Real Estate Information Archive

Harvey Mackay's Column This Week

Giving thanks for heroes

November brings two remarkable holidays: Veterans Day and Thanksgiving. I thought of both when I came across the touching story of the creation of "Taps," the tune that gives me a lump in my throat and usually brings tears to my eyes.

The song dates to 1862 during the Civil War, when Union Army Captain Robert Ellicombe was with his men near Harrison's Landing in Virginia. The Confederate Army was on the other side of the narrow strip of land.

During the night, Captain Ellicombe heard the moans of a soldier who lay severely wounded on the field. Not knowing whether it was a Union or a Confederate soldier, the captain decided to risk his life and bring the stricken man back for medical attention.

Crawling on his stomach through the gunfire, the captain reached the soldier and pulled him toward his encampment. When the captain finally reached his own lines, he discovered it was actually a Confederate soldier, but the soldier was dead.

The captain lit a lantern and suddenly caught his breath and went numb with shock. In the dim light, he saw the face of the soldier. It was his own son. The boy had been studying music in the south when the war broke out. Without telling his father, the boy enlisted in the Confederate Army.

The following morning, the heartbroken father asked permission of his superiors to give his son a full military burial despite his enemy status. His request was only partially granted. The captain had asked if he could have a group of Army band members play a funeral dirge for his son at the funeral. The request was turned down since the soldier was a Confederate. But out of respect for the father, they gave him a single musician. The captain chose a bugler.

He asked the bugler to play a series of musical notes he had found on a piece of paper in the pocket of his son's uniform. And thus, the haunting melody we now know as "Taps" used at military funerals, was born.

Here are the words, which I find so appropriate for these November holidays:

Day is done, gone the sun
From the lakes, from the hills, from the sky.
All is well, safely rest.
God is nigh.

There are more verses, but I think you get the drift. Every day is a new day. And no matter how bad things seem, there's always a ray of hope here in America. We, as Americans, have weathered every kind of storm and managed to prevail. All will be well.

The reason? We are an optimistic people, able to see the glass as half full.

The Pilgrims toughed out awful conditions, unsure of what might lie just 100 miles to the west. They found a way to coexist with Native Americans, and celebrated their harvest not knowing what the coming winter would bring. These folks were not just hardy, they were heroes.

Then, through the Revolutionary War and the following years of growing pains, the Civil War demonstrated just how divided a nation can be—or in the case of Captain Ellicombe, how divided a family can be. Yet somehow, we recovered and became the most powerful, most amazing nation in the world.

As a business owner, I can't imagine this kind of success anywhere else. Many of you know my story: bought a small struggling envelope company at age 26 and worked as hard as I could to make it a success. We are close to our 50th anniversary, and despite market turns and any number of threats to our survival, we have not only survived, but thrived. Why? Because we are also optimistic.

We have every reason to remain optimistic. If I've learned anything about American workers, it is that they want to succeed as much as their employers do. They take pride in their products and services. They see hard work as a badge of honor. They are resilient when challenges present themselves. They are my heroes. They are the reason I can stay in business and prosper. When day is done, all is well.

Mackay's Moral: If we pause to think, we'll have cause to thank.

November 12, 2008

While no one has a crystal ball, as agents we all have access to valuable data. And intelligent interpretation of this data leads to truth about local markets. Truth is a process of discovery. I have found that sharing market data on my blog with anyone who cares to read it has created a conversation about the market (and) a collective intelligence, which leads to greater understanding for anyone who reads. Though we may not have fully foreseen the enormity of the financial crisis that we are now in, we can make sound decisions moving forward to help speed up the process of recovery. People need to know the truth about current market conditions so that they can make intelligent choices. Our industry needs to drop the spin and explore the truth, no matter how difficult that may be.

