Arizona Real Estate Notebook

17 responses so far ↓

• 1 Cbass // Apr 25, 2008 at 12:28 pm

  Nice story John but it seems like more economist are telling people don’t worry than the few that are saying be worried? Every day the AZ Rep runs a story that says the bottom is in but when you read the comments it seems that most consumers are the ones who don’t share the same sentiment. In fact Yahoo had a story today that consumer confidence is at a 26 year low while CNN writes that the credit squeze is over. I think eventually things will be fine in the long run say over the next 100 years but that does not mean that there a not going to be some rough patches on our way to Xanadu.

  Are you still doing the AZ Realestate Market at a Glance? I look forward to that every month around the 15th.

  Thanks for putting out a great blog John.

• 2 John Wake - Real Estate // Apr 25, 2008 at 2:23 pm

  Cbass,

  Yeah, I have the Arizona Real Estate Market at a Glance but haven’t taken the time to post it. I wanted to try explaining it with some “video” software I just updated but I’ve been too busy (thank goodness!).

  Had a home close today. That will free up some time. I’ll put it up this weekend.

• 3 packerbacker // Apr 26, 2008 at 3:21 am

  I think the sentiment of many don’t match the actions of most. If you are going to complain about gas prices, don’t drive, if you are going to complain about food prices, don’t eat. Supply and demand dictate prices for (almost) everything, eventually. And in situations where it doesn’t apply, say, the airline industry, things are pretty messed up.

• 4 Brian McMorris // Apr 26, 2008 at 7:07 am

  From an investment perspective, the stock market leads the general economy by 6-12 months. So, the market now is looking at what will happen in the 4th quarter this year to the middle of next, whether it is a rebound in real estate or consumer buying. It is classic that a stock market makes its bottom just when people are the most fearful and sentiment is worst.

  That date was Monday, March 17.

• 5 Cbass // Apr 26, 2008 at 8:21 pm

  Packerbacker, I am not sure what you are talking about. I have read several articles recently indicating that people are in fact cutting back on eating out, driving less, etc. Also my own observations support this so I see no reason to doubt that is what is really going on. So are you supporting my position I can’t tell from your comment?

  Brian, So it is your position that things will begin to improve in the 4rth quarter? I will be interested to see how it turns out for you. I personally find it hard to believe that these huge run ups in commodities such as wheat, rice, oil, and gold favor that statement. I mean we are seriously rationing rice right now. I really don’t care for rice that much but it will affect all of us eventually just like the soaring fuel prices are. If more money is spent on fuel it is not going to get spent somewhere else.

  My prediction: I think inflation is going to bust out and the fed will have to start raising rates by the fourth quarter, but as usual they will be behind the curve. There is more pain to come and it will not end in the 4rth quarter of 08. Maybe we will see some light in the spring of 2010 when some balance has been restored.

• 6 packerbacker // Apr 27, 2008 at 7:05 am

  Cbass, I guess my point is this: We live in a massive economy, a disposable economy, and a very diverse economy. I have argued that a severe recession is virtually impossible. We can hardly put two negative quarters of growth together!!!! I will not argue that some people may cut back on dining out or filling up their Suburban, but don’t forget people are still spending $600 a night to stay in Scottsdale, or Canadians are dropping $250K on homes in Phoenix. The same supply/demand rules that are working for the housing market should work for restaurants, gasoline, computers, and big screen TV’s. Until I see any price dips in things like that, I say B.S. on people cutting back….

• 7 Phil Sexton // Apr 27, 2008 at 8:48 am

  So I heard a major reason prices are rising on commodities like rice and oil isn’t due to supply and demand but it’s because of investors leveraging them with hedge funds.

  Has anyone heard anything about this?

  (John, nice work on Fri!)

• 8 John Wake - Real Estate // Apr 27, 2008 at 10:09 am

  Thanks Phil!

• 9 Cbass // Apr 27, 2008 at 10:13 am

  Packerbacker,

  Eventually consumer debt and rising prices in commodities will take its toll on consumers. You can’t party like a drunk college student with credit cards forever. The thing I call B.S. on is all this Canadian buyers are snapping up US RE stuff going on right now. I would like to see some data on what Canadian spending on U.S. realestate over the last 10 or so years is. I think this is a ruse to try and stir up confidence. Hey everybody else is doing type stuff. Also sales are still dismal so it must not be helping that much.

• 10 Brian McMorris // Apr 27, 2008 at 12:34 pm

  Phil, your point is well taken. This Rice thing is about speculation, not about a sudden change in supply or demand for rice. Rice is consumed by billions in Asia and there was no sudden population explosion that changed demand. And supply is fine too. But Rice has gotten caught up in the whole commodity inflation story. (I find the whole Costco story very strange…Americans eat almost no rice. This was a media hype event, not a reality).

