Recent reports show that nationally, home prices have dropped for the third straight quarter. Interestingly, here in Arizona we were reporting less sales, but sales prices were actually increasing. What does it all mean? Well let us not forget that anyone can pull a set of statistics and interpret them to suit their own purposes. In this case, nothing nefarious is occurring but we do need to analyze the stats carefully. What is happening in the Phoenix metropolitan area is that although the number of homes sold has gone down, the ones that have sold are at the higher end of the price range. This reflects a couple of interesting points in the Arizona real estate market. Firstly, the fact that more expensive homes are still selling just reveals a broader fact of life that the more wealthy among us are not as affected as the less financially fortunate, by the overall economy or the ups and downs of a finicky real estate market. Secondly, the folks in entry level homes who desire to trade up for something bigger or better (and this is an excellent time to do this) are experiencing a great deal of difficulty in selling their current homes due to unrealistic pricing and an over-abundance of inventory. The pricing problem is one I encounter all the time. Otherwise intelligent folks cannot seem to grasp that the "investor" fueled madness of two years ago is over. I point out recent comparable sales and the response is universal. Those people just "dumped" the property at below market prices. The old "grassy knoll" conspiracy trick!
The overall economy is generally healthy. In the Pacific Northwest prices have either held, or dipped slightly, due to excellent job growth. Here in Arizona, the economy has some catching up to do, to help siphon off excess inventory. That may take time. Also, banks are tightening up lending parameters; making loans, particularly "low-down" or "no-qual" loans, much harder to get. Lenders are now seeing an increase in foreclosures, Arizona ranks 7th in the nation, as their previously lax requirements are coming back to haunt them.
Lenders are also starting to process "short-pays". This is a situation whereby a bank will forgive a portion of the debt secured by a home, in order to allow it to be sold. Traditionally, in a foreclosure a bank would receive, after expenses, around 70-75% of sale proceeds, whereas a short pay could net as high as 90% of proceeds. See your Realtor, or accountant, for more details of both procedures.
It is not all gloom and doom. There will not be any catastrophic decline in house prices, as we saw in the 90's, due to the underlying strength of the economy. Some of the huge "investor" fueled increases will inevitably be given back. However, the market will stay robust, but it will need a year or more to rid itself of the so-called investors, the foreclosures and for inventory levels to return to normal.
Look on the bright side, at least the weather is excellent!
Thursday, May 31, 2007
Wednesday, April 11, 2007
Scottsdale, Arizona, Where The Living Is Easy
Scottsdale Arizona, is internationally renowned as a major resort destination despite barely squeaking into the top 100 of U.S. cities in terms of population. No Virginia, size is not everything.
Although its nickname is "the West's Most Western Town" I have to say that really is a misnomer. In fact, construction of new horse corrals was all but banned back in the 70's. Call me old fashioned but to be "Western" I think horses should factor into the equation somewhere. The only re-shoeing going on in Scottsdale today is a trophy-wife exchanging her Blahnicks for Jimmy Choos!
That being said, Scottsdale truly is a treasure. It has been written that in terms of entertainment and culture, Scottsdale ranks at #3 behind Los Angeles and New York. As someone who has lived, at length, in all three places, I have to say that Scottsdale is most definitely on the ascendancy; indeed it may already have surpassed L.A., in this humble scribe's opinion. Certainly, theatre, dining and entertainment are L.A.'s equal, but housing costs are much lower, and the traffic here in Scottsdale is a breeze compared to the grid-lock that L.A. has become.
It is also the reason that many wealthy people, and in fact several celebrities, have chose Scottsdale for their second home. Spectacular estate homes in Scottsdale are available for a fraction of the cost of comparable homes in LaLa land. Of course, many are of new construction with all the attendant modern conveniences that would be expensive retrofits in Los Angeles. Plus we still have abundant land available here in Scottsdale, a situation not available in L.A. for many years.
Scottsdale is also well served by its own airport as well as Phoenix International Sky Harbor Airport just minutes away. Of course, the northernmost boundary of Scottsdale abuts Carefree,(which also has its own airport) even so it is still a scant 30 minute drive to downtown Phoenix.
Believe it or not, when the town of Scottsdale was incorporated in 1951 it was just one square mile. Today, it covers around 184 square miles.
