This is my column for this week from the Arizona Republic (permanent link).
Prices for Phoenix-area real estate are very low, but are they low enough to justify a run on the market?
Looking for some rock-solid investment advice? Buy low. Sell high.
That seems obvious enough — except it often turns out to be the opposite of what people do. There are legions of people in the Phoenix market who bought high and are having to sell low.
The trouble is, it’s hard to know which is which until after the fact. Many people bought homes during the boom at what seemed to be high prices, only to sell them a year later for even higher prices.
That was a very fun game to play — until the music stopped and left you without a chair. Many putative experts — I was one of them — thought the boom would go on even longer than it did.
But what about now? Prices are very low, but are they low enough to justify a run on the market?
The technical answer is yes. Phoenix-area home prices are nicely aligned with incomes, and premium rental homes are comfortably cash-flow-positive from the first tenant.
The market’s response is no. So far, there hasn’t been a fire-sale mentality in the marketplace to go along with the fire-sale prices. I’m working with several investors who are picking up multiple properties, often for cash, but there is nothing like the activity we saw in 2004 or 2005.
But all that could change very soon. The Fed continues to hold interest rates very low, and there is talk of forcing the rate for a 30-year fixed-rate mortgage down to 4%. And the so-far-unadopted stimulus plan includes a $8,000 tax credit for first-time home-buyers.
Lenders will find a way to turn that tax-credit into a short-term loan. And $8,000 is a 10% down-payment on an $80,000 home. Putting 3.5% down on an FHA loan, $8,000 is enough to get an $225,000 property.
If owner-occupant buyers soak up all the excess resale inventory, that should cause prices to stabilize or even start to rise. If, instead, new-home builders use the tax credit to build even more homes in our already-overbuilt market, the bottom will be but a distant dream.
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