Bloodhound News:
A bubble bursts in the bayou...

You might not have noticed it, but the dire predictions of imminent doom in the residential real estate market – the supposedly inevitable bursting of the housing "bubble" – have been absent from the public prints lately. We've all been preoccupied with the wrath of Hurricane Katrina, horrified by the totality of the destruction. But the absence of all that sky-is-falling rhetoric is not a coincidence. We have not stooped so low as to gloat at the misfortune of others, but everybody who works in or writes about the real estate industry knows that the aftermath of Katrina is going to be very, very good for business.

Not good for every business, of course. Destruction does not create wealth. But there are tens of thousands – possibly hundreds of thousands – of people left homeless by the storm. The short term consequence will be a bidding up of the value of available housing stock, an accelerated run-up in prices. This has already happened in a huge way in Houston and Baton Rouge. The long term consequence will be a massive building boom, whether or not New Orleans is rebuilt.

Metropolitan Phoenix should be a long-term beneficiary of migration from the soggy south, even among people whose homes survived the hurricane. We are the safest, sunniest, most family-oriented city in the United States, and we always appeal to people fleeing weather catastrophes elsewhere.

But there is another interesting facet to the self-silencing of the lamenters. For the total destruction of New Orleans provides an object lesson in the actual complete deflation of housing values in an entire metropolitan real estate market. There for all to see, by the miracle of television, is a bubble that has burst. Again and again, people who should know better insist that the current run-up in real estate values resembles the dot.com boom. But the only way for housing values to drop to zero, like a dopey internet stock issue ten reckless months after its triumphant IPO, is for people to cease entirely to value that housing. Even in half-empty towns in the Rust Belt, homes still have a value. But in New Orleans, homes are worthless, value-less, priced at zero with no takers.

But what's bubbling
up in Baton Rouge?

Perhaps all the babbling bubble bewailers should bounce up to Baton Rouge, where the real estate market, flat of late, is suddenly positively effervescent. Witness this report from the Wall Street Journal:

Overnight, this city of 400,000 has grown faster than any other in America.

Exactly how many have come to the metropolitan area isn't known, but the tens of thousands of residents and business owners from across the hurricane-ravaged parishes of southern Louisiana seeking to rebuild businesses and lives illustrate a far larger picture of the mass migration that promises to reshape life in Gulf Coast and deep South communities such as Houston; Jackson, Miss.; Mobile, Ala.; and Memphis, Tenn.

"There is just a huge demand for office space," said Herb Gomez, executive vice president for the Greater Baton Rouge Association of Realtors. Anything you can turn into offices is being grabbed up at the list price. We have members [of the Realtors association] trying to find any vacant grocery store or old strip center that they can." [....]

Similar dynamics are unfolding in the residential market. Before Katrina, "a fast sale here was a home that sold in a week in a hot neighborhood," says Judy Burkett, owner of Judy Burkett Realtors in Baton Rouge. "Today, homes last for minutes. You put them into the [Multiple Listing Service] system, and they're gone almost immediately."

Because phone networks haven't been completely repaired, buyers and agents are frustrated that by the time they ring through to a seller, an available house has already been sold. On average-priced homes in the $140,000 range, buyers are bidding as much as $10,000 above the asking price, sight unseen, and hoping to get a contract signed before a competing bid arrives. In one instance Ms. Burkett knows about a seller who accepted an offer on a house but hadn't yet signed the paperwork when another buyer knocked on his door and offered $30,000 more.

Homes that have been on the market for a year in some cases "are now receiving multiple offers at the listing price or above," says Betty W. Jackson, a CJ Brown agent who has sold off all of her inventory of homes.

Sounds like Metropolitan Phoenix, doesn't it?

We lack the necessary hubris to make pronouncements about national (or global!) housing bubbles, but it seems pretty obvious that what is happening in Baton Rough is not a bubble but a rational response to demand.

That sounds like Metropolitan Phoenix, too, doesn't it?

The Valley of the Sun is the beneficiary of sixty years of steady, and steadily increasing, in-migration, bubble belaborers be damned. Our housing prices are going up because there are more buyers for our homes than there are homes for buyers – supply and demand. Very simple.

A migration of our own...

On top of everything else we've been up to, we just went through the (one hopes seamless) migration of our web site to an Apache web-server. We needed more horsepower, and especially more back-end programming power, so we re-wrote hundreds and hundreds of web pages to take advantage of Apache's PHP CGI scripting language.

