Archive for April, 2009

Is there a housing boom going on in the Phoenix real estate market? Or is this really just a Fool’s Gold Rush?

This from my Arizona Republic real estate column (permanent link):

Do you feel an insatiable urge to rush right out and buy a house?

There’s a reason for that: You’re being conned into thinking there is a shortage of available housing, when the exact opposite is actually the case.

Maybe conned is too strong a word. Are you begin misled? Are experts and pundits themselves misled? Are we all of us suffering under a mass delusion, an amplified species of wishful thinking?

Here’s what’s really going on: Last fall FannieMae and FreddieMac, along with some of the bigger private mortgage banks, declared a moratorium on new foreclosures.

So for four months, homes that would have been foreclosed on sat on the sidelines of the real estate market.

And for those same four months, inventories of already-foreclosed homes declined. In March of 2009, for example, a total of 7,621 listed homes were sold in the Phoenix area, of which 5,066 — two thirds! — were lender-owned homes.

That sounds good doesn’t it? Even better, as I write this, only 7,607 lender-owned homes are listed as being Active in the MLS database. That’s just a month-and-a-half’s supply. Happy days are here again!

Not quite. That Fannie/Freddie moratorium on new foreclosures ended on April 1st. In the first three weeks of April, there were 2,460 new lender-owned listings. And there are still two years of foreclosures in the pipeline.

What we’re seeing is a Fool’s Gold Rush. The perceived shortage of housing is an illusion, an artifact of a normal number of buyers competing for an inventory that seems to be declining rapidly. It isn’t. Instead, even now the inventory of lender-owned homes is surging.

If you need to move, you need to move, and interest rates are amazingly low. If you want to bite the bullet and move up, now might be a good time.

But even if we see a month or two of stable or even rising prices, there is an echo-bust in our future as buyers catch on to the artificial nature of our illusory housing shortage.

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Why won’t I take real estate investors to buy super-cheap rental homes in Queen Creek, Maricopa or Buckeye? Because residences without residents have no value…

Here are three hard-boiled facts of life for real estate investors in Metropolitan Phoenix:

1. Despite the ridiculous hoopla in the newspapers, there is no shortage of foreclosed homes. FannieMae and FreddieMac imposed a four-month moratorium on new foreclosures, which resulted in the false perception of a shortage. The moratorium ended on April 1, and inventories are surging.

2. Hence, there is no sane reason for an investor to get mixed up in a bidding war for a particular property. If you can’t buy what you want right now, you’ll be able to get something better for less money a month from now. You don’t need to — and shouldn’t — buy the cheapest rental property out there, but there is no need to overpay for anything right now.

3. There is no viable tenant base in Queen Creek, Maricopa or Buckeye. Investors fixate on those towns because the homes are so cheap. They’re cheap for three reasons: They’re half vacant, they’re more than half lender-owned and — most importantly — there are no jobs to speak of in those towns. No jobs means no reason for tenants to live there, which means no rents for landlords.

Those three towns — Queen Creek, Maricopa and Buckeye — are the poster children of the real estate bust. Out-of-state investors got suckered into buying rental homes there in 2004 and 2005, which homes comprised much of the first wave of foreclosures in the Valley. Now a second wave of suckers are snapping up super-cheap homes in those remote locales, even though there must already be at least a dozen vacant rental homes for every marginally-qualified tenant.

Here’s the hard, cold truth, and it’s a lesson every landlord has to learn: Residences without residents have no value. The price you pay on the way in matters, yes. The price you collect on the way out matters, too. But what matters most is whether your rental home covers its own costs — ideally throwing off positive cash flow — while you own it.

Emphasize that: It doesn’t matter how cheaply you bought it, and it doesn’t matter what the theoretical Gross Rent Multiplier might be — if the home sits vacant for months on end.

So who is at fault when a Realtor helps an out-of-state investor buy the wrong rental property in the wrong town? Is it the Realtor, who should have put his foot down? Or is it the investor, who insisted upon buying the cheapest possible property, even though the cheapest homes have no commercial value right now?

My answer is that I don’t care. I don’t work with investors who can’t figure out which side of the bread has the butter on it. I sell rental homes in towns with a strong jobs base, abundant retail and entertainment, decent, nearby schools and adequate transportation services. In other words, I work in towns — and in specific neighborhoods — where tenants actually want to live, where rental homes stay rented, and where they sell for premium prices to owner-occupants on the way out.

Here’s the kick in the teeth: Even in these premium neighborhoods, lender-owned houses are still amazingly cheap. The homes I sell are cash-flow positive from the first tenant, and acquiring that first tenant is normally quick and painless.

