The Information Market's Founder, Leading Housing Data & Trend Expert, Tom Ruff's Look at Housing & Trends for April, 2010
"Buy when there's blood in the streets, even if the blood is your own." Baron Rothschild
Home values in Phoenix metro may fall again because of 'shadow inventory':
Foreclosures hit record in March for Phoenix area:
I love Catherine Reagor’s approach; she works hard, she’s honest, she puts her heart and soul into her work, and she’s open to differing opinions. In the truest and finest sense of the word, she is a reporter. So, when you read the bold headlines linked above; remember, she’s doing her job, she’s gathering information and opinions, and she’s reporting them. In a dynamic real estate market as ours, there is always going to be someone on the other side of the opinion aisle. The Book of Fair doesn’t require the journalist to be correct all the time; it only requires the voicing of differing opinions. If you want to know the general public’s sentiment, one has to look no further than the comments section below each linked article. Regarding the Shadow Inventory article linked above TakeFive commented, “For those investors who tripped all over themselves to buy, may find that they jumped about two years too early, and will in fact aggravate the problem before long as they, themselves, can’t hang on,” and the polling readers responded with a resounding 62 thumbs up and only 5 thumbs down. As for me, I respectfully disagree with the report as well as the majority of its readers, to me, their opinion seem illogical.
Investors In Our Marketplace:
Let’s take a short walk back in time to early 2005 and take a look at another article in the Arizona Republic written by Catherine Reagor and Glen Creno entitled "Gambling on Housing". This article, as in her latest piece spoke of investors in the marketplace and how their presence could have a negative impact on our housing market. In March of 2005 17,016 homes were purchased in Maricopa County: 5,712 or 33.6% of those buyers were either from out of state or stated their intention to rent and not occupy the property. A closer look revealed 60% of all out of state buyers in March of 2005 were coming from California. California investors we’re getting on planes, viewing properties from buses, and buying as many houses as they could with little or no money down, and still making it home in time for dinner. When that article hit the newsstand in February 2005 the reporters and myself were quickly attacked, it was concluded our numbers were overstated and our interpretations misguided, we were thrown under a bus load of speculators. The commonly shared opinion in 2005 and 2006 were expressed in the following words from a popular blog, “It is by now hard to tell when the paper is actively campaigning for some covert purpose of its own, and when it is merely badly informed or poorly thought out.” Although both the 2005 article and the 2010 article dealt with investors and out of state buyers in our market place, I agreed with the 2005 article as strongly as I disagree with the 2010 article, in both instances; my opinion was centered with a thin minority. My hearing isn’t very good, so I’m quite comfortable being told I’m wrong; when judging opinions, I prefer history to label right and wrong. I can hear the grumblings now, oh, you’re a MLS guy, you just keep saying the same thing, it’s always a great time to buy real estate. No, I don’t. I’ll repeat what I’ve always said, purchasing real estate is not about price, it is about value. It would be great if every home was owned by a family with a couple of kids and a couple of pets rescued from the shelter, but let’s be cognizant of one fact, fortunes are made in real estate, and those fortunes are born in times like these. The investors of 2005 who were “Gambling on Housing” are not the same investor “Banking on Housing” today. As always, hold my feet to the fire, we’ll revisit this piece in the next year.
Why I believe what I believe:
Today the percentage of buyers from out of state or buyers who intend to rent their property is 35.4%, slightly higher but very similar to the 33.6% reported in 2005. The volume numbers of course are much lower, 8657 monthly sales today compared to 17,016 in March 2005. So now the question, if I thought investors and out of state buyers were a concern in 2005, why wouldn’t slightly higher percentages be a similar concern in 2010? There are some big differences, let me get started. The volume of investors is half of what it was in 2005. Home prices are 50% below their 2006 peak. The investor today is looking at income and cost models in addition to comparable sales when determining values, supply and demand are charted and referenced. The evaluation models used today are far more sophisticated as is the data being plugged into these models. The home builders are practically out of play or at the very least sitting patiently on the sidelines; in 2004, 2005 and 2006 we had 100,000 new homes built. Today, more buyers are coming from the Midwest and Snow Belt as opposed to California, purchasing from a totally different perspective as to the value of a home and what a house should cost, and, they’re buying with cash. 58.4% of all investors and out of state buyers are playing with their own money, real money. Buyers who buy with cash have 100% equity, and 100% equity means options. Cash buyers don’t get foreclosed on and can wait longer for the market to recover. Current inventories of rental houses are available in limited supply. We’re seeing a game of “musical houses”, homeowners are leaving their foreclosed home and renting a similar home with lower monthly payments, but still affording rental income sufficient to provide a suitable rate of return for the investor. One final caveat for the cash buyer when he does choose to sell, they will not have to rely on conventional financing; they will have the option of a seller carry back or agreement for sale.
"So let's leave it alone.
We can’t see eye to eye,
There ain’t no good guys,
There ain’t no bad guys.
There’s only you and me
And we just disagree.
This bigger person thread where it’s okay to “agree to disagree” thing really isn’t working for me. I’m more of a God Bless you Catherine Reagor kind of guy. I know words are a dime a dozen but I also know a picture paints a thousand words so here goes, my final shot. If we take a look at the most respected and unbiased index in the market today, the Case Schiller index, and put trend lines on the index from 1988 through 2001 and 1988 through 2002, then extend those lines to today, we clearly see a market that overreacted in both directions. When others say there that prices will fall another 20%, I say we’re already 15% below a normal market. The graph below will clearly demonstrate the effects of the California investor in the market in 2005 as well as the thoughts of current investors and why they are buying. For Joe the prospective buyer, take a page from the investor’s notebook, eventually the blue line will return to the projection lines. If you buy responsibly and stay within your means, time will most likely confirm a wise decision.
March numbers came in as expected. In early March we projected record foreclosures, in April we’ll see a dramatic drop, it is still obvious, month to month foreclosure numbers will swing dramatically. Predicting the next month is fruitless, but usually by the tenth of the month we can tell what the present month has in store. The loan modification program has gone from a buzz word for hope to the punch line of jokes and is now being teamed with the words failure and deceit. We’re seeing old school ways to finance, family helping family to seize the day and seize the moment; more and more parents with established equity and credit are purchasing homes for their children, as their children walk away from their existing mortgages into a similar or nicer home with lower payments, with mom and dad’s name on the deed.
Blood In The Streets:
The link below provides an opinion I strongly believe in. The writer states, “This is contrarian investing at its heart - the strongly-held belief that the worse things seem in the market, the better the opportunities are for profit.” http://www.investopedia.com/articles/financial-theory/08/contrarian-investing.asp
With that thought in mind, I’m going to buy some home builders stock and put it in a box, and take a look in five years.
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