2011 - July-August

Well, we have had an impressive last couple of months in the Phoenix real estate market. The volume of single family homes that have been sold since May has rivaled the “bubble” years of ‘05 – ‘06.

According to the current ARMLS data, there were 9,963 closed residential units in May of 2011, which was an increase of 341 units from April. June is even better with over 11,000 homes sold. In fact, we even broke a single day record on June 30^th when there were 2,216 properties closed. This total beat the previous record, which was set on June 30, 2004 by 57%.

These are very “good” numbers. In fact, the sales have been so strong that I could almost say that we are in a “seller’s market.” However, before we get too excited, I also have to share the “bad” numbers so we remain “fair and balanced.”

At the top of the market in 2006, the median home price in Phoenix stood at mighty $253,000. Today the median price home is down to below $120,000. And, as a point of reference, the median price for a home in the greater Phoenix area in the year 2000, was $125,000. The $120,000 median price on all resale homes and condos is down 13.7% from last year, with the median falling year-over-year for 11 consecutive months.

Additionally, while we are seeing inventory levels fall for the lower priced homes, the same cannot be said for homes priced at $400,000 and above. In fact, in the last 6 months of this year, 93% of all sales in the valley have been for homes priced below $400k.

We should also keep in mind that, while the improved sales numbers are great to see, they are not that much more than the numbers produced this time last year. And, as discussed in previous articles, the winter buying, which leads to closed sales in May and June, is a common occurrence for Phoenix. It is also common for sales to subside during the hot summer months. Time will tell if that rings true this year, but the current number of pending sales on July 1 were down 7.9% from June 1.

Keeping with the theme of the article, if the “good” represents the increase in sales and if the “bad” symbolizes the massive reduction in medium price compared to 2000 much less 2006, then the “ugly” has to be the fact that of the 11,141 properties sold in June 7,565 were distressed sales. A distressed sale is either a short sale or foreclosure sold by a bank.

Despite all the buying, the average price per square foot for homes sold has now fallen to $81.75. This low number is due to the insane high number of distressed sales that make up the market.

I know that with all the buying it may seem counter-intuitive to think that prices could fall even more as we watch supply drop due to strong demand. However, if we remember that we are in a market where banks are still holding huge amounts of inventory, where shorts sales still take forever and are fraught with problems, where unemployment is going up as opposed to down, and where public sentiment toward housing is still very negative, then further declines are not unimaginable.

Moreover, as we have spoken of in the past, lower prices beget lower prices. The problem is compounded as more people give up on the hope of any help from the government and realize that we are light-years away for seeing 2006 prices again. And, as long as 65% of the homes sold are of distressed sales, then we can expect the trend of falling (or at best flat line) prices to continue.

In a time when overall mortgage delinquencies are double and foreclosures are eight times higher than historical norms, there is not going to be any easy or quick fix to the housing crisis. It is awesome that we are seeing the current level of buying. However, before we get too excited, it is wise to remember the words of Mark Twain when he said "There are lies, there are damn lies, and then there are statistics."

Driving home the point that we are a long way out of this mess is a stat just released by Lender Processing Service (LPS) that shows the volume of seriously past due loans over-shadowed the number of completed foreclosures by 50 to 1. Simply put, there is another tidal wave of foreclosures heading to our shore. So as we celebrate the good news, it is wise to keep it all in perspective, recognizing that while time heals all wounds, it is going to take a lot of time to fix this mess. Lastly, the news out of China and Canada (two countries buying a lot of U.S. housing inventory), is not good as is looks like both countries could be facing their own housing bubbles. Time will tell. Robert Holt, CPDE/SFR of The [HOLT] Group, RE/MAX Sonoran Hills. For more info, please visit www.TheHoltGroupAZ.com or call 623.748.9583 & tell us your thoughts.