See below link for current Arizona Market Statistics:

http://www.makingazhome.com/links.asp

Real Estate Market January 2008

In-Depth Analysis January 2008 Market-at-a-Glance The Market-at-a-Glance section contains an overall summary of the trends described in our detailed articles. A recap of the current market indicators are as follows: 1. Resale Listings – 54,513 a. This has been the second month in the past eleven with a decrease in the number of resale listings. The decrease from November to December was 2,237 (3.9%). The trend of this metric shows that listings have been increasing for the past 30 months. The December decrease fits the normal calendar cycle. 2. Resale Sales – 3,412 a. Resale sales volume is down from this month in 2006 by 1,981. b. Resale sales volume is down 3,137 sales from this month in 2005 (the Decmeber 2005 figure was inflated by speculator activity). c. Resale sales volume is down 4,490 from this month in 2004 (the December 2004 figure was very inflated by speculator activity). d. Resale sales volume is down 2,945 from December 2003. e. Resale sales volume is down 2,528 from December 2002. f. Resale sales volume is down 1,054 from December 2001. 3. Resale Sales Price - $229,800 a. The median December sales price is down by $2,700 from November 2007. b. The median sales price has declined $25,200 in the last five months. c. The median sales price is $30,200 below the September 2005 level. d. The appreciation rate for the last twenty-seven months (September 2005 to present) is a negative 8.6% on an annualized basis. 4. New Home Market a. The number of New Home specs in December decreased by 104 from the November count to 3,739. The record level was in October 2006 at 4,692. Prior to February 2006 the record was 2,400 homes. b. The number of new home subdivisions selling dipped for the second time in the last six months - down by 11 to 1,102 (the largest number ever recorded prior to 2006 was 813 in May 2003). The spec inventory remains far above norm. That level is currently about double the level that has historically been healthy for our market. What will it take to get the inventory level back into a normal range for our market? Sales have now been below the 2002 level for seven months. I believe that a major portion of the drop in sales from the 2002 level can be attributed to three factors: 1. Potential buyers waiting to be able to sell their homes 2. Buyers concern about the magnitude and timing of the market price correction 3. Tightening in mortgage qualification criteria. This is not true of the drop from 2004 - 2006 which can be almost totally attributed to drastically reduced speculator buying.

Markets Adjust Nationally

The National Association of REALTORS® (NAR) reported in late September that existing homes sales fell in August, caused in large part by recent adjustments within the mortgage industry. The overall national market for existing homes slowed 4.3 percent in August. NAR still anticipates close to 5.5 million units to be sold in 2007, which is 12.8 percent below last year's pace for existing home sales.

On September 28th, the Wall Street Journal reported that the thirty year conventional, fixed rate mortgage was averaging 6.42 percent, which is up from 6.34 percent earlier in the month. Still, NAR president Pat Combs explains that today's mortgage picture is getting better. "Mortgage interest rates have been declining and loan availability is improving,” she said. “Movements to enhance the FHA loan program and to raise the limits for conventional financing could provide additional relief, and it looks like the worse of the mortgage availability problem is behind us. The abundant choice of homes is permitting buyers to better negotiate price and terms. There are good opportunities in the market now, especially for first-time buyers.”

The national median home price for all types of housing was up .02 percent from this time a year ago, to $224,500. The median is the typical market price where half of the homes sell for more and half sell for less.  "Price gains in the Northeast and Midwest were largely offset by a decline in the West, while medial existing home price in the South was down slightly, demonstrating that all real estate is local," Combs said.
 
 
Advice for Home Sellers!

Competition for qualified buyers is greater than it has been in years past, but there are still buyers out there who are willing, able, and interested in purchasing your home! If you are realistic about what it takes to sell in a buyers market — and you are willing to meet the buyer in today's market — then success can be yours! Here are a few tips to make your home stand out from the crowd:

Pricing - Price your home realistically.  Remember, buyers are comparing your home against all others and are looking to stretch their dollar. By pricing your home to sell, you end up saving time and money in the long run by keeping your home from being shop-worn and overlooked.

Home Inspection - How does your home stack-up against new construction?  Pre-existing homes often require more effort to maintain.  By ordering a home inspection and fixing any known defects, buyers can be confident in what they're buying.

Incentives - Buyers love incentives. With larger housing inventories, incentives can be the deciding factor between your home and the competition.  Consider offering a free home warranty, a carpet allowance, or assistance with closing costs.  Incentives don't have to cost a lot to be attractive.