Owning rental housing is a business — and not an easy business. The objective is to make money. If you want to find out more about how to make money on buying lender-owned homes and converting them to rental properties, assert yourself.

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A good Realtor may be the key to preserving your parents’ legacy when they pass away

This from my Arizona Republic real estate column (permanent link):

Here’s a horrifying thought. It’s late at night and you’re at home in bed in Manhattan or Manhattan Beach when you get an emergency phone call from Thunderbird Hospital. Your widowed mother has passed away unexpectedly.

And now you must take on the burdens of the grieving. In addition to making the funeral arrangements, you have inherited your parents’ estate. You’ll need to talk to their estate planner, and possibly also to their accountant. But the financial professional who could have the greatest impact — positive or negative — on the legacy your parents have left is the one with whom they very probably forgot to forge a relationship.

That would be a Realtor, of course. For many retired people, the most valuable investment they have will be their home. Many will own the home free and clear, a six-figure asset. But how the heirs manage the sale of their parents’ home can make a huge difference in how much the property sells for.

Here’s one way of looking at things: Your folks have died, may they rest in peace, and everything they left behind is free money. Sell it cheap, sell it fast and move on.

But your parents worked hard all their lives, in part to leave you a significant legacy, and with just a little bit of planning and husbandry, you can realize thousands more on the sale of their property — perhaps to pass along to their grandchildren.

You’ll need to have an estate sale, first. Cluttered houses sell slowly and for less money. Then you’ll probably have to arrange for repairs, painting and cleaning. You can sell the home as-is, but then you’re competing with all the low-priced foreclosed homes out there.

What you’ll need more than anything is a Realtor who is accustomed to handling estates in your absence. To sell for top-dollar, the home will need a thoroughgoing marketing effort — staging and decorating, open houses, internet promotion.

Your parents are gone and nothing will bring them back. But a little bit of forethought will go a long way toward preserving their legacy.

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USA Today: “Foreclosures 46% higher in March than a year ago”

The other shoe drops:

The number of homeowners facing foreclosure surged in March as lenders lifted temporary moratoriums and resumed legal actions against delinquent mortgage payers.

Foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 341,180 properties in March, 46% more than a year ago and 17% above February’s total, RealtyTrac reports today.

One in 159 U.S. housing units received at least one foreclosure notice in the first quarter, for a total of 803,459, according to RealtyTrac, which lists foreclosed properties around the country.

The sharp increase in foreclosures comes as the Obama administration is launching an effort to help as many as 9 million borrowers avoid foreclosure by modifying their loans or refinancing mortgages. Many lenders put a temporary freeze on foreclosures late last year while the administration prepared its program.

Much of March’s activity was in new foreclosure actions — bank repossessions fell 3% from February. With most of the moratoriums now lifted, bank repossessions are likely to start rising again.

This is not the end of the world, but reports of the real estate market’s immediate resurrection may have been exaggerated.

Put another way: This does not mean the Phoenix real estate market is not going to find a bottom, but it does seem to imply that, once it does, it’s going to stay there for a while.

Buying a residence with plans to stay put for five years? It’s hard to argue with today’s interest rates.

Buying a rental home for cash-flow now, putting off any hopes for appreciation for the next few years? You’re probably okay.

Buying to fix and flip? Guard your upside and get it sold fast.

Buying to fix and hold, either as a residence or a rental? This may be the best bet of all right now.

Selling a home? Don’t play games. Price it to the market and get it sold. If your home is not showing, the price is too high. If it’s showing but not selling, unearth the deal-killing defect and correct it. Every month you waste is costing you money.

We have two years, at least, of bad loans still to work through. If demand rises to meet the inflow of foreclosure inventory, prices will rise despite everything. But don’t hold your breath on that outcome. Long-term risk is probably pretty safe. Short-term risk is foolhardy, for now.

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Taking the pulse of the Phoenix real estate market: Boom? Bust? Both?

This from my Arizona Republic real estate column (permanent link):

I was in a new-home sales office last weekend, and the sales rep was raving about how the real estate market has turned. It was hard to argue with her. That subdivision had a lot of traffic, and, besides, the newspapers have carried story after story bearing good real estate news. And who wants to rain on the parade?

There is good news out there, after all. We track bread-and-butter tract homes month-by-month, and, in some respects, March was a great month. Volume of sales was up 62% over February, for example, and this past month was the best March since 2005.

But both August and September of 2008 were better months. Still worse news, sales prices were down another 5.2% for the month. That’s 35.22% year-over-year and 54.13% from the peak in December 2005.