Wednesday, 7.21.11

“Real Estate for Real People”

Eat your peas

This past week while speaking at a White House news conference regarding the nation’s debt limit, President Obama said it’s time to “pull off the Band-Aid“ and ”eat our peas.” I found this reference rather interesting especially since Michelle Obama grows snap peas in her vegetable garden there at the White House. What was his statement all about - does the Pres not like peas? After giving it some thought (about a nanosecond) my feeling is that the one who needs to eat his peas is Barack. After all, a recent government report reveals that the federal debt has shot up from 40% of the economy at the end of 2008 to 70% at the end of 2010. The Congressional Budget Office (CBO) went on to state that the debt would exceed the size of the entire economy within 10 years. Moreover, our debt is now bigger than China’s entire economy. That is scary!

The past week President Obama also tried to scare the American people into thinking that if the debt ceiling is not raised then it would be the Republicans fault when the world falls back into a recession that would throw "millions of more people out of work.” What the President has conveniently forgotten is that the Democrats took control of both houses of Congress in 2006, two years before the end of George Bush’s second term. Additionally, Democrats controlled both houses of Congress from 2008-2010, as well as the White House. Furthermore, they still control the US Senate and the White House. It is impossible to ignore the fact that the Democrats controlled Congress during the period of the greatest deficit spending in the history of the world. Remember too, that ONLY Congress can initiate spending. Of course, the Presidents had to approve all of the massive budget bills, which clearly he did (so did Bush II). The President has also forgotten that one of the underlying causes of the crisis was President Clinton's initiatives that required Fannie Mae and Freddie Mac to make mortgage loans to people with no credit or bad credit.

As we all now know, this policy led to massive foreclosures, the banking crisis, the Great Recession and to the devaluation of home prices the likes of which no one has ever seen. And it is a fact that when the Republicans, who were in the minority at the time, warned that Freddie and Fannie were leading us into a disaster, they were ignored by Democrats like Barney Frank and Chris Dodd who defended the agencies. Furthermore, I think the President has forgotten his own words. Case in point is when, as a Senator in March of 2006, he stood on the Senate floor stating the following: “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies.” He went on to declare that the Trillions of dollars of debt “is money that we have borrowed from the Social Security trust fund, borrowed from China and Japan, borrowed from American taxpayers.” He continued his rant with “Numbers that large are sometimes hard to understand. Some people may wonder why they matter. Here is why: This year (2006) the Federal Government will spend $220 billion on interest. That is more money to pay interest on our national debt than we’ll spend on Medicaid and Children’s Health Insurance Programs. That is more money than we will spend on education, homeland security, transportation, and veterans benefits combined.”
He then added, “This rising debt is a hidden domestic enemy, robbing our cities and States of critical investments in infrastructure like bridges, ports, and levees; robbing our families and our children of critical investments in education and health care reform; robbing our seniors of the retirement and health security they have counted on.” At the end of his speech, he left us with this jewel. “Every dollar we pay in interest is a dollar that is not going to investment in America’s priorities.

Well, Mr. President, I could not have said it better myself. However, as has been the case over the last 2.5 years, President Obama is much better at making speeches than he is at backing up his rhetoric. Fact is that when he took office on Jan 20, 2009, the total public debt at the time was $10.6 trillion while the US economy (GDP) was $14.2 trillion. Today the total public debt is $14.3 trillion, and the current US economy (GDP) is $14.8 trillion.

Look, I am not here trying to just bash on Obama. In fact, as those of you who read this column know, I'm an equal opportunity basher of all politicians who just BS their way through office. Don’t get me wrong--I know it's not just Obama or the Democrats, or for that matter, the Fed who have failed the American people. No, the problem is with the Republicans too. They talk tough, but at the end of the day, they haven't managed to do anything to stop the crazy spending or put Americans back to work. After all, it was the hundreds of billions of dollars spent by President George Bush that put us on this path of no return.

The problem that I do have with President Obama is when he now stands in his Ivory Tower telling others it is time to take your medicine or “eat your peas.” Come on, this sort of rhetoric is absurd when it comes from a President that has run up the highest debt known to mankind, and whose policies have bailed out Wall Street brokers, big banks and anyone else who happens to be politically connected. Meanwhile, these same policies have crippled the U.S. economy and left this country bankrupt. All the while, the American people fear for their jobs, lose their homes, and have a rapidly increasing grocery and gas bill.

