by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Every day is a great day to buy a single family home, even in Phoenix. That ought to rile up the analytical types here. Of course, that same principle applies to the stock market, as well.
I started my career as a “Financial Consultant” but was mentored by some fellas who preferred to be called “Customer’s Man” (title preserved with apologies to the fairer gender). My tutors would buy me a scotch in Suburban Station, then ride the R5-Paoli Local home with me. I’d receive a 70-minute lesson about how and when to buy stocks for clients. The first lesson was that every day was a good day to own a good company.
Of course, the part I’m leaving out is that price and underlying quality were important factors in the investment decision- fundamentals rule when it comes to long-term investing. These Customer’s Men weren’t the Bud Fox-type on Wall Street, churning clients’ accounts, they were more like the character Hal Holbrook played (Stick to the fundamentals. That’s how IBM and Hilton were built. Good things, sometimes, take time).
The same principle can be applied to real estate. Greg Swann did his best Hal Holbrook impression with this article in the Arizona Republic. The fundamentals are fabulous for Maricopa County real estate. Three people move into Maricopa County for every two people that leave every year; that’s a growing population. The local economy is diversifying with small businesses leading the way. An expanding economic base and a growing population make for an attractive situation for landlords.
Are the long-term prospects for Phoenix real estate good? The fundamentals would have you believe that they are. Lawrence Yun predicted a 50% rise in Phoenix housing prices in a five year period; I commented that it may take ten years. Still, 50% over ten years is a helluva return, when leveraged four to one. Invest $100,000 in Phoenix real estate today, and you could conceivably receive a triple in your original investment, ten years from now. That could be a 15% annual return- not too shabby.
Is now the right time to buy Phoenix real estate? My title suggests that every day is a good day to buy Phoenix real estate- if the price is right. Some Maricopa County properties are selling for their 2002 prices and are as much as 40% off of their high.
Robert Kerr suggests that Greg’s call is far too early:
If so, at just 2 years from peak to trough, this would be one of the shortest duration downturns I’ve ever seen.
Robert may be wrong about cycles. Cycles are compressed and volatility is increased when market information becomes more readily available to market participants. When pricing was available only in books, held under lock and key, buyers and sellers couldn’t access the data. Today, market pricing is found in Google search. Registered users get updates more quickly than the professionals do. As less experienced investors get into the game, the emotions of greed and fear tend to influence investment decisions rather than analytical thinking.
Barry Cunningham provides solid market fundamentals supporting Robert’s statement:
1 Million more foreclosures set to come in late 2008 and early 2009. Large number of foreclosure properties already taken back by the bank and not as of yet on the market…bottom? I think wishful thinking.
What Barry says may be true. The prognostications of foreclosures, however, have always been inaccurate. Few saw the tidal wave of foreclosures, these past 12 months, in 2004. It is possible that the tsunami we expect in 2009 may be a winter storm- pounding but hardly as damaging as Barry suggests.
I don’t care about either of those issues if I can buy the property correctly. Bill Gross and Warren Buffett will tell you that it’s wiser to be early rather than late in identifying an investment trend. If I can buy a Phoenix property that will be worth 50% more in ten years, and leverage it properly (with positive cash flow), I don’t care if the trough is in May, 2008 or December, 2009. I’m a long-term investor who recognizes that the absolute bottom of the market is impossible to call. I just want to own an appreciating asset with net zero carrying costs.
Greg sent me a list of some battered workhorses (battered in price). If an investor buys one of these, the question is no longer “Will the price drop in the next 3 years?” The question is “Can I get $800/month for rent?”
That’s positive cash-flow. That’s what removes the worry about market timing from the equation.
Barry Cunningham says:
Brian I think I said…that it is a veritabe smorgasbord for those who know what they are doing. It is unfortunate too many real estate agents do not understand this.
What makes a savvy investor stand out from the rest is the knowledge that you make your money when you BUY…not when you sell. I don’t want to buy HOPING for market appreciation. I want to and do buy NOW guaranteeing either positive cash flow or a short term hold immediate profit.
These are the days we all hoped for. It is unfortunate that so many are unprepared to capitalize on it.
June 7, 2008 — 8:56 pm
Brian Brady says:
“Brian I think I said…that it is a veritable smorgasbord for those who know what they are doing”
I gotchya, Bar. I was trying to show that the foreclosure predictions in the future might be as imbalanced as the lack of understanding of the foreclosure mess we’re in now.
“What makes a savvy investor stand out from the rest is the knowledge that you make your money when you BUY…not when you sell.”
You get it- the point of this essay.
June 7, 2008 — 9:36 pm
Robert Kerr says:
The fundamentals are fabulous for Maricopa County real estate. Three people move into Maricopa County for every two people that leave every year; that’s a growing population.
Come on, Brian! You know better than to use specious statistics. “3 in for every 2 that leave” tells us nothing.