By offering value, you attract buyers and enhance your property's desirability.  If you are thinking of selling your home, please contact us for a current market analysis and marketing consultation.  There is no obligation for these services.

http://www.brookings.edu/papers/2007/10_mortgage_industry_downs.aspx

The Great Capital Inflow into Real Estate

Throughout the 1990s, the investment community had largely considered real estate undesirable because of its falling rents, occupancy rates, and prices; so investors shifted most of their attention and funds to stocks and bonds. This helped launch a record price rise in world stock markets. Soaring stock prices drew money away from real estate into stocks until the Internet stock bubble burst early in the new century.

Overnight, real estate morphed from a pariah among investors to the major viable and easily accessible way to invest funds, since stock markets were plummeting in value. The NASDAQ composite index fell over 70 percent in value from its 2000 peak in two years, and the other major indices also declined sharply. But real estate investment trust (REIT) stock prices started a steady climb as money flowed into both residential and commercial property markets.

This money came mainly from a global over-supply of savings from rapidly developing nations like China and India, from newly independent Eastern European nations just returning to market economies after almost a half-century of Soviet domination, from soaring profits in oil-producing states like Russia, Saudi Arabia, Venezuela, and Iran, from zooming corporate profits in the U.S. economy, from investors borrowing money at almost zero interest in Japan and investing it elsewhere at higher rates and from a variety of other sources. A fundamental paradigm shift took place in the attitude of world financial institutions and investors toward the relative desirability of real estate – especially commercial properties – as compared to other asset classes.

The Impacts of Securitizing Real Estate Finance

The expansion of a financial technique known as securitization helped to encourage the change in attitude toward real estate. Formerly, mortgage lenders often held onto the entire mortgage until it was repaid. But under securitization, lenders put many such mortgages into a single pool, dividing the interests into several different “tranches.” With differing yields and access to mortgage repayment flows, tranches offered differing degrees of risk. Mortgage repackagers could sell off tranche pieces to other investors, spreading the risks of any one mortgage among many lenders. This technique reduced the risks and allowed for the expansion of world capital available to real estate. The globalization of capital markets also aided the flow.

Securitization also generated more private mortgage lenders and packagers who were not covered by extensive federal regulations. Residential mortgage-backed securities issues by private labels rather than federally regulated agencies accounted for $135 billion, or 21 percent, of all such securities issued in the first quarter of 2003, but rose to about $320 billion, or 56 percent of the total issued, in the fourth quarter of 2005. Private label issuers were more likely to engage in reckless subprime lending with extremely easy credit terms for subprime borrowers. So their expanded responsibility for residential mortgage lending increased the risks of such lending through 2005.

Securitization of real estate debt also created great uncertainty about who would be responsible for absorbing losses or working out repayment problems if borrowers were unable to pay on time. The actual sources of capital for any one loan were so scattered among multiple lenders, each with a relatively small piece of each total loan, that no one was certain who would bear the costs for defaults or delinquencies. The massive amount of securitized debt outstanding had never been subjected to a large-scale repayment crisis; so past experience was not much of a guide.

Effects of the Massive Capital Flow into Real Estate Markets

As capital poured into real estate, especially after 2000, it generated a worldwide upward movement in real property prices. This was most evident in housing prices, not only in the United States, but throughout the developed world – except in Japan and Germany. According to Freddie Mac’s home price index for 381 U.S. metropolitan areas, based on repeat sales of the same properties, housing prices had risen 46.5 percent in all of the 1990s, but they then rose almost another 59.8 percent in just the first six years of the new century.

This worldwide inflow of financial capital into real estate was a crucial factor influencing U.S. housing prices and the general boom in housing production after 2000. As the value of housing soared, U.S. homeowners realized they had more equity in their homes; so many borrowed against that equity or refinanced their homes at falling interest rates and used some of the acquired funds to stimulate their general consumption. That helped keep the entire U.S. economy booming. It also led to bigger U.S. trade deficits with the rest of the world as we imported more than we exported, and paid for that deficit by issuing Treasury securities and other I.O.U.s to foreign investors and governments.