As I pointed out a couple of weeks ago, we have taken a round trip to nowhere. The stimulus stimulated nothing but Wall Street and the CEO’s of the Big Banks. Was it supposed to stimulate the economy? Weren’t we all told that the massive $800-billion-plus economic stimulus program would shrink unemployment dramatically? Well as a point of reference, when Obama was elected, the unemployment rate stood at 6.6%. Two and a half years under Obama's policies, it is 9.2%.

So as unemployment continues to rise and the economy heads back into recession, the President and Congress argue like 5^th graders. Meanwhile, the obvious answer to the US debt problem is a no brainer--we must cut the spending NOW—but will any of them do it? I doubt it. Worse yet, Big Ben (just as I predicted two months ago), recently announced the possibility of a 3^rd round of QE, even though rounds 1 & 2 did nothing for the average American.

No matter how much the President, the Democrats and the Republicans TALK about fixing the problem, none of them grasp the simple, indisputable nature of this crisis. Quite simply--we as a country have borrowed and spent far beyond our means for far too long. Every economic issue we face can be traced back to too much borrowing--too much debt and too many self-serving cowards running around DC.

Sadly, as many Americans are now figuring out the hard way, one cannot leverage his or her self to prosperity. Well I got news for you – neither can the US Government. If our government does not stop spending, then a collapse is inevitable. And if you think it is tough now, just look to Europe to see the coming attractions. Folks, there is no easy way out! Even Treasury Secretary Timothy Geithner is finally speaking the truth when he stated a few days ago: "It's going to feel very hard, harder than anything they've experienced in their lifetime now, for a long time to come." Notice he kept saying “they” not “we.” However, I guess he is just being honest, since he and the elite will not feel the pain like you and me.

But do you know why Little Timmy is coming clean now? He knows what is ahead. The French, the Russians, and the Chinese along with 40-plus economies that are pegged to the US dollar are all pushing the International Monetary Fund (IMF) to remove the US dollar as the World Reserve Currency, and if that should happen, then hold on to your hat as your standard of living will change dramatically (and not for the better) overnight.

As a reminder--Global Reserve Currencies don’t last forever. Anyone remember the Sterling?

Utopia has a price tag and US Government can't afford it any longer. Unfortunately, because of the cowards in DC, you and I will be eating our peas for a long time--like it or not. And for those that do not see the seriousness of the situation, then read your history and some basic economics. It’s all happened before and the outcome is predictable. And when it comes time to vote, remember the words of John Kennedy: “The ignorance of one voter in a democracy impairs the security of all.” Robert Holt, CDPE, SFR of The [HOLT] Group, RE/MAX Sonoran Hills. For more info or access to archived articles, please visit www.TheHoltGroupAZ.com or call 623.748.9583 & tell us your thoughts.

Wednesday, 8.3.11

“Real Estate for Real People”

Irrational Exuberance

Over the last several weeks I have read one fascinating article after another from some of our local publications (both big and small) that are exclaiming how amazing the current Phoenix real estate market is and how many homes are being sold. In these articles, we are told that the buying is at the same pace we saw in 2005, and we hear from real estate agents who are as giddy as a schoolgirl the night before the big prom.

By the sound of it, one would think that home prices were accelerating through the roof and everyone had tons of equity again. Granted, it is good that the buying has been strong, but I fail to see why there is such exuberance when a blind man can see that we are still in a massive hole. Maybe the digging has stopped (for a while), but the hole is so massive that it is going to take many years for us to climb out of it. While real estate agents might find joy in the current pace of buying, I do not think the family that bought (or re-fied) their home in ‘03, ’04, ‘05, ‘06, ‘07, ‘08 are all that happy, much less exuberant. To me, the exuberance is irrational at best and irresponsible at worst. By the way, the term “Irrational Exuberance” was coined by none other than the former Wizard of the Fed, Alan Greenspan. He used the phrase in a speech in 1996 when he was attempting to warn that the US stock market was overheating. Keep in mind that it was Greenspan’s commitment to a loose monetary policy and his utter disdain for regulations that played a major role in every boom bust this country has seen in the last 15 years. Only a minor amount of research on Greenspan reveals how his policies and views created an environment that led to the massive housing bubble. He not only kept interest rates near 1%, he did nothing to provide oversight of the subprime market while allowing the national banks to run amuck in the highly risky derivatives market.