So, yes, people are buying homes. And, yes, for now inventories are declining. But FannieMae and FreddieMac had declared a moratorium on new foreclosures late last year. This was quietly ended on April Fool’s Day. There are 10,000 new foreclosures happening right now, half of which will hit the market as lender-owned homes in the next 60-90 days.

So what? Boom? Bust? Both?

If purchases exceed new listings, prices should stabilize or even go up. But if that’s a temporary phenomenon — a temporary “shortage” of newly-foreclosed homes — we could see an echo-bust: Stability for now followed by more price declines later.

And heads matter more than beds. If investors buy homes for which they can’t find tenants, this will depress prices, too.

On the other hand, interest rates are at unprecedented lows. Is it possible that you could save more by paying a higher purchase price now, at a lower interest rate? Or are you better off waiting for better prices, even if you end up paying a higher interest rate?

Here’s an easier question to answer: Is it time to put the champagne on ice, thus to celebrate the bottom of the real estate market? Possibly. Just don’t pop the cork yet.

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The five bad habits of highly ineffective real estate investors

This from my Arizona Republic real estate column (permanent link):

I’m working with a lot of investors right now, which is fun for me. There are a great many challenged houses in the Valley, and it’s the investors, for the most part, who are digging in and restoring value to those homes.

There is another class of investors I don’t work with at all, and I’d like to highlight some of their bad habits, in the hope of convincing you to adopt better practices.

The number one bad habit of unsuccessful real estate investors is buying homes where there are no tenants. Yes, the houses are cheap in Buckeye, but that’s because there are no jobs in Buckeye. In ten years, the Valley’s western outpost will be a thriving rental community. Not now.

The number two bad habit? Buying way too much house. This 1,400 square foot house is selling for $75 a square foot. But we can get this 2,600 square foot house for only $30 a square foot! Even though the price seems very low, the house is too big for tenants, and too costly to maintain and keep cool.

Bad habit number three is buying the worst property available. No one wants to be treated like a second-class citizen. Bad homes send premium tenants to better homes.

The number four bad habit is over-charging for rent. If the market rent for a turn-key unit is $1,000, a bad landlord will offer his home dirty and unpainted — and then charge $1,100 a month. If he delivered the best-quality home at $950 a month, he would have the pick of the premium tenants. Instead, he’ll end up settling for the tenants no one else wants.

And that leads us to the fifth and most costly bad habit: Our investor chose the worst available model of a too-big house in a town without a tenant pool. The house is dirty and grungy, and he’s charging too much for it. Therefore, he will have no choice but to rent to tenants with bad credit, bad work records and bad real estate references.

Making money in the metropolitan Phoenix residential rental market is easier than it’s been in years. But losing money is easy, too, if you make the right mistakes.

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Timing the bottom of the market? For home-buyers, the trade-off may be a lower interest rate now versus a lower purchase price later

I won’t be able to rely on the numbers for another few days, but March will turn out to have been a very busy month. Volume of sales will be up substantially over February, and April promises to be even stronger.

The bad news? Prices were down again in March, and I’ll bet April will also be a down month.

The good news? Mortgage interest rates are at historic lows.

The worse news? The foreclosure pipeline is still very full, and 10,000 more homes are being lined up at the entry point.

And that’s the trade-off confronting owner-occupant home-buyers. We’re looking at two more years of foreclosures, which argues that prices will continue to decline, at least for a while. But it’s hard to imagine interest rates going much lower — or staying this low.

About half of those newly-foreclosed properties will end up as lender-owned resale homes, hitting the market in 60-90 days. FannieMae and FreddieMac had a moratorium on foreclosures in the fourth quarter of 2008, so some of these new foreclosures will reflect that delay. Even so, there are plenty of other troubled mortgages still to hit the pipeline.

I see two issues that matter:

  1. Will new foreclosures come onto the market more quickly or more slowly than they are coming off? Right now, overall inventories are declining, which argues that sometime soon prices will stabilize or even increase.
  2. But do we have enough heads for the bedrooms? We’re overbuilt, and if we don’t have enough people to put into these homes, we could see an echo bust as inventory newly absorbed by investors sits vacant.

We know in the long run we will recover, but we don’t know where the long run is. The question for owner-occupant buyers is the one addressed above: Will you save more by paying a higher purchase price now, at a lower interest rate? Or are you better off waiting for better prices, even if you end up paying a higher interest rate?

Is it possible that the home of your dreams could be selling for $10,000 less three months from now? Yes. Is it also possible that, three months from now, interest rates will be high enough that you won’t be able to qualify for that home, even at the lower price? Sadly, yes.

These are all questions for a lender, so let me know if you want me to put you in touch with one.

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