Bloodhound News: Reflecting
an extraintestinal universe...

It's not as cool as when Odysseus was on the Channel 15 News, but we were liberally quoted in a rundown on the Valley's red-hot real estate market in the Arizona Republic. The main article featured all the usual suspects predicting imminent doom by reference to their vast catalogs of gut feelings. The stories in the suburban sections were based on interviews with in-the-trenches grunts like us, so they had the virtue, at least, of reflecting an extraintestinal universe.

As you might have noticed, the sky, so far, has not fallen.

The news hook for the whole extravaganza was the observation that MLS inventories were up in June. Is this true? Yes. Is it a leading indicator of anything significant? Maybe. At the time the articles were written, inventory will still about one-third of 'normal,' about 8,000 available homes. In a balanced market, the Arizona Regional Multiple Listing Service would have around 25,000 resale homes on the market. Interestingly, since the appearance of the articles, inventories have jumped to almost 11,000 homes, over 40% of 'normal.'

Is this a matter of great moment? Possibly. But inventories are always up in June, since families with school-aged children want to be moved-in to their new homes by August. By raw mathematical analysis, there are still more than two buyers for every available home, and this is borne out in continuing upward price pressure. It's certainly reasonable to argue that appreciation over the next twelve months won't match the blistering 50% pace set by the last twelve months, but this hardly justifies the doom-and-gloom blaring forth from every intestinal orifice. Increasing inventories may be a leading indicator of a slowdown, but only the absorption rate – the rate at which inventory is 'absorbed' by buyers – will say if this is so, after the fact. An increase in supply means nothing if demand is increasing even faster.

Are there reasons to suppose that demand is increasing, that the Valley's baseline demand has taken a quantum leap to a new level? We think there are. First, while some of the investors who have been buying in the Phoenix area may move on, we expect that many will stay. Other markets may offer lower entry prices, but – with the possible exception of Las Vegas – no residential market in the United States offers the long-term appreciation potential to be found in suburban Phoenix. Second, while we will always have the snowsick to count on – and they have brought us a fantastic appreciation rate since the 1940s – we are becoming a favored destination for Baby Boomers looking for second homes and retirement homes. The net effect is that even if the investors flee in flocks, our baseline demand will settle down to a much higher level of excitation.

It is important to understand Phoenix investment homes are not terribly rent or interest-rate sensitive: A properly-leveraged rental home in suburban Phoenix will be fabulously profitable in the long run even at a relatively weak 6% annual appreciation rate. Moreover, a lot of California and Las Vegas real estate investors are cashing out their equity by IRS Section 1031 tax-deferred exchange and coming to Phoenix to ride out the next two years. We see no reason why Phoenix will not take the same trajectory as Las Vegas, returning to a stable appreciation after a three-year boom. So long as our built-in baseline demand exceeds our ability to bring new product to market, Phoenix will appreciate. The absorption rate will tell us when the appreciation rate is going to change – and the builders will tell us by inviting the investors back to their properties – but the sky is not going to fall, nor are home prices.

Analysis-by-intestine might make for good water-cooler conversation – people have been saying "bubble" for over a year, before anything interesting was happening in Phoenix, and people have been predicting an 'inevitable' increase in interest rates for over a year. We have seen no rigorous analysis that argues either that the appreciation boom in Phoenix is nearing an end or that prices will decline here when it eventually does come to an end. Certainly the Las Vegas experience argues to the contrary.

Here's an alternative lens, in any case, for looking at the market: Residential real estate has been persistently undervalued as an investment vehicle, and what looks like a price bubble from a short-term analysis is actually a long-term correction in misperceived value. Because of the deductibility of mortgage interest (adding value to interest-only loans) and the capital gain exclusion for personal residences and the IRS Section 1031 capital gain deferral for income properties – and because housing is a necessity of human life – both owner-occupants and investors are re-evaluating real estate against other investment options, coming to the conclusion that real estate is a much better investment than securities or more-fungible commodities. Residential real estate is not overvalued now, it was undervalued – particularly in terms of its tax advantages – in the past.

People have been talking down this market for more than a year, and they have been wrong every step of the way. Math is hard and boring, but it is substantially more accurate than the gut feelings of prominent pontificators.

More boring math...

All from the Arizona Republic: Maricopa County is the fastest growing county in the United States, Phoenix is the fastest-growing big city in the United States and Arizona will add 5 million new residents over the next 20 years.

But one big picture is
worth a thousand words...

The photo is of Standard Pacific's forthcoming Donatela subdivision at the northeast corner of 115th Ave and McDowell Rd in Avondale, taken Saturday, July 2, 2005. The land is nothing but dirt and a sales office right now. Lots are being distributed by lottery, which is the reason for the huge crowd. More about the lottery here.

This is nothing but an example, a visual anecdote. But it's interesting...

The Becker family's wild weekend in the Valley real estate market...

The Arizona Republic article cited above mentions one of Greg Swann's clients, Mei Loh Becker, a Realtor from Henderson, Nevada. Following is Greg's account of the frenzied weekend the Becker family spent in the suburbs of Phoenix in their quest to purchase two investment homes. This is real estate in real life...

