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Monday, February 20, 2006

An open letter to Catherine Reagor and Glen Creno of the Arizona Republic

First, Catherine, congratulations on your new column. Hard work pays off.

Second, I would dearly love it if both of you would bring some perspective to your writing. For example, from Catherine's new column:
What this year holds is the multibillion-dollar question. A 10 percent drop in home building or sales would cost the Valley's economy at least $1 billion.
There are two important caveats missing from this conjecture. First, we are more likely to gain 10% in value this year than to lose it. Las Vegas had a 50% upswing in 2004, very much like our year last year. Their appreciation in 2005? An incredible 19.2%, four times their normal appreciation.

I doubt Phoenix will do this well, especially since the year has started down, with a serious dearth of buyers. But Catherine's worst-case scenario seems even less likely. But even if we entertain it, what are the consequences?

If I bought a home for $300,000 in January of 2005 (which I actually did do), and if that home is worth $450,000 in January of 2006, and if the market now suffers a "ten percent drop," what happens? My home would then be worth $405,000, $105,000 more than I paid for it. I put 5% down, so my cash-on-cash return after what Catherine seems to regard as a financial cataclysm would be--how much? Jeepers, it's only 700%. A ten percent drop in values would not be good, but after the surge we've had over the last 18 months, it would hardly be tragic, and most people would still be far head of where they were before this boom began.

The "would cost the Valley's economy" argument is also specious except as a bookkeeping analysis. A homeowner's equity isn't actually gained or lost until it is liquidated. If values drop by 10% this year and gain 6% a year for the next three years, none of it matters until the homeowner either sells or refinances. A drop in values might matter to builders' shareholders, and it would matter to homeowners if their notes were to be called by their lenders, but otherwise it's all academic. Without doubt, someone will claim that because his home lost 10% of its value, he now eats oatmeal for every meal, but this will not be true--not the whole truth in any case. A paper loss against paper profits will have few if any measurable real-world consequences, sob stories notwithstanding.

In the same respect, Glen, I've chided you for reacting to the market like Austin Powers with The Mole. Both of you are persistently guilty of this, and I think you are being less than forthcoming in not putting your reports into perspective. Yes, 2006 isn't starting like 2005 did. But if we acknowledge that 2005 was an anomaly--which is what makes the stories newsworthy--then what is actually important is that 2006 seems to be off to a better start than 2004.

Omitting this essential fact is either tendentious or puerile, I can't decide which.

I really can't decide which. The Republic has become such a translucent propaganda organ, it is by now hard to tell when the paper is actively campaigning for some covert purpose of its own, and when it is merely badly informed or poorly thought out.

Your Saturday article was actually funny, and not just because we caught another sighting of The Mole:
The number of existing homes for sale has shot up from a year ago. Home prices are flat or down slightly in most areas. And in January, used-home sales were half of what they were in August, a record month.
Again, January 2006 was a much better month than January 2004. And we all can see the mole on The Mole.

As a side note, I'd love to hear how it could be that investors "snatched up three or four new homes at time a year ago" when they were forbidden to buy any new homes. The Republic printed the builders' propaganda line when they trotted it out, and I told you at the time that it was propaganda. I don't believe in proof by isolated anecdote, but can you name even one investor who successfully reserved an unbuilt home last year and has walked away from it now? As R.L. Brown points out to you, the return on investment would be huge--a $2,000 deposit turns into maybe ten or twenty times that in instant equity. Why would an investor leave that kind of money on the table?

But I'm more interested in this remark by the estimable Dr. Jay Butler:
Just look at all the ads.
Indeed. Look at the ads, the other white meat in the newspaper.

An incentive is not a fire sale, it's an enticement to induce the buyer to do what he otherwise might not do. In many cases, the incentive is just icing on the cake, since the buyer was already committed. Are builder incentives working? Call and ask. But in fact, incentives are not news. I started hearing about them in September of 2005. This is also when builders resumed courting Realtors--and boosting commissions by double or triple what they had been paying.

Note, however, that investors are still excluded from most new home subdivisions, as least as a matter of stated policy. What this suggests is that the builders themselves do not regard the current market as being as soft as it was in 2004, when the investor policy was all-you-can-eat. In other words, the no-investors rule argues that builders believe they can sell all the inventory they intend to build as high-profit, highly-upgraded owner-occupied housing. They do not need to sell excess to-be-built inventory as low-profit, upgrade-free models to investors.

All of which brings me to my own little bit of news: I had a very busy weekend, which is good for me. But I saw more showing activity among other parties than I've seen so far this year. My joke last year was, if you lingered in a doorway you'd be trampled by the next party of buyers. Saturday was the first day this year when I have seen anything like that. Quite a few Realtors' business cards in newly-listed properties, too, which is also a good sign.

This is nothing more than the kind of isolated anecdote I hate to see reported as real estate news, but it is one data point of actual on-the-ground evidence. If next weekend is just as hot, it will be a strong sign that the drought of buyers is over.

And, all that by the way, I encourage you both to call upon me if you have questions about how real estate works in real life. Someone once told me that I am "rather glaring on the receiving end," which I thought was an exceptionally polite way of putting things, but it remains that I can give you a perspective on what is really going on, short- and long-term, that you are not getting anywhere else. At a minimum, if you let me do your math problems for you, I won't make fun of you for getting them wrong.

Very best,

Greg Swann

posted by Greg Swann | 6:10 AM  


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