Was that word salad? We have plans for future enhancements to our site that will require more programming power than we had available with our old web server. We now own – count 'em – 23 domains, and we are adding several every month. We need a lot of web power, now and in the future.

But the future is now! The testimonials you see on each of our main pages are being driven by a PHP script, so that we can show them all off without showing off all of them all at once. We would love to show off your testimonial, too. If you'd like to see your comments reflected in that space, speak up.

We also rewrote or substantially revised many of the individual pages on the site, making them more informative, more current, and (again, one hopes) more readable.

Another goal was to make our pages rank better in search engines, but here our passion for sharing information works against us. Our pages have too much content to fare well with search engines, if you can imagine such a thing!

But this is another place where we could use your help: If you add a link to us from your own web site, web page or weblog, this will work incrementally to overcome the search engines' bias against our too-rich content. There are buttons and banners on our referral page, but any link you feel like doing will be great.

How rich would you like to be?

(This is one of the articles added in our recent revisions. This is from our investments page, but investment should be read very broadly: This concerns the investment value of all Phoenix-area homes, not just income properties.)

In the 12 months leading up to August 1, 2005, single-family residences in the Metropolitan Phoenix/Scottsdale market appreciated by an average of 47%. That's the average, and it includes challenged neighborhoods and cities so remote as to qualify as rural. If you look at just the sweet spot, the middle of the bell curve, Phoenix/Scottsdale-area homes appreciated by 60%, 80%, over 100% in some areas. Price pressure has not slowed down, and there are good reasons to believe that appreciation over the next 12 months will be 20% or more, possibly a lot more. We have a built-in baseline demand from the Great Lakes and other snowy regions. And we seem to be experiencing a steady increase in our long-term in-migration from California.

Even at 6% annual appreciation, single-family residences in the Metropolitan Phoenix/Scottsdale market are an excellent investment. Our best estimate right now is that annual appreciation over the next seven or eight years should average out to around 11%. If it does, then investments in the Greater Phoenix-area will be just that much more profitable.

In the following table, we're looking at the same one real $225,000 house in five different down payments with two different assumptions about average appreciation over the next eight years. This is a real house that we sold recently, with all costs, taxes, rents, etc., being based on the real numbers. We've held rents flat (at $1,050 a month) and vacancy high (at 10%), even though, in the long-run, rents should go up and vacancy should go down. We are extremely rigorous about real-life numbers, so you know exactly what you're getting into. If anything, we want for our numbers to be more pessimistic than reality, so that your real results turn out to be happier news than our projections.

If you click on the down-payment percentages in each scenario, a five-page spreadsheet will open showing you every last fact and projection leading to our conclusions. CFBT is your projected annual cash-flow before taxes. CFAT takes account of the cash-flow after you have deducted losses and depreciation from your tax liability. Yield is the net annual after-tax return on your initial outlay. Since you will probably be selling your investment properties by IRS Section 1031 tax-deferred exchange, your actual Return and Yield numbers could be higher; this is a topic to discuss with your tax professional.

What this table makes abundantly clear is that positive cash-flow, except with a very hefty down payment, is very difficult to achieve. But because our annual appreciation rates have been so high – and because they show every sign of exceeding appreciation in other markets – if you can make that down payment, or if you can absorb a negative cash-flow from other sources of income or with a negatively-amortized loan, your ability to build long-term wealth in the Phoenix residential real estate market is tough to beat!

Fisking the physics of whack...

There's a certain kind of newspaper article we take great delight in ridiculing. It follows this basic format: "Sam and Janet Evening didn't know what they were getting themselves into when they did something that is temporarily newsworthy, but now they're suffering the awful, unforeseen consequences." You can fill in the blanks any way you want, because none of it matters. Sam and Janet are there because they're only too willing to moan and groan in public about the unhappy consequences of their own free choices, and whatever it is they're whining about will be forgotten by everyone – excepting, perhaps, grandstanding politicians – before our fancies have lightly turned to thoughts of lunch.

Just this week, the Arizona Republic sought to incite our pity for a couple who bought a 3,100sf home in tony Paradise Valley and are now having trouble paying for the gas for their his-and-her Hummers (okay, we made up the part about the Hummers). You are supposed to be so swept up in your pity that you forget that the pitiable couple live in a million-dollar home. The horror!