Very early Friday morning (I had a home inspection at 7 am), I ran listings for that day's home search. We had been watching listings day by day, but there is no point in running listings until the day you plan to look at homes, since many homes will have sold overnight. Out of 26 total listings that met our search criteria, I was able to pull 18 possible candidates. Practically speaking, twelve houses is the limit at which people's eyes start to glaze over, so I split the listings into two groups, far west and nearer west, planning for a lunch break in between.

I met the Beckers--William, Mei Loh and their daughter Marissa--at the Hyatt Regency at around 10 am, and we were in our first house by 10:30. Out of the first group, we identified two very strong candidates. We picked out one more from the after-lunch group. The Beckers, having flown from Las Vegas and dealt with a car rental and a hotel check-in, and having looked at 18 houses in the hot sun all day, sallied forth at the end of our day to explore the Valley by car. I went back to my office to attend to other clients and to start running listings for Saturday's showings.

We worked on and off by phone during the evening, and early Saturday morning we wrote a contract for one of the three homes we had identified, a 1425sf home in Cottonfield Ranch in Goodyear. We would have written another contract, this one for a very new home in Los Arbolitos in Avondale, but it had already sold.

The nature of this market is such that any offer you write is essentially full-price or above, with the buyer sanding away all possible points of friction. The goal is to write an offer that is not only better than all the competing offers, but which answers any objection the seller might raise, in advance, in the text of the purchase contract. The objective is not just a meeting of the minds through negotiation, but complete agreement from the first swing at the ball--since any counter-offering back and forth provides an opportunity for someone else to swoop in and snatch the house. We had two stern deadlines to deal with, as well: The Beckers need to identify at least two properties within the time-frame of their IRS Section 1031 exchange, and they were returning to Las Vegas by Sunday night.

While that contract was out with the lister and seller, we drove to Chandler and Gilbert to look at homes. From there we looked at one house in Laveen, an amazingly-low-priced almost-new two-story home with a pool. And from there we went back to the West Valley to look at new listings and to revisit the third of the homes we had identified on Friday, in Canyon Trails in Goodyear. In the end we sat in a Quiznos in Goodyear and wrote two more contracts, one for the Laveen home and one for the Goodyear home. (I travel with a wi-fi-enabled laptop computer (with a cellular modem for back-up access) and a portable printer. When I run a listing, I run the full tax records plus a competitive market analysis. That way, I can write a contract anywhere.)

Alas, neither lister would present these offers immediately. Another fact of life in this market is that listers and sellers agree to present all offers at a certain time, often the Sunday or Monday evening after the home is listed. This drives up the price, of course, since the competing bidders are double-thinking each other about how to make the most enticing offer. A savvy lister will improve upon this by calling every buyer's agent to tell them what they have to beat, a virtual auction. The flip side of this coin is that an offer can be withdrawn at any time before it is accepted, so sellers need to be careful how hard they push things. By Saturday night, we had three contracts in play, but we knew nothing for certain.

Late Saturday, the seller on our first contract came through with a minor counter, which the Beckers signed with alacrity Sunday morning. One down, one (or more) to go. Meanwhile, the lister on the other Goodyear house had called to bid up our offer, telling us what we had to beat. We revised that contract and faxed the paperwork through, knowing that the offer still would not be presented until Monday evening. Then we went out again, looking at two new listings in Avondale and one in Chandler. In the lobby of the Hyatt Regency (with the Beckers running out of time for their flight), we wrote a fourth contract for a sweet four-bedroom home in Crystal Lakes in Avondale. I ran off to fax this contract while the Beckers ran for the airport.

Meanwhile, we had conclusively lost the house in Laveen. It went for what it should have, about $30,000 more than the list price. But the Crystal Lakes home went under contract just like that, without a hitch. Before their plane had left SkyHarbor, the Beckers had two homes under contract, with a third, the other Goodyear home, still in play.

Coming from Las Vegas, the Beckers knew what to expect in the Phoenix market. They came prepared and motivated, and they were willing to put in the time it takes to see a lot of houses and to write a lot of contracts. We improved our chances by working on Father's Day weekend--less frenzied than normal, believe it or not. But we got lucky, too. Of the 26 homes we started with on Friday, eight were left on the market by Monday morning. All but four were gone by Tuesday morning.

Administrivia...

Since June 30, the ARMLS system has been updating our SearchBots as often as four times a day. This is a boon if you're desperate for that perfect house and you're afraid it will evaporate as soon as it comes on market. But it does make for more mail in your inbox. Let us know if it gets to be a problem.

Happy Independence Day!

It's our wedding annivesary, actually. We would normally spend it in Las Vegas, but Cathy has real estate deals and our kid, cats and dogs to nurture and Greg has a huge backlog of paperwork – and a craving for hot dogs and Margaritas followed by a nap on the sofa. Plus which, we're still not even all the way moved in to our new house – although owning two homes simultaneously is going to be hugely profitable in that long run we're always talking about. This day is devoted to the idea of political independence, and there's not a whole lot we can do about that. But we are all about financial inpendence – ours and yours – and that is a goal we never stop working toward.

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