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Wednesday, July 05, 2006

RE: A Look At Arizona

Arizona Central often carries detailed articles about local real estate. The market there has been very hot, but in some places the latest developments seem to have been sold largely to flippers. I know people were laughing about Queens Creek last year.

This particular article has some anecdotes, and this one in particular seemed almost emblematic of such areas:
When Titus and Angel Metzger paid $135,000 for their 1,480-square-foot Maricopa home in July 2004, they never envisioned 2005's run-up in prices.

When they refinanced their house into a $174,000 loan, they couldn't have imagined 2006's market cooling.
They've been trying since January to sell their corner-lot home in time to buy a bigger new home in Maricopa.
They have gradually whittled their original asking price of $269,000 down to $229,000.
Ironically, builder D.R. Horton has slashed the price of the new 2,200-square-foot home they want from about $300,000 to $215,000, cheaper than the smaller, older home they're trying to sell, and offered a $10,000 down payment if they finance through the builder's preferred lender.
They've already put a $5,000 deposit down on the new home, and may have to default on it. There you have it. The buy, the cash-out refi, the desire to move up, the inability to sell and the discovery that they are being undercut by the builder. Elsewhere in the article it says that if they manage to sell for the $229,000, they'll only clear $30,000. That means that somewhere since the last refi they must have taken at least another $10,000 in equity out, even allowing for buyer credit, commission and fixup expenses. They probably got a home equity line, and used some of it to put down the $5,000 deposit on the new home, and spent some. The builder will most likely be adjusting its sales figures on this one. My guess is that those seemingly excellent new home sales figures from last month will be adjusted downward....

There's another example of the current dynamic in the same area in the article:
Cool down. Warm up.

It doesn't matter much to investor Dana Byron, as long as any downturn doesn't become so frigid that he can't find occupants for his seven rental homes, including five he bought in May in Maricopa, Queen Creek and the Santan area.
He recommends sound money management to cover an unexpected crisis like sudden repairs, finding quality tenants, and not fretting over the little things like collecting rent that is lower than monthly mortgage payments. "You can't be upset you lost $200 on a rental when you made $10,000 in equity," he said.
$10,000 in equity in a month? Not very likely! If he's running a monthly cash-flow deficit on some of these houses he's really living off the equity by drawing on lines of credit. How long will that last? The article says he bought his first in 2001, so he did have some solid gains. But you just know he drew on that equity to buy those 5 houses in May. No doubt he was an answer to some prayers when he decided to buy in May! Hopefully he sold a few for a profit earlier.

It's extraordinarily difficult to divine the dynamics of these "hot" markets from looking at statistics alone, but it's like dominoes falling. Acre after acre of developments have been sold in this merry-equity-go-round, and now the apparatus is grinding to a halt.

Ziprealty has listings by many of these neighborhoods in the Greater Phoenix area, and I've been following them. Queen Creek is up to 2,351 single-family houses for sale. Of those 1,148 have been reduced in price. For several months in early spring it was hanging at about 1,900, and about a third of those were reduced. I don't know when the numbers will stop swelling, but they haven't yet. Tonight Ziprealty showed 50,079 homes for sale in Greater Phoenix. For comparison see this March post by Mish at Global Economics.

Arizona State University has good real estate sales information for this area. In May 6,870 sales were recorded for Greater Phoenix. Year to date sales are 30,870, so there's about 8 months of inventory on the market. Look at recorded sales in May compared to single family, townhouse/condo listings now:
Glendale 575 sales and 1,914 listings.
Mesa 790 sales and 3,460 listings.
Chandler 485 sales and 2,541 listings.
Surprise 275 sales and 2,313 listings.
Sun City 120 sales and 537 listings.
Sun City West 45 sales and 426 listings.
Goodyear 125 sales and 1,113 listings.
None of the markets listed in ASU's summary had higher sales than a year ago, and most had significant drops. There's been a significant pickup in sales since April, but it doesn't look like it will be enough to stop the rise in inventories. ASU will have their June report out next week, and I'm waiting for it with great interest.

Nationally, I am guessing that new home sales in the second quarter will end up really hurting due to cancellations from people unable to sell their current homes, even while home sales continue to show stronger owner-occupier activity than last year. The thing is, there are bargains out there one way or another in most areas compared to a year ago. I have recently heard that builders in some areas are offering 8-9% commissions plus bonuses to realtors. They have to move product to maintain cash flow.

See this:

Commercial RE rocks.

No need to applaud, really... Well, if you insist....
From your link
David Lereah, NAR’s chief economist, said fundamentals are improving with tightening vacancies. “Rent growth in commercial space is gaining traction, although there is some softness in part of the retail sector,” he said. “Commercial real estate remains a bright spot in the economy, but there are concerns over energy costs, rising interest rates and slower-than-expected job growth which could dampen future demand.”

Lereah is mush-mouthing it. We have a very strong economy right now, but everyone in the business knows that slower consumer RE is going to be a drag on it in the future. That doesn't mean that commercial RE isn't a good investment currently - it just means that you have to know the environment and not overextend yourself. No one should buy RE if they are going to be facing a negative cash flow in the foreseeable future, either.

The two sectors are not unrelated.
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