Much of that gigantic pool of capital from around the world is still out there looking for something in which to invest, and investors are still willing to consider real estate – including American real estate. The outcries of Wall Street that there is a capital crisis are exaggerated – there is only a shortage of confidence in some of the instruments that Wall Street has invented to capture some of that capital. Though the resulting uncertainty has spread to banks and other financial institutions, plenty of capital is still out there and looking for a home.

The Current Overall U.S. Housing Market Situation

In both 2004 and 2005, the U.S. housing industry built 2 million new housing units, including mobile or manufactured homes. Yet most demographers believe our economy actually needs only about 1.3 million new housing units to supply shelter to all new households formed each year, plus 200,000 to 400,000 new units to replace obsolete older ones. This means the homebuilding industry was reaching into future demand to support its high levels of new housing production in 2004 and 2005. Four previous high-level bursts of new housing production have been followed by two-to-five year production declines averaging 37.5 percent. Housing starts have already fallen below 2005 levels by 13 percent in 2006 and 29 percent so far in 2007. So the housing industry’s production decline is not over yet, and will continue through 2008.

Sales of existing homes have also decreased in number from a peak rate of 7.2 million per year in September 2005 to 5.5 million per year in August 2007, a drop of 23.6 percent. However, that does not mean housing prices as a whole will collapse, even though such prices have risen dramatically in the past decade. According to Freddie Mac’s home price index, housing prices in 381 U.S. metropolitan areas rose an average of 46.5 percent in 10 years from the first quarter of 1990 to the first quarter of 2000, then soared an average of 59.8 percent in the six years from the first quarter of 2000 to the first quarter of 2006. From early 2006 to the second quarter of 2007, home prices continued to rise in 314 of those metropolitan areas, or 82 percent, by an average increase of 7.3 percent. In the other 41 metropolitan areas, prices dropped by an average of 3.4 percent. The areas with continued price increases included 24 of the 29 largest metropolitan areas in terms of population.

As of September 2007, National Association of Realtor data show that the median price of existing homes sold was down only 4.2 percent nationally vs. one year earlier, though down 8.8 percent in the west. These data show that prices of existing homes are not collapsing, despite large decreases in both new home production and sales of existing homes.

Why is that happening? Most American home owners do not have to move. So when prices start to fall below what they think their homes are “really worth,” they will simply withdraw those homes from the market and wait for prices to improve. This puts a floor under the prices of most single-family homes. Where overbuilding has been spectacular and many buyers were speculating on flipping the units they bought rather than occupying those units, a price collapse could occur. That is most likely in condominium markets in big cities like Miami and Las Vegas, but probably will not spread to typical single-family homeowner units in most U.S. metropolitan areas.

The Subprime Mortgage Situation

The subprime mortgage market has recently generated the most concern that credit markets may completely seize up and paralyze the economy. In fact, subprime mortgages form a relatively small part of all mortgage originations. They are mortgages made to households with poor credit records at interest rates 3 to 4 percent above normal prime mortgages. Lenders liked them because they had higher interest rates than prime mortgage rates, which had fallen very low in the early 2000s. Borrowers with poor credit liked them because they enabled such households to buy homes when they otherwise could not do so.

But when prices stopped rising and began to decline, as they did in many markets after 2005, subprime default rates began to rise. Since many mortgage-backed-bonds had been based on subprime loans, the conduits floating those bonds had a hard time making their payments to the persons or institutions investing in such bonds. Surprisingly, those persons and institutions included many in Europe and even in Asia who had been attracted by high-interest rates and the prospects of continuing increases in housing prices. Moreover, the conduits creating such bonds were largely unregulated, private firms, unlike Freddie Mac and Fannie Mae, and took many risks by making loans with no down payments, monthly payments of interest only and even no checking of borrowers’ incomes.

Yet among all U.S. residential mortgage originations, subprime loans altogether comprised a cumulative total of under 13 percent from 1994 through 2005, though they rose to 19 percent in the year 2004 and 21 percent in 2005, according to the Mortgage Bankers’ Association (MBA). This means at least 87 percent of residential mortgages as of mid-2007 were not subprime loans, according to the MBA’s delinquency studies.

