Historical Fair Value - Phoenix Properties Attractive
By Michael Douville - Real Estate Market:
Visit the front pages of Wall Street Greek and Market Moving News to see our current coverage of economic reports and financial markets.
Sir Isaac Newton is considered one of the brightest minds in history. He is the father of modern physics. His famous "Third Law of Motion" states that for every action, there is an equal and opposite reaction. Had there been an active real estate market in his home town, he would have understood the pricing mechanics of today. The froth and frenzy of home buyers purchasing properties in an uncontrollable mania during 2005 and 2006 resulted in sellers benefiting immensely from the buying panic. Now, conversely, the buyers are hugely benefiting from the REO Asset Managers' selling panic; the dynamics are both equal and opposite.
(Article interests: NYSE: SRS, NYSE: URE, NYSE: IGR, NYSE: XIN, Nasdaq: RYHRX, Nasdaq: TRREX, NYSE: TOL, NYSE: HOV, NYSE: BZH, NYSE: BAC, NYSE: FRE, NYSE: FNM, NYSE: LEN, NYSE: PHM, NYSE: NVR, NYSE: GFA, NYSE: MDC, NYSE: CTX, NYSE: KBH, NYSE: RYL, NYSE: MTH, NYSE: XIN, NYSE: BHS, NYSE: SPF, NYSE: MHO, NYSE: OHB, NYSE: WCI, NYSE: NYX, AMEX: DIA, AMEX: SPY, AMEX: SDS, AMEX: DOG, AMEX: QLD, AMEX: VNQ, Nasdaq: QQQQ, Nasdaq: VGSIX, Nasdaq: AVTR)
No two properties are identical. Unlike Euros and Cronas, each one being identical to the other, real estate is absolutely unique. Even in tract developments with identical models, no two buyers paint the walls the same, let alone choose the same cabinets, flooring, counter tops, landscape with the same plants; use the same window treatments, etc. Furthermore, every location is different, even standing side by side in the same subdivision.
Every home ages differently; I have been in fifteen year old homes that have been meticulously maintained and lovingly cared for that still appear to be new. In contrast, I have been in 5 year old homes that have been abused by 50 years of wear compacted into a hard 5 years. The obvious problem with statistics is in the detail of which property is being used for the comparison. Additionally, some segments of every market are obviously better than others, having city or light views, located on a waterfront or abutting state preserves, which stabilize and enhance their value. Beyond physical location, there exist intrinsic benefits to living near the right school; inside the boundaries of a particular Parrish or Synagogue; or having access to a freeway or train route into the city. There are many reasons to argue against empirical pricing data for any particular home. However, inflation and appreciation are real, and general trends can be extrapolated with historic data.
In the universe of homes where I purchase investment properties, there are established growth and appreciation trends. These areas are selected because of their higher potential for better appreciation. The long-term trend has been 6.7%; some years a little higher, some a little lower. There is even data available that suggests the U.S. long-term appreciation rate since Post-World War II is 5.45%. Current population pressures would suggest a rising rate.
In 2005, the trend line was severely violated and investment value was difficult or impossible to find. The perfect storm of frenzied buying caused a supply/demand imbalance, and home prices in my home market of Phoenix, Arizona skyrocketed over 50% in 18 months. Homes were being sold 40% above historical fair value. As most Wall Street Investors will attest, markets regularly regress to the mean; 2007 started the decline back toward home. In early 2008, the real estate market had returned to historical fair value and was attempting to stabilize. The new perfect storm of Bear Stearns (NYSE: JPM), Countrywide, Merrill Lynch (NYSE: BAC), and the Lehman Brothers failure that coupled with the credit crunch has caused prices to decline below historical fair value, amazingly to almost the same equal, but opposite amount. Another approach also confirms the same findings.