  CBass, you can’t have it both ways. If we are going into some deep recession, than high inflation can’t coexist (at least when supplies are plentiful, don’t bring up post WW1 Germany). Deep recessions mean deflation and prices should be going down if we are in one now (like for real estate, which is in a Depression) not up (like for everything else).

  I find myself agreeing with Packerbacker (and as a current MN resident, that is tough to do!!) This recession, if it technically qualifies as one, will be short and shallow. The only way to a deep recession is if the Fed screws up and keeps money tight too long, like in 1929 or in 1972-73 (Nixon’s mistaken decision to do a wage-price freeze). But boy, they have not kept it tight at all this time. It is gushing out of the Fed right now.

  This may very well lead to inflation. But that is okay in the short run. Some inflation is good for the economy because it keeps consumers buying now (and not waiting for a cheaper price). It is only when inflation gets move up faster than incomes, that it becomes problematic. That point is usually around 5%.

  So, soon the Fed will need to start tapping no the brakes of money expansion to head off inflation. The liquidity added to the economy will start taking hold in another quarter or so. The typical lag is around 12 months from the start of loosening till the economy turns (which is why it is important for the Fed to not get to far behind the economy and react quickly). Loosening started in August 2007, if you recall.

  I see the global economy helping our industrial sector and keeping many businesses strong. We are close to working out the mortgage and real estate markets. I still like Q1 2009 for the bottom of the real estate cycle. We may move down another 15% during that time, but it will set up pricing for buying to get going in earnest (as house affordability comes back into line).

  So, yes, we will need to check out my predictions at the New Year. You can hold me to them ;o)

• 11 Cbass // Apr 27, 2008 at 7:12 pm

  Brian,

  So you mean to tell me that prices for goods and services can not increase while our economy stops growing or goes into a recession just becuase there is supply?

  en.wikipedia.org/wiki/Stagflation

  “Demand-pull stagflation theory explores the idea that stagflation can result exclusively from monetary shocks without any concurrent supply shocks or negative shifts in economic output potential. Demand-pull theory describes a scenario where stagflation can occur following a period of monetary policy implementations that cause inflation. This theory was first proposed in 1999 by Eduardo Loyo of Havard University’s John F. Kennedy School of Government.”

  Just an example of some smart dude who agrees my thoughts are possible.

• 12 Brian McMorris // Apr 28, 2008 at 9:19 pm

  I don’t think you and I are very far apart on this. I concede the idea of some level of stagflation at a time like this. Today we have “demand shocks” rather than supply shocks. That demand comes from the BRIC nations and is outside our Fed’s control.

  I don’t know that residency at Harvard makes this guy smarter than you or me. But yes, anything is possible. But there is no real proof, yet, for this theory that was postulated in 1999 (stagflation that results from loose monetary policy).

  The most often cited example of Stagflation came in the 1970s and was the result of supply shocks (in oil and base metals). The supply constraints, accompanied by rapid demand increases in Asia (as Japan and Korea underwent a huge expansion) did result in inflation. But monetary policy probably had little to do with it. A wage inflation spiral was a reaction to the “materials” inflation, but that was in a time of powerful unions that no longer exist. It took Volcker’s interest rate shock therapy in 1980 to break the cycle of wage increases gained by striking unions ending the phenomenon known as “inflationary expectations”.

  The “stag” term suggests flattish growth that is behind the rate of inflation. If inflation is at 5% and nominal growth is at 4%, that is stagflation, and not really so bad. It is just important to be invested in hard assets during such a period so that investment earnings beat inflation.

  But this scenario is a lot different than the Depression that many are predicting, which requires a Deflation. I say we already have a housing depression (deflation), as compared to the 30s for example. But the other elements of the 30s Great Depression, are not in place and very likely won’t be if the Fed keeps the economy from panicking by pouring on liquidity.

• 13 packerbacker // Apr 29, 2008 at 5:52 am

  Brian-

  I think you are smart. I like what you say, but someone should slap you for this. You say, “we are already in a housing depression-as compared to the 1930’s” A quick google would show you that during the Great Depression, around 25% of people were forclosed on, unemployement was over 20% and household income dropped 40%.

• 14 Brian McMorris // Apr 29, 2008 at 6:20 pm

  Thank you for the compliment and comments. But see that I limited my statement to “housing depression” which I borrowed from Dr. Shiller himself. He is the greatest authority maybe in the world, on the history of housing pricing, and has lots of historic data to back up his comparisons. So I am comfortable with that statement.

