Real Estate

It is exciting to see a real free economic market in full correction. The 3rd Quarter Case-Shiller home price index shows arizona as having year over year value declines close to 9%. Month to month declines nationally show an accelerating trend in home price depreciation--this means we are still picking up speed on our way down to the bottom of this market. For all prudent and patient consumers out there this is great news. For the would-be first time home buyer recently priced out of the market, this is good news. Frankly, it is good news for just about everyone and I think we will give back all of the 50% gain we had from '04-'05 and then some.

Personally, I am very interested in what will happen to rental rates in the next 24 months. Recently, apartments have shown some weakness in rent growth (read: no rent growth over teh last quarter) and rising vacancies and concessions (discounts and deals offered to lure renters). Typically, these don't disappear overnight, but here's why I'm not that worried:

Price is a function of supply and demand. In this case we are talking about the rental price or rate (ie. economic rents--a combination of market rents less concessions). When supply is added to a market with constant demand, the rents landlords can charge will decrease. Recently we have seen additional rental housing supply dumped into the market in two forms: broken condo deals and investors renting out houses.

Over the past few years, hundreds or even thousands of apartment units were removed from the rental supply because developers planned to convert them into condos. Many of these projects went belly up halfway through the selling period. So... supply was taken out of the market (when renters were booted in preparation for selling the condo) and then dumped back into the market.

The other market supply contributing factor to flat rents and rising concessions is the increased availability of single family homes for rent. As investors find it increasingly difficult to sell vacant homes, many are resorting to renting the home hoping for a better market 12 months from now. Single family homes and condos are a substitute for traditional apartment living and could be considered an economic substitute--drawing renters out of apartments. Essentially, this factor has increased available rental supply, putting downward pressure on rents and contributing to the weakness in vacancies and concessions (free microwave, 2 months free, etc.)

Where we go from here:

The surge in single family homes for rent and the failed condo conversions reverting back to apartments is commonly referred to as the Shadow Market.

I think the shadow market is about as large as it will be in this cycle. My opinion is that the failed condo deals are already in lease-up and will be fully occupied within the next 3-6 months. I also think it is likely the investors who have decided to 'ride out the storm' have already put their houses in the rental pool.

I also think that most of the home buyers in this marketplace are buying homes to live in, not for investment purposes. So, although we are still at the front end of a foreclosure Tsunami in Phoenix and in the nation, I think these homes will largely be sold to individuals who will truly be able to afford the payments and who plan to live in the homes. Some distressed foreclosures may wind up in the hands of investors but my hunch is that this activity will not have a net increase affect on the available homes for rent in the marketplace.

It will take a few years for the shadow market to return to historically normal levels (whatever that is...) because many investors will be able to supplement their investment home mortgages and will do that instead of going through foreclosure, and here is my point:

THE APARTMENT MARKET IS THE BRIGHT SPOT over the next few years. Specifically, new apartment construction. Historical data shows the Valley is far from being 'over-built' relative to multi-family product. It is also safe to say that the thousands that will loose their homes to foreclosure are going to return to the renter pool--thus increasing demand for rental housing. A dissipation of the shadow market and the return of renters to apartments will play out over the next five or so years WHICH WILL CAUSE HEALTHY RENT GROWTH AND LOW VACANCIES.

This is my opinion and I could be wrong. I am interested in any feedback or opinions in support or in contradiction. Thanks, Mark.

"Whadt?"

Drew's new word is "Whadt?" He says this when you say, "Hey Drewbie!" He still uses "No" as the standard response to any question you ask him. Especially when he means "Yes" which when told to say it he pronounces "SssSSyeehh".

Drew's hearing checked out as totally normal. Rule that out as to why his speech development is slow. Despite being slow to walk and talk, Drew is certainly not slow in his friendly demeanor. Yesterday at the McCormick-Stillman train park on Indian Bend he was practically waving non-stop: both while riding on the train and when the train passed with others in it.

I ran a 7 minute mile yesterday and just about died doing it. I once almost held that pace for 26.2 miles... It seems like almost a lifetime ago now. I'm going running in the morning again. Another week of a mile a morning and then I might go to 2.

Thanks to Mom and Dad for coming to Dane's TBall game Saturday! He was happy you were there.

Love you all. Mark.

Dog

This is a picture of an actual dog I found on the internet. It was entered into an Ugliest Dog contest...

Halloween

Dane hustled and had a good, positive attitude at his T-ball game yesterday—a marked improvement over last week’s slow sulking and wandering over to me several times during the game. Dane and Drew had a complete blast on Halloween. It was definitely the high point of the week. We toured them around the block in the wagon. Drew was more interested in making new friends than getting candy and he left his Woody hat on the entire time.

At one house the lady who answered was holding a small dog (ankle-biter variety). Drew kissed that dog at least 4 times and wouldn’t stop talking with the lady and wouldn’t turn away from the house after several good-bye’s. Drew continues to approach complete strangers with hugs and love. A week ago at a fall festival in one of our neighborhood parks he climbed into the lap of a girl sitting on the ground who looked about 16 years old. I had to pick him up eventually because he wouldn’t get up.

Dane really enjoyed the Charlie Brown play last night as well. He recognized Thomas in the dancing blanket costume. He kept asking if Lucy was really mad or just pretending. He also kept reminding me we don’t say ‘stupid’. He had fun.

I ran Weds-Friday this last week. 1 mile per day. I am committed to doing it tomorrow morning as well. It makes a big difference in my day. It’s easier to focus and work hard when I feel I have already accomplished something great (running 1 mile is a great feat for me at this point.)

Setting up the land division at ARA is coming along fine. Mostly research up front… I do have a developer driving a site in NE Mesa tomorrow and will likely write an offer for the property. It’s nice having all the tools I need, the contacts of seasoned brokers to leverage and a lot of room to do the job the way I think it should be done. I am happy with the situation.

Life gives us a return based on our investment in it. Reading the scriptures daily, reading other good books, running and eating good help keep our saw sharp which helps us produce more (work, service, etc.) Also, there are no short cuts in life. I sit near a 24 year old researcher at work who wants to fast track his path to success. My advice to him was to look at a 5-10 year picture instead of a 12-24 month picture. There are no shortcuts to big results. Stephen will be a partner in a prestigious law firm someday because he is paying the price right now.

All for now. Enjoy the pictures.