As testament to its status as one of the premier golf and tourist destinations in the world, Scottsdale is home to the annual FBR Open Golf Tour, the most attended PGA event on the tour.
It is also home to the world famous Barrett-Jackson Collector Car Auction, plus a host of lesser auctions staged at the same time, such as Russo and Steele and Kruse.
While it is true that it can be an expensive place to live, it should be remembered that the older parts are quite affordable and are enjoying something of a renaissance. One of the benefits of the cooling real estate market, is that for some who felt the ship had sailed forever in 2004 and 2005, there is a second chance to grab a piece of the dream.
Whether your interest is cars, horses, museums, art, theatre, entertainment, shopping, nightlife or golf, there is something for everyone in Scottsdale, Arizona.
Tuesday, March 20, 2007
Responsibility in Home Loans Goes Both Ways
Whilst watching the news on a local Phoenix TV Station recently, I came across a human interest story about a couple who were in danger of losing their Phoenix home as they could not afford the payments. In this case, the homeowners had an interest rate of 9%, we will get to that later, and the mortgage broker who had arranged the loan in the first place had told them that would refinance after a few months in order to get lower monthly payments.
Firstly, they did not have great credit, plus they had no down-payment, hence the aforementioned interest rate. Also, given those circumstances, they were gambling that home prices in the Valley of the Sun would go up, of course they didn’t, which would enable them to refinance with a better loan-to-value ratio, they couldn’t. The fact is, they could not really afford the payments in the first place, and were using their meager savings to supplement them until re-financing. It was a house of cards, and it all came tumbling down. Yes, it is sad, but also quite predictable. If you are paying 9% in a 6% world something is not right. If you cannot afford the initial payments don’t take the loan. Do not take an adjustable rate loan with a low teaser start rate if you know you will not be able to afford the payments when the honeymoon period is over. Do not gamble that your home will increase in value in the next 6-12 months. You don’t know! Nobody knows. Some, but not all, lenders are quite willing, and ethically-challenged enough, to tell you anything you want to hear, in order to get you to sign on the dotted line. This is not an Arizona specific problem, it could happen anywhere.
The second case involved a gentleman in California who re-financed his home in order to finance his home-based used car business. The lender failed to supply, as required by California law, the loan documents translated into the language used predominantly in the negotiation. The borrower claimed he was duped, however he did admit an English speaking friend had read and translated the terms of the loan to him. Now he could not afford the payments and was looking to lay off the blame. In this case, I know for a fact that in order to be a car dealer in California, you must (amongst other requirements) have a storage facility for at least four cars, not at your residence. It must be completely separate. My point is, in this case, the borrower was quite willing, and ably abetted by the lender, to circumvent the rules while it suited his agenda. When he could not make the payments, he cried foul.
In both these cases, the borrowers played a little loose with the rules, or ignored early warning signs in pursuit of their goals. The will both certainly pay a price in the future because of bad credit, late payments and maybe even foreclosures.
Studies have shown that many times ethnic minorities end up paying more for their home loans than other folks. What the P.C. police do not tell you is that in most of those cases the victims were taken advantage of by people of the same ethnicity, that is to say unscrupulous people taking advantage of their own. In the end we are responsible for our actions, but remember everything must be in writing. If the broker “said”, then have him put it in writing. If he won’t, well you know the rest.
Firstly, they did not have great credit, plus they had no down-payment, hence the aforementioned interest rate. Also, given those circumstances, they were gambling that home prices in the Valley of the Sun would go up, of course they didn’t, which would enable them to refinance with a better loan-to-value ratio, they couldn’t. The fact is, they could not really afford the payments in the first place, and were using their meager savings to supplement them until re-financing. It was a house of cards, and it all came tumbling down. Yes, it is sad, but also quite predictable. If you are paying 9% in a 6% world something is not right. If you cannot afford the initial payments don’t take the loan. Do not take an adjustable rate loan with a low teaser start rate if you know you will not be able to afford the payments when the honeymoon period is over. Do not gamble that your home will increase in value in the next 6-12 months. You don’t know! Nobody knows. Some, but not all, lenders are quite willing, and ethically-challenged enough, to tell you anything you want to hear, in order to get you to sign on the dotted line. This is not an Arizona specific problem, it could happen anywhere.
