At Valley dinner parties and soccer games, the talk still turns to real estate. Whose home is for sale? What is it worth? Why did they lower the price so much? Did you see that foreclosure sign on the next block? Is now the time to buy low?
So we invited the state's three wise men of real estate - RL Brown, Jay Butler and Marshall Vest - to a dinner party at Kai restaurant to talk about the Valley's market. After the wild years of 2004-05, when home prices jumped 50 percent, prices are down in most parts of metropolitan Phoenix, and foreclosures are outpacing sales in some far-flung suburbs.
What does it all mean for the economy and home values? Over steak, scallops, lobster and foie gras, we found out. Republic reporter Catherine Reagor talks with three leading experts about the Valley's real-estate market - the challenges and the future.
Catherine Reagor: So, gentlemen, when is the housing market going to come back or at least stop slowing?
Jay Butler: Builders are telling me over and over again that they're seeing better traffic. There's some encouragement there, but it's grim. There are just fewer buyers out there.
RL Brown: I think a lot of people are looking for the deal.
Butler: When we do find the bottom, we are going to find it's uneven. For example, Pinal County is probably a couple years further away from recovering than other parts of the Valley.
Marshall Vest: Foreclosures are key to a recovery, and they continue to rise.
Butler: I think what we're now going to start to see is the traditional foreclosure: people losing their job and their home. It's been mostly the investors who have lost most of the homes to foreclosure so far. Nobody cares about them.
Brown: Take your typical young family: Their loan resets, their payments go up and they say forget it and are walking away and letting it go into foreclosure. But they don't say "foreclosure," they say, "We're giving it back to the bank." Then that couple moves a few doors away to a rental, where the payment is $1,000 a month, instead of the $2,500 their mortgage was costing them.
Butler: A lot of these people can afford a house; they just can't afford the house they bought.
Brown: That's right. They just overbought because of the frenzy and the aggressive advertising of loans that didn't make sense.
Vest: It used to be you'd fall behind on your credit cards but you made your house payment no matter what. It's a different generation, I guess.
Reagor: What does people walking away from homes do to home prices?
Butler: Prices are dropping about where they should be.
Brown: They haven't gotten down to where they should be yet.
Vest: Prices are likely to drop another 10 percent.
Reagor: Whose fault is all of this?
Butler: Everybody's, and everybody is blaming everyone else. A few years ago, if a lender told a borrower a loan wasn't right for them, that borrower could walk out the door and . . . get the loan from someone else.
Reagor: What's the fallout from the housing market's problems?
Vest: The economy appears to be in a freefall. I'm talking about the national economy. . . . I think we're in the panic stage right now.
Brown: You mean the policymakers are panicked? Or are the consumers panicked?
Vest: Some of the economic statistics for the nation just look really dismal. It's clear that the economy is contracting, certainly in Arizona. The economy has to improve before the housing market can. That could be two years.
Butler: It used to be that the industry would lay off and then hire again when the market came back. But the mortgage brokers aren't going to go back to $100,000-a-year jobs.
Reagor: Will Arizona fare better than other parts of the country during this downturn?
Brown: We're faring worse because we had a higher level of greed or a higher level of frenzy. Arizona's going to suffer more in the near term. In the long term, the general outlook is good. You can argue or discuss or speculate when job growth will come back, but it will come back.
Reagor: What about a recession?
Vest: What's different this time is Arizona is leading the nation. If you look back in history, we've always lagged behind the national economy in recession times. It goes back to what's going on in housing. Housing was the driver of our economy.
Brown: I don't think there's any question that the confidence of the consumer has to come back first. . . . There's no confidence in jobs, there's no confidence in government. We have to see confidence come before we can expect housing to start some form of recovery.
Vest: A well-respected national economist recently said housing sales will pick up by the end of the year, and home building will bottom out and pick up early 2009.
Butler: It's difficult to measure price changes in new homes because of the chronic concessions.
Brown: True, you can't measure what's been given away with concessions on new homes, and there's no question there are deals. A guy told me ... that he bought a new Shea home for $183,000. . . . The same house sold for $300,000-something in the Valley two years ago.
Reagor: How can we best track the housing market now?
Butler: There's no such thing as a national housing market. There's no such thing as a Maricopa County housing market. It's really what's happening in your neighborhood. Some neighborhoods are holding up. There's very little turnover, and people are very happy. . . . In others, you're going to get foreclosures and sellers cutting prices to get out.