The serious delinquency rate among subprime mortgage loans remained below 8 percent from 1998 through the third quarter of 2000. Then it rose to between 10 and 13 percent through the second quarter of 2003, and has declined to below 8 percent since the fourth quarter of 2003. Thus, at least 87 percent of subprime home loans had not defaulted as of 2005. True, this is much higher than the serious delinquency rate among prime mortgages, which has remained below 2 percent from 1998 through 2005. Subprime delinquency rates may rise somewhat more in 2008 because monthly payments on many such mortgages will be re-set to higher levels when interest–only periods end or adjustable rates are driven upward. But even then, the vast majority of subprime mortgages are likely to remain fully paid up as long as unemployment remains as low as it is now in the U.S. economy.

The Broader Repercussions of Subprime Mortgage Problems

These facts hardly indicate a credit crisis throughout the economy or even in mortgage markets. But the subprime mortgage problems do glaringly reveal the inadequate mortgage and other credit underwriting standards in practice during several recent years of high-volume, low-interest lending. Subprime mortgage problems make many real estate lenders realize they should have been conducting more thorough underwriting, demanding higher-interest rates and putting more loan covenants into their deals.

Lenders have woken up to the fact that their actual risks were much greater than they had recognized. In response, many recently stopped making any loans until they could better assess the real risks involved. Other lenders raised rates and increased loan covenants. The resulting shock threatened to upset lending activity throughout global credit markets. This fear was encouraged because many complex securitized loan funds contained small portions of delinquent subprime mortgages. If this seizing-up of credit markets became worldwide, that would slow down economic growth everywhere – hardly a desirable outcome.

In response, the Federal Reserve Bank, the European Central Bank, and the Bank of England all cut their discount rates (the rates at which they lend money to banks) and pumped more liquidity into credit markets. Then the Federal Reserve Bank further cut the fed funds rate (at which banks can lend reserves to each other) and the discount rate by 50 basis points each – a dramatic change in past policy. This has seemed to reassure credit markets somewhat, although interest rates and credit terms are almost certain to remain higher than before the subprime mortgage mess – as they should. How long it will take credit markets to recover fully is not yet clear. But investors still have a tremendous amount of financial capital that they must put to work somewhere – there is no basic shortage of money.

The Booming World Economy

The world’s generally favorable economic conditions suggest continued prosperity rather than a collapse of market economies. Western Europe, Eastern Europe, Asia’s developing nations, and Japan are all prospering and growing economically faster than they have been in the past decade. The U.S. economy has slowed down somewhat, but our gross domestic product is still growing and our unemployment rate is very low compared to historic norms. There are large supplies of capital being generated around the world looking for places to invest. Although growth rates in developing nations are faster than the U.S. growth rate, our economy is still regarded as the safest and most politically secure place to invest in the world, despite the devaluing U.S. dollar. This is shown by the recent decline in U.S. Treasury interest rates as lenders fled into Treasuries seeking guaranteed security. These are not the conditions likely to generate a financial crisis.

As noted above, the world’s major central banks have taken steps to pump more liquidity into financial markets to forestall any fears among investors of a credit crisis. The Fed has put billions of additional dollars into U.S. banks, and those banks must lend that money to someone to make it work for them. These actions are designed to offset the feelings of panic generated by the Wall Street purveyors of gloom and doom. Some aid to their borrowers might be justified, but bailing out the lenders even more than we have up to now would create a moral hazard of merely encouraging them to do it again when the next chance appeared.

Is Real Estate’s Boom Sustainable?

Nothing in this world lasts forever, and the recent unprecedented prosperity in housing and real estate markets is no exception. Activity in U.S. residential markets has already slowed down, and that slow-down will probably continue for the next year or so, though it may recover after that. But in commercial real property markets, though interest rates are appropriately rising somewhat, there is still considerable capital looking for someplace to go. Thanks to the paradigm shift among world investors about the basic desirability of real property as an investment asset class, much of the money that has moved into real property will stay there.