The second case involved a gentleman in California who re-financed his home in order to finance his home-based used car business. The lender failed to supply, as required by California law, the loan documents translated into the language used predominantly in the negotiation. The borrower claimed he was duped, however he did admit an English speaking friend had read and translated the terms of the loan to him. Now he could not afford the payments and was looking to lay off the blame. In this case, I know for a fact that in order to be a car dealer in California, you must (amongst other requirements) have a storage facility for at least four cars, not at your residence. It must be completely separate. My point is, in this case, the borrower was quite willing, and ably abetted by the lender, to circumvent the rules while it suited his agenda. When he could not make the payments, he cried foul.
In both these cases, the borrowers played a little loose with the rules, or ignored early warning signs in pursuit of their goals. The will both certainly pay a price in the future because of bad credit, late payments and maybe even foreclosures.
Studies have shown that many times ethnic minorities end up paying more for their home loans than other folks. What the P.C. police do not tell you is that in most of those cases the victims were taken advantage of by people of the same ethnicity, that is to say unscrupulous people taking advantage of their own. In the end we are responsible for our actions, but remember everything must be in writing. If the broker “said”, then have him put it in writing. If he won’t, well you know the rest.
Thursday, March 01, 2007
Property Pricing In a Falling Market
This past weekend, a colleague asked me to join him in a visit to a homeowner who wanted a frank and brutal assessment of his home’s value. As usual, we prepared a bunch of comps, i.e. recently sold homes plus a list of currently available homes. This last list is less helpful, obviously, as the homes have not yet sold, but is somewhat helpful as they will at least indicate an upper price level by virtue of their listing price.
We started out by touring the home and making notes on various maintenance matters that should be rectified to better show the home. Pointers were also given on room staging to make better use of the available space. All in all, a fine home, with a pool, from a respected builder with all the right upgrades in both kitchen and bathrooms.
Them come the moment of truth “How much is it worth?” said Mr. Straight Shooter. “Seven Ninety Nine” I replied. Well, we gave him some smelling salts and when he came around it seemed he thought he was somewhere in the low $900K area.
How come we were so far apart? Well, the main point of his argument was a similar home that seemed to have sold for $915,000 about a year earlier. The problems with that are many. Firstly, a sale a year ago is useless to an appraiser. They prefer to go back 3 months as a rule, or six months if absolutely necessary. Secondly, this particular home sold in a week, for cash, to an out of state buyer. When folks pay cash, some of the checks and balances of a normal transaction are lost i.e. an appraisal and a bank watching over you. Who knows, the price may have included all the furniture and the $100,000 R.V. in the driveway. We do not know. We do know that an appraiser would have many questions regarding the sale of a home that seems to have sold for an excessive amount before an underwriter would allow him to use that comp.
I then pointed out that three similar homes had sold in the mid to high $700K range quite recently. He replied that they just “dumped” them to screw up the neighborhood! Believe you me, this is not the first time I have heard this “conspiracy” theory.
I then pointed out that there were three similar homes listed, but still unsold, in the low $800K range, that have been on the market for between 210 and 270 days. Anyone can list a home at whatever price they like, but if you want to sell a home you have to price it right. It has to be priced so well that a potential buyer in the price range has to see it. In this current market there are a lot less buyers, so they can pick and choose freely.
Finally, he told me that if he priced it too low (i.e. to actually sell) the neighbors would be mad at him. Well, you know what they say. “Misery loves company.”
We started out by touring the home and making notes on various maintenance matters that should be rectified to better show the home. Pointers were also given on room staging to make better use of the available space. All in all, a fine home, with a pool, from a respected builder with all the right upgrades in both kitchen and bathrooms.
Them come the moment of truth “How much is it worth?” said Mr. Straight Shooter. “Seven Ninety Nine” I replied. Well, we gave him some smelling salts and when he came around it seemed he thought he was somewhere in the low $900K area.