The name for this kind of light-hearted, heavy-handed analysis of the news is Fisking, after journalist Robert Fisk. Here's another example, also from the Republic:

"Sellers are getting greedy, and buyers are getting desperate," said Jay Butler, director of the Arizona Real Estate Center at Arizona State University's Polytechnic campus. "If too many Valley homes aren't appraising for their sales prices, it's a sign the housing market is out of whack." [...]

Recently at a party, Butler said a real estate agent told him about nine deals he had lost because the appraisals didn't come in high enough.

You may have been absent from Physics class when they discussed the science of whack. It's measured in intestinal rumblings. It goes without saying that nowhere in the article is "too many" quantified, but we are not completely out of luck. Dr. Butler is a scientist, after all, even if only of whack science. He thoughtfully provides us with at least one number, rather than just a collection of presumably horrifying anecdotes.

What is that number? Nine. Nine contracts that fell apart because the houses failed to appraise. Nine failed transactions from one Realtor who confided in Dr. Butler at one party. You don't have to be a whack scientist to know that this foretells an epidemic. It's a simple extrapolation: All those Realtors. All those parties. All those failed transactions, dashed on the rocks of bad appraisals. All those buyers and sellers, eternally lost in a universe that no longer makes sense, a universe that is – perpetually and irredeemably – out of whack... What could be more presumably horrifying than that?

Of course, no one ever exaggerated at a party. No one ever had one drink too many and inflated a number to draw attention to himself. Particularly not to an academic who is quoted in the newspaper all the time, always stoutly engirdled by only the most rigorously analyzed of intestinal rumblings.

And, of course, only the very finest of Realtors are so outrageously wrong about the market value of homes that their houses not only fail to appraise, they fail so badly that there is no bridging the unfathomable gap between asked and offered, no way to negotiate past the impasse, nothing for it but to abandon the deal and all hope with it. Only the most noteworthy and quoteworthy of Realtors are this wildly wrong so many times in a very short span of time. It is utterly beyond comprehension that a Realtor could be so perfect as to massively misjudge his stock in trade ten times. This perfection is reserved for the gods alone.

Please...

We have been wrong about appraisals. Twice, in fact. Once this week, embarrassingly enough. But a Realtor who is wildly wrong nine times in rapid succession is in the wrong line of work. Fortunately for students of the science of whack, Dr. Butler is ideally situated, his ear firmly pressed to the belly of the marketplace...

You've read the newsletter,
now see the video...

As mentioned in our last missive, Greg Swann recently spoke to Jim Lake's Real Estate Pre-Licensing classes at Glendale Community College. This is text from a web page we made about these talks (we make web pages for everything!):

Greg Swann took his real estate pre-licensing classes at Phoenix College with Professor Jim Lake, an MBA and retired Marine officer. Since then, he has spoken at the introductory class of every section of real estate pre-licensing Professor Lake has taught.

The topic is Real Estate in Real Life – how the real estate industry really works. Greg covers a vast range of real estate issues, but his main goal is to do what he can to cut the outrageous (90+%) failure rate for new licensees. The sessions are very fast, sometimes funny, and always dense in information.

In the Fall of 2005, we videotaped two of the three presentations Greg made. In the first, Greg covers everything, with a special emphasis on the real estate boom in Phoenix and why it is not a bubble. Why, in fact, there is every good reason to expect it to last for a long, long time.

The second video is a fairly short excerpt from another presentation concerning the art of real estate brokerage – the engineering of introductions between buyers and sellers, and the resolution of the differences that keep them from effecting a real estate transaction.

Fair warning: These videos are not rich in production values. They were made with home video equipment by videographers who will qualify as amateurs if they practice a lot more. What's worse, Greg has the look and feel of real Fred Flintstone, a malady largely beyond correction. But, still, he can speak well if not wisely, and he can think on his feet.

All of this fascinating material--the videos and the flyers handed out to the students--is available to you on CD-ROM. Seriously, we're not completely vain, but a number of clients have asked us to share this stuff, so we videotaped the presentations and burned everything to a CD. If you'd like to have a copy, say so, specifying your physical mail address.

If we don't already have your address, so much the better: We'll send you postcards adorned with Odysseus the Spokesmodel Bloodhound.

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