Vest: By the end of this downturn, prices are going to be back to the same place they were at the end of 2004 (before the run-up).
Butler: There are parts of the Valley where nobody wants to be in at the moment. Young households don't want to spend too much time on the freeway. So if you buy a home to raise your family, you're not going to do it in Maricopa or Casa Grande or Buckeye or Surprise because it's too far away.
Brown: Let me ask you an obvious question, Jay. Let's assume everything you say is true. If housing prices in Pinal (County) regress to where they were five years ago, will the area's affordability draw people again?
Butler: I think people are going to be very cautious about what and where they buy. A lot of people that already live out in Pinal County want out but can't get out.
Reagor: What about the subprime loans? What will the ultimate fallout be from those?
Butler: There are two groups of people who are losing their homes. One's the investor, especially the amateur, and those who simply stretched their income to buy. Both used loans they shouldn't have. Should they have been able to get those loans in the first place?
Brown: And there are the homeowners who tapped all their equity to buy toys. Now they are candidates for foreclosures. . . . Think about the homeowners in the Valley who have had their houses for several decades and seen them triple in value.
Vest: You think, 30 years from now, people who just bought are going to see that kind of appreciation?
Brown: I think there's potential to see that.
Vest: Is Arizona a better place to live today than it was 20 years ago? Are we headed in the right direction?
Brown: We're not headed in the right direction because we've not done what's required to keep up with the same level of service and infrastructure that we had 20 years ago.
Butler: One of the examples I always use is that we used to have flower growers on Baseline Road. Now they're condos and apartments. That's good housing, affordable housing for people who live in the area, but the flower gardens are gone.
Reagor: What role did speculators from a few years ago play in the problems the housing market is having today?
Butler: The professional speculators bailed in 2004-05. Who really got suckered were the amateurs because they didn't understand what is required to manage investment properties, and they believed all those infomercials. I had a student who worked for UPS, and a few years ago, they were shipping enough of those little infomercial tapes about investing in Phoenix homes to fill eight semitrucks a night.
Brown: The real investors are scoping out the neighborhoods and doing the right kind of homework.
Butler: I have a neighbor who owns 10 homes, but he knows how to manage them. The amateur doesn't because they think these tenants are actually nice people. My friend, the investor, once told me he's having a good day when DEA (Drug Enforcement Administration) isn't kicking in the door of one of his houses.
Reagor: What will the employer-sanctions law, which will crack down on illegal immigration, do to the housing market's labor force?
Butler: I did a thing for the Arizona Landscaping Association, and the small guy's convinced that the big guy's trying to force them out of business with the sanction law. It's the small guy who uses the labor, and if they have to pay someone $12 an hour instead of $6, they are going out of business. In today's economy, people will pay $30 or $40 a week to have their lawn done. But if they have to pay $60 or more, they will mow their own lawn.
Brown: The approach in the home-building industry is that they're going to go through the verification process.
Vest: It will mean higher inflation.
Reagor: Should Valley homeowners keep putting money into their homes?
Brown: If you're going to live there, you should invest enough to make it the way you want it. You shouldn't double the size....
Vest: The real problem is the word "invest." People are looking at homes as investments instead of a safe and comfortable place to live. Do something to your house that you're going to enjoy. Right now it's cheap to renovate because there are contractors available.
Brown: If you'd have bought that house 10 years ago, you would not have bought it as an investment. You would have bought it as a place to live, and that's the approach people should take now.
Reagor: What surprised you all the most about the boom and then the downturn?
Brown: The real ramifications relative to the whole credit issue. The credit markets have to get squared away before we rebound. I'm really hoping this is the bottom, but it might not be. It's certainly not the bottom in terms of home-price wars. There's too much inventory.
Reagor: Is this a good time to buy, even though prices could continue to fall and credit is tight?
Butler: Yes. Prices may drop some more, but you can sit around and worry about a car hitting you in the intersection, too.
Vest: You need a place to live, and if you can afford the loan and plan to hold on for a while, then buy.
Brown: It's the best time to buy a house that we've seen in at least the last three years. Decide where you want to live, and then start focusing on that neighborhood. When you see the "for sale" signs start disappearing, it's a clue that the area is in the process of recovery. Then prices in that neighborhood have probably bottomed out, and you'd better make your move.
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