Yet the impacts of the tremendous inflow of capital into existing real estate have in some respects undermined its continued attractions as an investment. As competition among investors drove prices of existing properties up and their yields down, more investors have begun to consider building new properties rather than buying existing ones. They think they could get higher initial yields from new and “greener” or more high-tech properties than from older, more obsolete existing ones, since the older ones had become so expensive and have such low yields. This change in views could start another new development boom like those that have ended so many real estate cycles in the past. That is especially likely to happen if the oversupply of capital keeps borrowing very cheap and interest rates do not rise much. Eventually, such a new development boom would overbuild world property markets and make it less desirable to keep putting more money into them. But that would take several years of booming new development.

So real estate’s boom cannot last forever – nothing does – but it could last a lot longer than it has lasted up to now. There is still plenty of financial capital out there looking for somewhere to go, and there are still plenty of property markets around the world that present good development opportunities. In the absence of some catastrophic world crisis that would upset all forecasts, there is no reason to think we are in the midst of an inevitable credit crisis. Just look at the facts.

www.azcentral.com/arizonarepublic/business/articles/1007biz-catherine1007.html

Resales across metropolitan Phoenix were down again in August, but new-home sales held steady.

It could be a sign that the thousands of speculatively built homes across the Valley are selling while buildersResales across metropolitan Phoenix were down again in August, but new-home sales held steady.

It could be a sign that the thousands of speculatively built homes across the Valley are selling while builders are pulling back on putting up more new ones. Both moves will help the resale market because fewer listings mean less supply.

The Phoenix Housing Market Letter tracked 3,110 new-home closings in August. It was the fifth straight month the figure didn't lose any ground. advertisement 
 
 

New-home prices have dropped since last year, which also is helping sales. The typical new Valley home price shot up to $285,000 during the frenzy of 2005, but this year slipped back to the $255,000 range.

But the report's publisher, housing analyst RL Brown, said based on home-price increases during normal years like 2002 and 2003, the median price of a new home likely should be even lower, in the $220,000 range now.

Another good sign for metro Phoenix's housing market is that listings seem to be flattening.

According to the weekly tally of David Blank of the Freedom Team at National Realty Brokers, the number of homes for sale in the Valley stabilized at just under 57,000. Part of that was due to the expiration of some listings at the end of the month, so next week will be telling.

The uptick in new-home closings and leveling off of listings hasn't helped the Valley's resale market yet. Early counts by real-estate agents show existing-home sales fell again last month.

And Brown is still giving the housing market a "code red" rating, but he can see it turning the corner in early 2008.

New housing chief

Sheila Harris is leaving the Arizona Department of Housing. The well-known housing advocate has been director of the agency since its inception five years ago.

She is firming up her future career plans, which likely will include some affordable-housing development in the private sector. Her contract is almost up, and Harris decided with her youngest child going to college, it was a good time to make a change.

The department's incoming director is no novice to the state's housing issues. Gov. Janet Napolitano has named Fred Karnas Jr. to the position.

Karnas, who recently joined the housing agency as administrator of its new Center for Housing Affordability and Livable Communities, began his career working for the Phoenix task force on homelessness. He then went on to become the first executive director of the Community Housing Partnership, a non-profit housing corporation.

In 1995, he joined the U.S. Department of Housing and Urban Affairs and worked on projects across the country.

Condo craze reverts

Metro Phoenix now leads the country for condo "reversions."

Developers jumped on the condo-conversion craze in the Valley a few years ago, snatching up apartment complexes to turn them into for-sale condos.

But the demand for those condos slowed with the rest of the housing market. Now, more than 2,946 condos are being turned back into apartments in the Phoenix area, according to Real Capital Analytics.

Baltimore is second in the country for condo reversions, with 1,433 units going back to the rental market. Orlando is third, with 1,233 units.

The figures were published in the new PriceWaterhouseCoopers Korpacz Real Estate Investor Survey.

Not all condo conversions in the Valley have failed, however, and some developers are trying valiantly to sell the projects. People with big signs, and often wearing eye-catching costumes, still can be seen promoting condo-conversion projects on many Valley  are pulling back on putting up more new ones. Both moves will help the resale market because fewer listings mean less supply.