The term “Irrational Exuberance” is also a title of a book written by Robert Shiller, who is one of the most rational people in the country & is also the one who along with Karl Case, came up with Standard & Poor’s Case – Shiller Home Price Indices. Shiller, who is an economics professor at Yale, is also one of the most respected economists of our time. He is also the same person who recently declared that he foresees housing falling by as much as 25% before we finally find a bottom. He also believes (as I do) that it is highly probable that the US economy is heading back into a recession or worse. However, as I have previously written, I do not think the Phoenix market will fall another 25%, unless the unthinkable happens. What is the unthinkable? A dollar collapse, US dollar removed as world reserve currency and/or run-away inflation. While these events are possible, I am not ready to think they are probable.

What I do believe, is that anyone who thinks the Phoenix housing market is ready to take off is uniformed or delusional or both. I hate to bust anyone’s bubble, but the current level of buying is doing nothing more than helping the market to potentially find a bottom. However, the buying (much of it from investors) is not going to give way to any serious level of home appreciation any time in the near future (years). And, while I too am happy to see that we are eating through some inventory, it will do nothing for the homeowner who is seriously underwater except perhaps give false hope.

Look – despite the buying, the fundamentals that drive appreciation are not there. Buying is part of the equation, but for every home that is sold there will be one going into foreclosure if not today then tomorrow or next year or the year after that. Why, such a dire prediction? Well currently, 2/3 of all Phoenix homeowners find themselves with negative equity and over 200,000 of them are more than 50% underwater.

Remember that one of the many reasons this country has never seen this level of foreclosures is because in previous down turns, homeowners would let every other asset go before letting their home go back to the bank. Was this because people were “better people” or more committed to paying their obligations in the past? I say no. The single biggest difference between the past and now is that in past real estate / economic downturns, homeowners had equity in their home and as such they would fight like crazy to keep the home. They fought not because they were more “moral,” but because the only thing they had left was the home and the equity in it. Now, because this downturn has been so severe, homeowners find that they are just really renters paying the bank. Except in this case B of A or Chase does not pay for the HVAC when it breaks down.

Like it or not there will be many more foreclosures to come as more and more homeowners wake up to the complete futility of paying a mortgage that is twice as much as the home is worth. Remember that a home that has fallen 50% in value has to appreciate at over 100% to get back to a breakeven point.

And when will home prices go up? According to Moody's Analytics, a subsidiary of Moody's Corporation and the same ratings firm that is warning the US Government that our debt is about to be downgraded from AAA, has predicted that the Phoenix housing market will not see 2006 prices again until 2035. Others say it will be even longer.

No matter what your personal opinion is of those that just walk away from their homes, the fact is there are hundreds of thousands more potential short sales and foreclosures ahead. This of course, will continue to place heavy pressure on home values.

What is worse is that the problem of negative equity is not just confined to those that bought from ‘04-‘07. Data shows that many more people re-fied during that time than actually bought. In fact, the ratio of refinancing to buying was at 75% / 25% during the boom years. This simply means that all neighborhoods throughout Phoenix (and the country) regardless of when they were built are being devastated by foreclosures.

And, because prices have continued to fall so much, those who bought in ‘08, ‘09 and even 2010 potentially find themselves severely underwater. Many of the homeowners including those that bought in ‘02 and ‘03 are now having to short sell their homes or they are walking away. Keep in mind that many of the sale price of homes sold today are often less that what they would have fetched in the year 2000.

Adding to the problem is the massive amount of buyers who have used FHA financing in the last 3-4 years. The problem here is that FHA financing only requires a down payment of 3.5% of the purchase price. As we all now know, and what I pointed to earlier in this article, homeowners that are underwater are much more likely to walk away from their home. For those FHA buyers that bought anytime in the last 4 years, there is an extremely high probability that they too are underwater, some seriously.