How come we were so far apart? Well, the main point of his argument was a similar home that seemed to have sold for $915,000 about a year earlier. The problems with that are many. Firstly, a sale a year ago is useless to an appraiser. They prefer to go back 3 months as a rule, or six months if absolutely necessary. Secondly, this particular home sold in a week, for cash, to an out of state buyer. When folks pay cash, some of the checks and balances of a normal transaction are lost i.e. an appraisal and a bank watching over you. Who knows, the price may have included all the furniture and the $100,000 R.V. in the driveway. We do not know. We do know that an appraiser would have many questions regarding the sale of a home that seems to have sold for an excessive amount before an underwriter would allow him to use that comp.
I then pointed out that three similar homes had sold in the mid to high $700K range quite recently. He replied that they just “dumped” them to screw up the neighborhood! Believe you me, this is not the first time I have heard this “conspiracy” theory.
I then pointed out that there were three similar homes listed, but still unsold, in the low $800K range, that have been on the market for between 210 and 270 days. Anyone can list a home at whatever price they like, but if you want to sell a home you have to price it right. It has to be priced so well that a potential buyer in the price range has to see it. In this current market there are a lot less buyers, so they can pick and choose freely.
Finally, he told me that if he priced it too low (i.e. to actually sell) the neighbors would be mad at him. Well, you know what they say. “Misery loves company.”
Wednesday, January 24, 2007
Is it Equity, or is it Memorex?
What is equity? Well I consulted my trusty dictionary and one of its meanings is “the value of a property in excess of claims against it”. Fair enough, but what prompted me to look it up? Well, I was having a discussion with a fellow real estate professional who was rather proud of himself. He had a client who had bought an “investment” property this past summer, who was having a little trouble re-selling it for a profit after upgrading (and spending too much on) the kitchen. So the agent advised, and the client complied, re-financing to take out the “equity”. Do you see where I am going here? After marketing the home for sale for several months no one had bought the property at its asking price which suggests it may have been overpriced. Let’s be honest, in the overheated and now somewhat cooler, real estate market we are experiencing here in the greater Phoenix metropolitan area, the chances of buying a home in summer of 2006 and flipping it for a profit within 6 months are very slim. So what was wrong with re-financing? Well the problem is that the buyer is releasing equity that does not really exist. Sure, you can find a lender, and a helpful appraiser, to value the home a little on the high side so that they can grant you a loan. In some cases, we will get to those later, such helpfulness borders on the criminal. However, lenders will usually bend over backwards to loan you money, it is their business after all, but they will be the first to cry “foul” when you can no longer make the payments, or the property goes into foreclosure because its value has dipped below the size of the loan. And that is the problem. If there was real equity in the property, it would have sold. Now that you have taken every last penny out of the home, you cannot endure any drop in property values that the Arizona real estate market may suffer in general.
Now, what of the actual criminal activity I mentioned earlier, I hear you cry. As houses stagnate on the market, sellers and agents start to get creative, and that is where the trouble begins. Usually, it ends in a criminal investigation into fraud, and a trip to the “grey-bar hotel”. The current crop of schemes and scams operate broadly as follows. It generally includes a buyer making an offer way above the asking price with the excess to be kicked back either for “repairs” or, in cash, under the table. It will involve, with varying degrees of complicity, a corrupt agent, lender, appraiser and likely title and escrow officer. A duped or criminal buyer, who very often does not even view the property and an unwitting, usually, seller who is unaware of the fraud being perpetrated, but may still be criminally liable.
The key factor in all these, and similar internet “Nigerian type” schemes is greed. Do not let greed blind you to the reality. These are difficult times in Arizona real estate. There are no quick fixes, no get out of jail free cards and no charitable angels paying big prices to get you out of a jam.
Remember, if it walks like a duck….
Now, what of the actual criminal activity I mentioned earlier, I hear you cry. As houses stagnate on the market, sellers and agents start to get creative, and that is where the trouble begins. Usually, it ends in a criminal investigation into fraud, and a trip to the “grey-bar hotel”. The current crop of schemes and scams operate broadly as follows. It generally includes a buyer making an offer way above the asking price with the excess to be kicked back either for “repairs” or, in cash, under the table. It will involve, with varying degrees of complicity, a corrupt agent, lender, appraiser and likely title and escrow officer. A duped or criminal buyer, who very often does not even view the property and an unwitting, usually, seller who is unaware of the fraud being perpetrated, but may still be criminally liable.
