“The Sun Will Come Out Tomorrow…You Can Bet Your Bottom Billion….”
by Marc Pascal
On a recent Saturday, I bicycled with my family to the Arizona Biltmore Resort, as it is only a few miles from our rented condominium in Phoenix. As part of this architecturally-significant and very attractive art deco 5-star hotel is a conference center. In this venue was being conducted a day-long public auction of the remnants of the housing boom and bust that is a central part of this region’s and this nation’s deep recession.
Foreclosed homes that went to Sheriff’s sale, and were generally purchased by the financial institutions holding the mortgages, are now being auctioned off to the highest bidders. Many homes that once sold between 2004 and 2006 for over $250,000 were now being sold to lucky investors with the cash or with great credit at or below $50,000 – the 2008 median U.S. annual household income.
I suddenly realized that Phoenix has reached that proverbial “bottom” in the real estate market. If a fairly new and reasonably sized single family home on its own lot is now worth less than the median U.S. annual household income, you really have found a bargain. The land itself was worth more just a few years ago. Studies now indicate that the median sale price for a single-family home in what’s left of the regular open market in Phoenix is now just $135,000, lower than Tucson.
Responsible financial planners often stated that a family should not have a home mortgage larger than 3 times its gross annual income. Thus a median household in the U.S. and in the Phoenix area should not carry a mortgage costing more than $150,000. That limitation would keep monthly housing expenses to about 30% of a household’s total income. That payment size would be manageable for the long term. It also presupposes a fixed interest rate over a 20 to 30-year term.
Our economy has greatly changed during the past decade. People are more susceptible to job losses, having hours or pay reduced, or ending up working a few part-time gigs. Finding a job out of school and staying with it until retirement that includes full health care and retirement benefits is as likely to occur as being struck by lightening. And our economy continues to shed jobs quicker than a stripper sheds her clothes.
With so many people having financial difficulties, the long-term consequences of missed debt payments are lower credit scores, which either increases the interest charged on a mortgage or loan, or eventually renders the person completely unable to get any credit. After a protracted economic recession, so many people may have such poor credit that they will not be able qualify for a loan even if the banks opened a floodgate of new credit. But that may be a subject for another commentary.
I still got a strange yet positive feeling hearing so many foreclosed homes finally being auctioned off between $35,000 and $50,000 on that sunny, warm Saturday afternoon in Phoenix. The sun shines over 300 days a year in Arizona, so the namesake song from the musical “Annie” came to mind. We may not have to throw billions at the housing and mortgage crisis. The free market eventually and effectively takes care of such bubbles.
For those with good credit and a decent cash down payment, Countrywide (now owned by BoA) was also in an adjacent room ready to finance the buyers of these auctioned properties. I met 2 people who had pooled the cash of a number of small investors to purchase a handful of homes at these bargain-basement prices. Even just renting these houses at fair market rental rates would reap a decent rate of return for investors.
The big question over then next few years is how much these properties will appreciate in value. That may depend upon the employment situation of would-be purchasers. If they have decent-paying and fairly-secure jobs, then prices would eventually get closer to rational and historical levels so long as there isn’t a glut of available housing.
Many real estate experts believe the Phoenix area has more than a 2 years’ supply of housing. That many empty homes can only be filled by people moving to the area in significant numbers, as occurred during the prior 2 decades, or by foreign investors jumping on bargains in a major tourist-destination city because of its great weather and nearby spectacular natural scenery. In addition, the cities of Phoenix, Scottsdale, Tempe and Glendale are all relatively attractive places to live with many new urban amenities.
I used to live in the Midwest and I have read that typical homes in the cities of Detroit and Cleveland now sell for less than $35,000, and some go for less than $5,000. I am sure the prices for homes in their suburbs are a bit higher but national statistics indicate they hover around $100,000 or less. However, much of the housing stock in these 2 Midwestern cities is rather old and dilapidated. In addition, people continue to leave these 2 cities and their respective surrounding counties of Wayne and Cuyahoga at alarming rates because of the utter lack of jobs in their regional economies.
Now that some of the epicenter cities of the housing and mortgage crisis have essentially bottomed-out their housing markets, I am a bit more confident in a turnaround of the U.S. economy, but only after unemployment stops increasing and starts to decline with the creation of new government and private-sector jobs. Then people will have the income and credit to make long-term commitments to housing as principle residences or investments. But real estate will never go back up to 2004-2006 levels in anyone’s lifetime unless there is ample wealth and well-paying jobs to support such excessive valuations.
I am personally not interested in putting any money into real estate. I have yet to determine whether Phoenix is my family’s long-term home or if we are going to end up someplace else in a few years. We only moved here 3 years ago from living the prior 12 years in either Cleveland or Chicago, and for a few years straddling both. I am more interested in putting my investments in companies developing new energy sources and building high speed rail lines. Perhaps the National Infrastructure Bank may be the public’s next great investment option.
Whatever my family’s future and that of this country, we will soon be in a markedly different place than we are right now.
Marc Pascal obtained his J.D. and M.B.A. degrees more than 15 years ago. He worked for several years as an in-house legal counsel for two different corporations. He also started 4 new business ventures with friends. Since 2006, he has been an independent management and business consultant serving various private enterprises in the Phoenix area. He also posts weekly on TMV.