This situation creates a drag on future prices since even if the homeowner stays in the underwater home and does not walk away, there is no real chance of him/her moving up in the market. Move up buyers are a vital component to a housing market. But the only way most people can move up to a larger home is if they take the equity from the one they are in and then apply it to the new home. No equity means no moving up. The problem is made worse when most of these buyers are not seeing anything resembling a pay increase at their place of work.

Meanwhile, we have a market place where over 30% of the homes being sold are going to investors (many are Canadians, Chinese and others). While this is good in the sense that it eats up inventory, it could potentially be bad if the world economy takes another nose dive and these folks need their money back and decide to sell at the same time.

Of course, as we all know, lenders are not giving loans to the dead any longer and as such, the ability to get financed is tougher than ever. And, with so many homeowners having their credit destroyed via Foreclosure etc., then many would-be home buyers are out of the market for years.

Keep in mind that we currently have historically lowest interest rates and while I am confident that Big Ben will do everything in his power to keep them low, sooner or later, market forces might over take the little guy behind the curtain. And, should rates rise, expect buying to slow and those that can buy will lose buying power. I should also mention that come October 2011, the FHA maximum loan amount will fall from $346K to $271K. With such a sizable reduction in the loan amount, I would think the market between $280K and $350K is going to take a hit. This will have an adverse effect on all other price ranges.

The issues, as pointed out above, along with continued high unemployment, which only looks to be getting worse, is going to negatively impact Phoenix housing for many more years to come. Sadly, these are just some of the problems facing the economy and housing, which will prevent any real appreciation for years to come.

Look, I am very thankful for the buying ( I own a home too and would like to see values go up), but when I read articles or hear other agents that make it sound like happy days are here again, I am reminded of all the other misguided cheerleading we have heard over the last 5 years. Folks, I do not want to rain on the parade, but flat and very low growth is the new normal for housing and the economy. While it may prove to be a good time to buy (as long as you are doing it for the right reasons), it is not time to think that all the problems are solved and we are out of the woods. After all, we have seen this movie before, just ask anyone who bought in ‘08 when they were told “we are at the bottom.” Robert Holt, CDPE/SFR of The [HOLT] Group, RE/MAX Sonoran Hills. For more info please visit www.TheHoltGroupAZ.com or call 623.748.9583 & tell us your thoughts.

Wednesday, 8.17.11

“Real Estate for Real People”

Actions (and lack thereof) have consequences

Two weeks ago in an article about the irrational exuberance we are seeing by some in the real estate industry as it relates to the current pace of home buying, I made mention to the possible US Debt downgrade. Well, since that time, Standard and Poor’s did in fact issue a downgrade, which helped trigger one of the wildest weeks ever on Wall Street.

I, for one, cannot believe S&P actually had the backbone to do what no other agency has ever done! Of course, the reason I am amazed they lowered our rating is not that I do not think it was justified, heck it should probably be even lower. No, I am surprised they did it in the face of receiving unimaginable pressure from the Administration, the Treasury, and Wall Street to keep the status quo.

While S&P (and the other rating agencies) screwed up royally with the subprime debacle, I commend S&P for trying to get this one right. Meanwhile, President Obama has been condemning the action stating S&P had no right to downgrade the good ole USA. His major criticism stems from the idea that the U.S. has a printing press and therefore can never default on principal and interest payments. With logic like that why bother with a debt ceiling? Heck, why bother taxing anyone either.

In fact, if we relied on this sort of thinking, all a rating agency needs to do in order to provide a AAA credit rating to a country’s debt is go through the incredibly difficult work of determining if a country has a central bank, who can print money. (Please note the sarcasm).

Really, if all a country had to do is be able to print money (which ultimately destroys the value of the currency) for there to be no chance of a default, then places like Weimar, Germany and Zimbabwe would have a AAA credit rating. Instead, the government and people living in those two places experienced unimaginable hyperinflation, which destroyed the economy and any resemblance of a quality lifestyle.

