand.  

Fortunately, the North Scottsdale market is not as dependent on this type of buyer traffic as other areas might be.  However, we do get our share and, in fact, have often been able to put together transactions by having Canadian buyers  borrow against their own homes so that they can purchase here for cash. 

Appraisal reforms are being reformed!

In May of 2009, the Federal Housing Finance Agency (FHFA), and the State Attorney General of New York, promulgated the Dodd-Frank Act which was designed to protect the independence of appraisers and offer additional protection for consumers.

The act required that Mortgage lenders use third party Appraisal Management Companies to do their appraisal and prohibited lenders from having any conversations with the appraiser during the process.

As well intended as it was, the regulations caused delays in the process because of the addition of the AMC middleman, forced independent appraisers to align with an AMC, and drove up appraisal costs. It also drove most experienced appraisers from the market as the AMC’s found they could hire inexperienced help at a lower cost and boost their bottom line by doing so.

In a rare instance where common sense seems to have prevailed, the Dodd –Frank Act will be fading from the scene  effective around October 21^st and …..

 Fannie Mae or Freddie Mac will now be able to accept any appraisal report completed by a selected appraiser or paid by a mortgage lender

Lenders will be required to pay agents at market rates

Loan originators will be subject to state and/or Federal laws that prohibit them from making payments, threats or promises to influence the report

                                                                                                 --- Helene 9-20-2010

Economic panel says recession ended in June 2009

According to the Associated Press, the longest recession the country has endured since the Great Depression ended in June 2009, atleast that's what the National Bureau of Economic Reseach declared this this morning. 
This panel of academic economists based in Cambridge, Mass., said the recession had lasted 18 months. It started in December 2007 and ended in June 2009. Previously the longest post World War II downturns were those in 1973-1975 and in 1981-1982. Both of those lasted 16 months.
This is nice news, I presume, but there is an obvious distiction between the technicalities of academia and the practical realities of life. I will happily concede that we've crossed some technical barrier if they will now explain what that means for the economy in general. Teh recession my be over but when will the recovery actually begin - not the technical recovery - the one where people aren't afraid to spend again and aren't paralyzed by every negative suggestion from a pompous media paid prognosticator.