  Average national price is down about 15% from its peak now, and more or less in freefall. He concludes, and I have no reason to differ, that it could easily drop another 15% before it bottoms. That will be as big a drop as the 30s. I am not sure the source where 25% of homes were foreclosed in the 30s. I have not seen numbers that high. I don’t necessarily believe everything I read when I google.

  As for unemployment and household income dropping, this time is different. I am not saying we are in another Great Depression, just the contrary.

  What makes this time different, is we have the lesson of the 30s to teach us how to respond to the housing depression, so problems will not be magnified. We will probably not have 40% foreclosure, because this time, the banks started acting early to deal with their bad loans. The Fed also got into the act early because of Bernanke’s expertise on dealing with conditions that lead to broader economic depressions, including acting aggressively to cut interest rates and simultaneously supply liquidity (in numerous ways) to keep the banking system from imploding.

  It did implode in the 30s and that is why foreclosures went so high, the banks could not afford to negotiate with the home owner, do short sales, or hold bad mortgage portfolios. The banks then were S&Ls with no where to go for help (there was a Fed, but it wasn’t ready for the problems it faced).

  If you find economics interesting (you can probably tell that I do), I will share with you a very credible source on Depression era statistics, causes and effects: Mr. Ben Bernanke. Here is a speech of his from 2004 (so not colored by the current situation):

  http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm

  In it he quotes a study by Milton Friedman published in 1963 that proves that monetary contraction was the proximate cause of the Great Depression. There are many examples given as evidence, but I will let you read it there rather than fill this space with quotes. This is why we see Bernanke’s Fed has been so dramatically increasing liquidity, much to the consternation of C Bass and others. But Bernanke and others are on record saying it is much easier to fight easy-money induced inflation, than contraction-induced deflation. The housing crisis on its own contracts money supply (basically evaporating paper money in the form of mortgage liabilities). Bernanke’s Fed has responded by expanding it in other places, probably for a net zero effect. But we won’t know for a few years.

  So, I stand by my earlier positions defending monetary expansion, but appreciate the opportunity to explain why.

• 15 Cbass // Apr 30, 2008 at 3:46 pm

  Brian,

  What do you think of the Feds move today? I think it was again another terrible move by Ben B. He was on the right track when he took over for Alan G. but has lost his way.

  The historically low rates helped us get into this mess in the first place. Also with the FFR rate at 2% there really is nowhere else to go but up. This reduces the Feds options for the future. Also it had very little impact on Wall Street as he indicated that there may not be any more rate cuts in the future.

• 16 John Wake - Real Estate // Apr 30, 2008 at 4:02 pm

  I think it is probably as much to shore up the banking industry as anything. The yield spread is very large right now which helps the banks many of which have lost a incredible amounts in real estate.

• 17 RE Investor // May 23, 2008 at 3:24 pm

  CBass - With all due respect Greenspan did not cause the problems we have now - the banks themselves did. Mortgage interest rates were low on 30 year fixed mortgages and were low on standard 5/1 and 1/1 arms, however they were still market rates. The problems arose when lenders 1. started making “no doc” loans to people with no money 2. Made “teaser rate” and neg am mortgages with exploding index margins. It is the MARGINS that caused the trouble not the fed or bond rates themselves. If loans were made with normal market index rates and normal documentation was required we would not have had the big run up in prices, therefore no bubble, so no crash. This also would have made the current situation either non-existent or very mild since it would not be amplified by higher home prices and bad lending, overbuilding and therefore over hiring. Remember a recession is nothing more than a decrease of a baseline. If that baseline is artificially moved up, then when it corrects back to the real level it is just moving back to where it should have been. Unfortunately you add in a little media hype and emotion and it usually overcorrects, but in time (sometimes short) it will revert to normal again. No one but the banks themselves are to blame for this. Now it is just damage mitigation. Oil, Rice, and other commodities have nothing to do with fundamentals right now, it is hedging since the big money can’t make money in anything else currently. Another bubble, which will crash as well, but this one when it crashes is actually good for the economy. Breifly on the subject of consumer sentiment - the consumer sentiment it always behind what is actually going on. Case in point is that when the banks started to collapse and the loans went bad, people were still buying lattes at Starbucks, buying SUV’s and trying to sell their homes at bubble prices. Once reality finally set in, the damage had already been done, and the consumer sentiment finally went down. Same works in reverse, credit swaps are healing currently, and stocks while not stable yet, have definitely stablized greatly from a few months ago. Just observe the VIX or “fear” index and credit spreads since last March. Consumers will be the last to know.

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