A group of entry level properties have leased in the $800-900 range for the last 10 years. Last week, a vacant 3 bedroom property was advertised for $800 per month; over 50 people wanted that rental. The market confirmed the rental was perhaps priced a little low, and the price level was generally accepted as a good value. The peak price for that property in 2006 was $220,000. Today, an REO manager has a foreclosure property marketed for $105,000 that could probably be purchased for $95,000. The historical fair market value is $141,900, and that represents 33% below a conservative 5% trend line. Further, in a balanced market, the monthly cost to own versus the monthly cost to rent is in balance. At today’s price of $95,000, the monthly PITI would be approximately $638/month; 21% below the rental value of $800. At the top, the payments were $1,446 PITI, versus a $900 rental rate for a 34.5% premium, once again confirming extremes in the marketplace.
In conversations with two respected builders, both were of the opinion properties had dropped below wholesale replacement value. Material prices and cost of labor had softened, but existing properties offered a better value. The cost of remodeling and updating was far less than new construction. The "Cost Approach" to value is also indicating a below market environment.
In conclusion, many segments of the real estate market in my home MSA of Phoenix, Arizona are discounted below historical fair value and represent tremendous opportunity. Not every property is 20-40% below historical fair market value, but there are plenty to choose from, unlike just 18 months ago. An investor, or for that matter a first time home buyer, is perhaps presented with an opportunity of this magnitude once, twice, maybe three times in their lifetime.
Having been through the recessions of 1974-1975 and 1980-1982, I have experienced this before. The recessions were very bad and wealth was destroyed, but also created. The greatest mistake I made was not recognizing the event for what it was… a natural unwinding of the business cycle. Everyone goes through a few in their lifetime; they have a beginning and an END. Then a new cycle will start that will have the same components, but will be different. With the confluence of low mortgage rates and bargain-priced properties, fortunes can be made. A leveraged property supporting itself through rent revenue mitigates risk to the downside. A property with 20% down that experiences a 20% appreciation, results in a 100%+ return. Current evidence suggests segments of the troubled market of Phoenix, Arizona are 20-40% below Historical Fair Value. A "Buy Signal" is flashing.
Please see our disclosures at the Wall Street Greek website and author bio pages found there.
Visit the front pages of Wall Street Greek and Market Moving News to see our current coverage of economic reports and financial markets.
Sir Isaac Newton is considered one of the brightest minds in history. He is the father of modern physics. His famous "Third Law of Motion" states that for every action, there is an equal and opposite reaction. Had there been an active real estate market in his home town, he would have understood the pricing mechanics of today. The froth and frenzy of home buyers purchasing properties in an uncontrollable mania during 2005 and 2006 resulted in sellers benefiting immensely from the buying panic. Now, conversely, the buyers are hugely benefiting from the REO Asset Managers' selling panic; the dynamics are both equal and opposite.
(Article interests: NYSE: SRS, NYSE: URE, NYSE: IGR, NYSE: XIN, Nasdaq: RYHRX, Nasdaq: TRREX, NYSE: TOL, NYSE: HOV, NYSE: BZH, NYSE: BAC, NYSE: FRE, NYSE: FNM, NYSE: LEN, NYSE: PHM, NYSE: NVR, NYSE: GFA, NYSE: MDC, NYSE: CTX, NYSE: KBH, NYSE: RYL, NYSE: MTH, NYSE: XIN, NYSE: BHS, NYSE: SPF, NYSE: MHO, NYSE: OHB, NYSE: WCI, NYSE: NYX, AMEX: DIA, AMEX: SPY, AMEX: SDS, AMEX: DOG, AMEX: QLD, AMEX: VNQ, Nasdaq: QQQQ, Nasdaq: VGSIX, Nasdaq: AVTR)
No two properties are identical. Unlike Euros and Cronas, each one being identical to the other, real estate is absolutely unique. Even in tract developments with identical models, no two buyers paint the walls the same, let alone choose the same cabinets, flooring, counter tops, landscape with the same plants; use the same window treatments, etc. Furthermore, every location is different, even standing side by side in the same subdivision.