I believe Standard and Poor’s is simply trying to wake investors & the American people up to the reality that if this government does not get its fiscal house in order, then we should all get ready for an inflationary death spiral. By the way, much of Europe is experiencing this right now and according to David Walker (former Comptroller General for the U.S.), “The U.S. is only a few years away from reaching the same debt levels that pushed Greece to the brink of ruin.”

Walker recently stated, “With the recent increase in the debt ceilingand continued higher budget deficits at the federal level, the US is on course for its own crisis.” Like Greece, Ireland, Spain, Portugal, Italy and other European nations, we have an out-of-control spending addiction in this country. And the numbers are getting uglier year after year. For example, in 2010 the US spent $1.60 for every dollar it brought in and the Congressional Budget Office (CBO) claims that we are on track to top $1.63 for every dollar of revenue for 2011. As a result, the US is nearing the 100% debt to GDP threshold, which according to some pretty smart economists, this pathetic accomplishment will shave about one percentage point off GDP.

Meanwhile, the GDP for the second Quarter 2011 just came in at 1.3 percent (expect it to be revised downward) and 0.4 percent for the first quarter. That sounds like we are headed to a technical recession to me. Whether we are in a technical recession or not, I believe America is about to pay a very heavy price for the many years of out of control spending.For the last 30 years, it has not mattered who who's been in the White House, nor who has controlled Congress... our so-called leaders / public servants have found countless ways to waste taxpayer money year after year. And, now in the face of the first time ever down grade of US debt, a slowing economy and continued high unemployment, there is zero sign we're going to get off this road to destruction anytime soon. The fact is the debt ceiling debate was a joke!

There were no real cuts to anything and of course all the entitlements were completely untouched. Meanwhile, the politicians get to waste $2 Trillion more taxpayer dollars before we get to watch the train wreck happen all over again in about 16 months when we once again reach the debt ceiling.

A quick analogy of our economy might be to think of it as a massively obese patient who after years of eating poorly and little exercise, is now close to dying. Like the patient, the economy has had a number “heart attacks” over the years, but now we’re rapidly getting to the point where the drugs used in the past are not working anymore. The Quantitative Easing QE1 & 2 (money printing) and the easy monetary policy (low interest rates) from the Fed is like the drugs that doctors use to revive patients who have crashed. At first they work, bringing the patient back to life. But, after repeated use of the drugs and no real lifestyle changes by the patient, the drugs lose their potency. At that point, the patient cannot reverse course. Many economies around the world (US included) are like a very sick patient who is close to dying….but instead of dying the patient is given morphine to ease the pain. Of course, this allows a false feeling that everything is going to be okay. This is how our economy has felt after being stimulated with trillions of taxpayer dollars…but like the patient, economies at some point cannot keep taking such stimulation without a price. After a while, the revival drugs just won’t work anymore and the patient is dead.

Early on, had the patient made major diet and lifestyle changes that resulted in weight reduction and a healthier body then he/she could look forward to a long life. Instead, the patient (like our government) took the easy way out and continued to over eat, etc. As a result, no amount of medication can reverse the effects of a lifetime of undisciplined living.

My fear is that after nearly a decade of constant medication and no fundamental changes, our economy is reaching a breaking point that no additional amount of stimuli can help. Time will tell, but if we have any chance of a normal, healthy life, it is going to require a strict amount of fiscal discipline that I simply do not see Congress or the President having. I hope I’m wrong, but if past actions predict future results, then I am afraid we are headed for the ICU.

And yes, I know the subject matter is depressing, and it is made even worse by the fact that this situation was avoidable had there been true leaders leading. Of course, you and I might not be able to reverse the negative effects that have been years in the making, but that does not leave us powerless to get our own “financial house” in order. It is times like these that I am reminded of one of my favorite quotes, “The best day of your life is the one on which you decide your life is your own. No apologies or excuses. No one to lean on, rely on, or blame. The gift of life is yours; it is an amazing journey; and you alone are responsible for the quality of it. ” Now, if just everyone would follow that reasoning, we would all be better off. Robert Holt, CDPE/SFR of The [HOLT] Group, RE/MAX Sonoran Hills. For more info please visit www.TheHoltGroupAZ.com or call 623.748.9583 & tell us your thoughts.