The key factor in all these, and similar internet “Nigerian type” schemes is greed. Do not let greed blind you to the reality. These are difficult times in Arizona real estate. There are no quick fixes, no get out of jail free cards and no charitable angels paying big prices to get you out of a jam.
Remember, if it walks like a duck….
Thursday, January 04, 2007
Phoenix Real Estate Predictions for 2007
Good Grief! Another New Year sneaked up on me and took me by surprise. Welcome, 2007, I wonder what you have in store for us all. Hopefully, happiness, good health and prosperity to keep you in the manner to which you have become accustomed. I no longer ask for warm, sunny days as that is a given here in the Valley of the Sun.
So what will the new year bring to the greater Phoenix area real estate market? Of course, no one truly knows the answer to that, but we can make some informed guesses.
Firstly, as a nation, the economy is robust; interest rates remain low as does the unemployment rate, which is all good. The balance of power in Washington D.C. is changing and commentary in that direction is beyond the scope of this blog, but I suspect that for most politicos it will be business as usual.
What effect will all this have on the Phoenix, Scottsdale Metropolitan area? I still see 2007 as a slow year in terms of sales and a relatively flat one in terms of prices. We still need to recover from the massive (over?) building of 2005 and 2006. We have yet to pass on to real end users all those homes that were purchased by “investors” in that period. There are some communities where “investors” own between 50% to 75% of available homes. Believe me, they do not like leaving them vacant, nor do they like renting them out below cost. How long they will actually hold them is a game of steely nerves that we will monitor carefully in 2007. All the while, developers continue to churn out more properties that are able to be priced very competitively with current inventory. Remember, and I have said this before, those same builders that were selling homes, identical to yours, for $150,000 for a profit, three years ago, could do it again today if market forces demand it. Translation: if you can sell that home today for $225,000, then do so; do not squander that equity by being stubborn.
All is not gloom, however. The laws of supply and demand are very much in effect. Buyers have many options both in new and resale homes. Sellers do not have to sell their homes, but if they need to they must price accordingly. Too often, a stubborn seller is merely an expensive “re-owner”. You have that right, but don’t whine about it.
Remember also, now is a great time to trade up. Sure your house may be worth a little less, but the big house up the block is also worth a lot less. The actual cash differentials have closed making it easier to move up. Just be sure to sell your current home first.
Best wishes to all for the New Year.
So what will the new year bring to the greater Phoenix area real estate market? Of course, no one truly knows the answer to that, but we can make some informed guesses.
Firstly, as a nation, the economy is robust; interest rates remain low as does the unemployment rate, which is all good. The balance of power in Washington D.C. is changing and commentary in that direction is beyond the scope of this blog, but I suspect that for most politicos it will be business as usual.
What effect will all this have on the Phoenix, Scottsdale Metropolitan area? I still see 2007 as a slow year in terms of sales and a relatively flat one in terms of prices. We still need to recover from the massive (over?) building of 2005 and 2006. We have yet to pass on to real end users all those homes that were purchased by “investors” in that period. There are some communities where “investors” own between 50% to 75% of available homes. Believe me, they do not like leaving them vacant, nor do they like renting them out below cost. How long they will actually hold them is a game of steely nerves that we will monitor carefully in 2007. All the while, developers continue to churn out more properties that are able to be priced very competitively with current inventory. Remember, and I have said this before, those same builders that were selling homes, identical to yours, for $150,000 for a profit, three years ago, could do it again today if market forces demand it. Translation: if you can sell that home today for $225,000, then do so; do not squander that equity by being stubborn.
All is not gloom, however. The laws of supply and demand are very much in effect. Buyers have many options both in new and resale homes. Sellers do not have to sell their homes, but if they need to they must price accordingly. Too often, a stubborn seller is merely an expensive “re-owner”. You have that right, but don’t whine about it.
Remember also, now is a great time to trade up. Sure your house may be worth a little less, but the big house up the block is also worth a lot less. The actual cash differentials have closed making it easier to move up. Just be sure to sell your current home first.
Best wishes to all for the New Year.
Tuesday, November 28, 2006
Sales Incentives, Do They Work?
Sales incentives are just like us, they come in all shapes and sizes; some work really well and some are virtually worthless. I have said this many times, and regular readers will be aware of this, that price fixes everything. It is my mantra.