Every home ages differently; I have been in fifteen year old homes that have been meticulously maintained and lovingly cared for that still appear to be new. In contrast, I have been in 5 year old homes that have been abused by 50 years of wear compacted into a hard 5 years. The obvious problem with statistics is in the detail of which property is being used for the comparison. Additionally, some segments of every market are obviously better than others, having city or light views, located on a waterfront or abutting state preserves, which stabilize and enhance their value. Beyond physical location, there exist intrinsic benefits to living near the right school; inside the boundaries of a particular Parrish or Synagogue; or having access to a freeway or train route into the city. There are many reasons to argue against empirical pricing data for any particular home. However, inflation and appreciation are real, and general trends can be extrapolated with historic data.
In the universe of homes where I purchase investment properties, there are established growth and appreciation trends. These areas are selected because of their higher potential for better appreciation. The long-term trend has been 6.7%; some years a little higher, some a little lower. There is even data available that suggests the U.S. long-term appreciation rate since Post-World War II is 5.45%. Current population pressures would suggest a rising rate.
In 2005, the trend line was severely violated and investment value was difficult or impossible to find. The perfect storm of frenzied buying caused a supply/demand imbalance, and home prices in my home market of Phoenix, Arizona skyrocketed over 50% in 18 months. Homes were being sold 40% above historical fair value. As most Wall Street Investors will attest, markets regularly regress to the mean; 2007 started the decline back toward home. In early 2008, the real estate market had returned to historical fair value and was attempting to stabilize. The new perfect storm of Bear Stearns (NYSE: JPM), Countrywide, Merrill Lynch (NYSE: BAC), and the Lehman Brothers failure that coupled with the credit crunch has caused prices to decline below historical fair value, amazingly to almost the same equal, but opposite amount. Another approach also confirms the same findings.A group of entry level properties have leased in the $800-900 range for the last 10 years. Last week, a vacant 3 bedroom property was advertised for $800 per month; over 50 people wanted that rental. The market confirmed the rental was perhaps priced a little low, and the price level was generally accepted as a good value. The peak price for that property in 2006 was $220,000. Today, an REO manager has a foreclosure property marketed for $105,000 that could probably be purchased for $95,000. The historical fair market value is $141,900, and that represents 33% below a conservative 5% trend line. Further, in a balanced market, the monthly cost to own versus the monthly cost to rent is in balance. At today’s price of $95,000, the monthly PITI would be approximately $638/month; 21% below the rental value of $800. At the top, the payments were $1,446 PITI, versus a $900 rental rate for a 34.5% premium, once again confirming extremes in the marketplace.
In conversations with two respected builders, both were of the opinion properties had dropped below wholesale replacement value. Material prices and cost of labor had softened, but existing properties offered a better value. The cost of remodeling and updating was far less than new construction. The "Cost Approach" to value is also indicating a below market environment.
In conclusion, many segments of the real estate market in my home MSA of Phoenix, Arizona are discounted below historical fair value and represent tremendous opportunity. Not every property is 20-40% below historical fair market value, but there are plenty to choose from, unlike just 18 months ago. An investor, or for that matter a first time home buyer, is perhaps presented with an opportunity of this magnitude once, twice, maybe three times in their lifetime.
Having been through the recessions of 1974-1975 and 1980-1982, I have experienced this before. The recessions were very bad and wealth was destroyed, but also created. The greatest mistake I made was not recognizing the event for what it was… a natural unwinding of the business cycle. Everyone goes through a few in their lifetime; they have a beginning and an END. Then a new cycle will start that will have the same components, but will be different. With the confluence of low mortgage rates and bargain-priced properties, fortunes can be made. A leveraged property supporting itself through rent revenue mitigates risk to the downside. A property with 20% down that experiences a 20% appreciation, results in a 100%+ return. Current evidence suggests segments of the troubled market of Phoenix, Arizona are 20-40% below Historical Fair Value. A "Buy Signal" is flashing.
Please see our disclosures at the Wall Street Greek website and author bio pages found there.
posted by The Greek | 1:15 PM
0 Comments:
Post a Comment
<< Home