The casual reader may see that as “50% annual growth” but the growth rate is actually indeterminable from that statement; it’s somewhere between 0% and 50%.
US Census Bureau estimates Maricopa County population growth was about 1.6% in 2007.
Will you show me you math: how is a 1.6% growth rate going to have a significant effect on the amount of standing inventory?
June 8, 2008 — 12:03 am
Brian Brady says:
“Will you show me you math: how is a 1.6% growth rate going to have a significant effect on the amount of standing inventory?”
The mistake of parsing data, Robert, Click the links. Maricopa County has been the number one growth county for…four decades in a row.
There are some 4 million people expected by 2010. The fundamentals, long-term, for Phoenix are still compelling
June 8, 2008 — 1:52 am
Robert Kerr says:
But I did follow the links. All of them.
I’m not swayed by forecasts of a recovery which don’t address affordabilty.
From ’03 to ’06, affordabilty wasn’t an issue. Wal*Mart greeters could buy a villa on min wage with no money down and a suicide option ARM.
But times have changed. It’s the key obstacle to a recovery right now. If new residents can’t afford a house, they’re not going to drive a recovery.
Back to your links: Yun sees 50% appreciation in 5 years starting next month. The claim is intriguing but it comes naked: no explanation, no data, no analysis.
You see 50% in 10 years. Again, a naked claim. Share the rest of your analysis. Is it based solely on population predictions?
I agree that long-term prospects for real estate look good and there are some good deals out there, but that’s true of everywhere and every time.
And next year should look even better.
June 8, 2008 — 8:00 am
Brian Brady says:
“I agree that long-term prospects for real estate look good and there are some good deals out there, but that’s true of everywhere and every time.”
That’s REALLY the purpose of the article, isn’t it, Robert? The argumentative dance we do is really just for show, isn’t it?
June 8, 2008 — 9:27 am
Chris says:
If people can’t afford homes then they will rent, and rents should rise. Which is good because the fundimentals on 2 and 3 family homes have been way off for years.
Either way if you know what you are doing and buy right you will make money. (by “buying right” I mean purchasing below market, Ie 50%-70% of what the asset is worth right now. That way you make your money when you buy, further appreciation is the frosting on the cake)
As Trump once said “well real estate is always good as far as I’m concerned.”
Chris-
June 8, 2008 — 12:18 pm
Chris says:
Oh second point that I wanted to post but forgot to add.
As Brian says timing the bottom is pointless and irrelevent when buying investment property. If its cash flow positive who cares if it drops in value 10% next year? It could gain 20% in 2011. Your still making money, its a paper loss. If you bought it right (and financed it right!) you should still be in the black anyway. Any such paper loss only becomes real when you sell or try to refinance, so sit on it and enjoy the cash flow for 5-10 years and when all the scared light weights rush to the party late again sell it to them for a nice profit.
Real estate is simple, people make it hard.
Chris-
June 8, 2008 — 12:23 pm
Barry Cunningham says:
Chris..you must be an investor..it’s EXACTLY what I have been saying!
June 8, 2008 — 12:28 pm
Rick Belben says:
That has always been the key in real estate investing. It is buying right to begin with. It is also meant to be a long term investment. Most of the so called investors who are in trouble did not buy it right.
June 8, 2008 — 12:51 pm
Robert Kerr says:
If people can’t afford homes then they will rent, and rents should rise.
Why should rents rise? This is a serious question, by the way. People take rising rents for granted but when an area is badly overbuilt, rents can and do go down.
And, having been a landlord, I can tell you there’s much more to it than simply cashing the rent checks and counting your profits until the day you cash out all that ammassed equity.
June 8, 2008 — 2:16 pm
Chris says:
Well you have to know your local market. It all comes back to the fundimentals of the asset.
Is your market growing?
Is it overbuilt? You should know all the local players and what they are doing. No excuse not to know that one of the big boys plans on building a 50 unit development.
What is the average income?
Who is living their? Ie professionals? Working class? Students? Demographic changes under way?
Real estate is very much local.
The city that I invest in is a very mature market, with a slow growth rate of about 700ish people per year on a population of 55k ish. However average income has risen from $50k,-$61k in the past few years.
Naturaly rentals require some work and time, the trick is to buy enough so you can hire people to do a lot of the grunt work. Its difficult to get over that hump though.
June 9, 2008 — 10:46 am
KC Investments says:
Brian, no matter how hard you try I’m going to resist. 🙂
June 9, 2008 — 5:38 pm
Robert Kerr says:
Just this week, UA economist Marshall Vest reported that the state of Arizona is in a full-blown recession:
AZ economy in recession
Historically, housing takes some 1-2 years after a recession ends to show signs of recovery.
An AZ housing bottom in 2008? Unlikely.
June 11, 2008 — 8:48 pm