Let’s discuss the shapes and sizes. Here in Phoenix, Arizona it is quite common, and increasingly so, in this slow market, for new home builders to offer inducements to both buyers and buyers agents. Incentives to buyers range from upgrades to the home itself, i.e. Granite counter tops or premium appliances, low interest rate or no money down loans, free swimming pools and sometimes free automobiles. Incentives to buyers agents are almost always in the form of higher commissions (Realtors only respond to cash or food) to try to persuade agents to bring their clients round.
The advantage to the seller/builder is obvious. They desire to keep prices up, so that all future sales can remain higher. Offering incentives allows them to not lower prices, but still attract buyers. Which is good for them.
But is it good for the Buyer? Well, please remember that, whatever the incentive, the buyer is the one who is paying for it. I would agree that upgrades to the home itself are a benefit. However, when your agent receives an 8%, as I have seen offered in the greater Phoenix area, you, Mr. and Mrs. Buyer, are paying that commission and paying interest on it, most likely, for the next 30 years with your mortgage. I always have believed that paying much higher commission to an agent as an “inducement” indicated that the buyer is paying too much. I have always questioned the ethics of such an arrangement as an agent is supposed to represent the best interests of a client. However, the choice of either a 3% or 8% commission is bound to sway the thinking process; but to whose benefit?
As to receiving a “free” car. Well, I am not an accountant, nor do I play one on T.V., but I believe there would be tax consequences for a buyer. Also, for a private seller offering such an arrangement, it would also have tax consequences as it affects your tax basis in the home. Please consult your C.P.A.
Having said all that, it is extremely difficult to persuade a builder to drop all this fancy packaging and just lower the price for reasons stated above. Remember, in many communities in the Phoenix area, builders are selling the exact same properties that they could build, market and turn a profit on for the low $100’s three years ago, for the mid $200’s today. Sure, a little of that goes to higher material costs and inflation, but please! They could sell you a property for much less but they have an obvious vested interest to maintain price levels.
Eventually, prices will adjust to correct market levels driven, as much as anything, by falling prices on re-sale homes.
So, before you drive that “free” car, drive a hard bargain first. Happy Haggling!
Let’s discuss the shapes and sizes. Here in Phoenix, Arizona it is quite common, and increasingly so, in this slow market, for new home builders to offer inducements to both buyers and buyers agents. Incentives to buyers range from upgrades to the home itself, i.e. Granite counter tops or premium appliances, low interest rate or no money down loans, free swimming pools and sometimes free automobiles. Incentives to buyers agents are almost always in the form of higher commissions (Realtors only respond to cash or food) to try to persuade agents to bring their clients round.
The advantage to the seller/builder is obvious. They desire to keep prices up, so that all future sales can remain higher. Offering incentives allows them to not lower prices, but still attract buyers. Which is good for them.
But is it good for the Buyer? Well, please remember that, whatever the incentive, the buyer is the one who is paying for it. I would agree that upgrades to the home itself are a benefit. However, when your agent receives an 8%, as I have seen offered in the greater Phoenix area, you, Mr. and Mrs. Buyer, are paying that commission and paying interest on it, most likely, for the next 30 years with your mortgage. I always have believed that paying much higher commission to an agent as an “inducement” indicated that the buyer is paying too much. I have always questioned the ethics of such an arrangement as an agent is supposed to represent the best interests of a client. However, the choice of either a 3% or 8% commission is bound to sway the thinking process; but to whose benefit?
As to receiving a “free” car. Well, I am not an accountant, nor do I play one on T.V., but I believe there would be tax consequences for a buyer. Also, for a private seller offering such an arrangement, it would also have tax consequences as it affects your tax basis in the home. Please consult your C.P.A.
Having said all that, it is extremely difficult to persuade a builder to drop all this fancy packaging and just lower the price for reasons stated above. Remember, in many communities in the Phoenix area, builders are selling the exact same properties that they could build, market and turn a profit on for the low $100’s three years ago, for the mid $200’s today. Sure, a little of that goes to higher material costs and inflation, but please! They could sell you a property for much less but they have an obvious vested interest to maintain price levels.
Eventually, prices will adjust to correct market levels driven, as much as anything, by falling prices on re-sale homes.
So, before you drive that “free” car, drive a hard bargain first. Happy Haggling!
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