Test. Meagan is having the

Test. Meagan is having the baby right now!

George W. Bush

Tonight I found these opinion articles and they stirred some thoughts/feelings. Following the link are my thoughts:

http://online.wsj.com/article/SB122611181065310615.html?mod=igoogle_wsj_gadgv1&

http://online.wsj.com/article/SB122584386627599251.html?mod=igoogle_wsj_gadgv1&

George W. Bush is a good man and I am ashamed for turning on a president that never turned on me. The national and world events over the last 8 years have been nearly unprecedented in their magnitude. As a nation we have suffered great losses. President Bush largely handled these losses with a good dose of humanity, decency and dependability.

In recent weeks I have found myself joining with the throngs of Bush-haters in despsiting the man: his partisan politics, his too-loyal cabinet, his ignorance and inaction. Today I feel ashamed for turning my back on a man that loves his country dearly and has sacrificed selflessly on her behalf. History will eventually remember George W. Bush for what he is: A brave and unfaltering leader. A God-fearing and resolute man. A true friend and a compassionate servant of the people. I believe I will miss him dearly.

A Name for it!

Check it out. Wall Street Journal Article today says:

At the heart of the near-panic rocking Fannie Mae and Freddie Mac is a
vicious cycle gripping the U.S. housing market. It starts with the oversupply of
homes, which is causing prices to plummet. Falling prices are leading to more
foreclosures, as homeowners have difficulty refinancing their mortgages or
selling their houses. Banks are reluctant to lend freely at a time when home
values keep sinking and defaults keep rising. That is crimping housing demand
further and leading to more price drops and defaults.

This phenomenon -- which some economists call a "negative feedback loop" -- began with subprime borrowers but has
gone well beyond the small segment of borrowers with poor credit. It is now
spreading to the much-larger market of prime borrowers, which forms the bread
and butter of Fannie's and Freddie's mortgage assets.... (article
continues at http://online.wsj.com/article/SB121599431834249563.html)

So we have a name for the phenomenon. Why does this stuff seem some fascinating to me?...

Nail on the Head

Today I got these two slides from a recent presentation by a Multifamily Research Group. I agree with these predictions and side with the latter. What do you think?

The opportunity in this market is in managing single family homes to help investors mitigate the effects of falling asset prices and negative cash flow.

The Effect of Mortgage Rates

The family is happy and well. I spent most of the 4th weekend cleaning our Mesa rental property. Handling the grime of turning a trashed rental home is cathartic for me and actually satisfying. Whild plunging a mop in and out of a black oven I repeated my recent Economics Professor's Mantra:

When someone doesn't own it, they don't take care of it

When someone owns it, they take care of it

When everyone owns it, no one takes care of it


I kept reminding myself that I own it and that it is going to be worth it 13 years from now when it is paid off...

An article I came across this morning talking about the worsening housing market in Phoenix said, “Making matters worse, rates on 30-year mortgages have been above 6 percent since late May, leading to a steep decline in new applications…”

These graphs show what 30-year mortgage rates have done since 1971 and what they are doing now:





















Rates have been rising the last 5 months or so. Spreads between owner-occupied and non-owner loans have been widening, underwriting guidelines are becoming more strict and the mortgage industry is starting to undergo a major regulation overhaul--including a bill the governor just signed requiring all mortgage agents and originators be licensed.

With oil doubling in the last 12 months, everything is more expensive and I believe inflation will become more of a problem through year-end 2008. The Fed will have no other option but to raise rates to curb inflation. The UK equivalent of the Fed sees it's primary and only objective to as controlling inflation, in the US, we are a bit more liberal and we drop the rates quickly to dump money supply into the economy when people crash planes through buildings or when we have a credit crises. This liberal policy is not without risk and the liklihood of higher rates in the coming years is significant.

Historically, anything under 8% for a 30-year mortgage has been very attractive. I believe (and have money on it) that we will be back above 8% within the next 36 months. As most home buyers purchase based on a monthly payment number they can afford (and with the disaster we are going through now, the banks will err on the conservative side in the coming years...) higher interest rates will further drive down real estate prices on a macro level.

Where is the opportunity in all this?

As interest rates rise, residential investment properties will be selling at higher CAP rates, which means they will be selling for lower prices. I believe downward pressure on prices will be significant enough to drive prices down to a point at which savvy and well-heeled investors will be cash-flow positive on day 1 with a 20-30% down payment. Such an environment has not existed in the Phoenix area for a few years now.

Big money is made in real estate buying in the trough of a correction. We are entering that stage now, and buying opportunities will multiply over the next 36 months!

Cool Summer

While we've had a run of 110+ days recently, the real estate market continues to cool here in Phoenix. I should probably blog about the wonderful trip we had recently to Show Low first. So here are some notes from my journal:

We just got back from a very fun family trip to Showlow. We left Friday morning and just returned this afternoon around 5. One of Meagan's nail clients has a cabin in a place called Torreon (?), which is a newer golf club development just this side of Showlow. Lots of well-to-doers in their 30's and 40's with cabins ranging from 1200sf on small lots to several acre lots with very nice custom cabins.

Dane and Drew loved the concept of staying in a cabin. Dane kept referring to it as "camping"… not sure if this is setting him up for a big let down when he really truly camps in a tent in the forest someday (I doubt it.) The cabin we stayed in was roughly 4000sf, had a large vaulted ceiling main room with floor to ceiling windows that gave a good view of pines as close as a few feet from the house. Some of the things Dane and Drew loved doing:

Riding an electric quad they had in the garage up and down the long gravel drive and a little off-road too. Drew was surprisingly good at steering the thing.
Hiking around the property with me, looking under big rocks, exploring fallen trees and wash areas and looking under the house (actually under the deck) where we found a secret locked compartment.
Laying in the hammock in the late afternoon.
Playing Sponge Bob video game (Dane).
Swimming at the pool and dangling our legs in the hot (very hot) tub. Then eating delicious grilled hamburgers at the pool.
Playing air hockey and free race car and motorcycle racing video games in the activity center.
Going fishing at Showlow Lake, learning from the guy down the shore line how to catch Trout but not having the proper equipment and sufficient time, so we failed to catch anything.
Going to the family fun park and riding the go-karts with Gma and Gpa Bergeson. Drew rode with me and from the G forces and the vibrations kept sliding down in his chair so that the seatbelt was at his throat. It was really funny. I think he was experiencing sensory overload because he was just staring at a spot near his feet with no expression on his face--just enduring it. Dane drove one of the kiddie carts by himself and enjoyed it.
Drew pulling a post out of the stair railing as we were cleaning up the house getting ready to leave.

Meagan and I enjoyed watching a movie we rented with her parents. They stayed both nights with us up there and we enjoyed their company.

It was a perfect summer weekend get-away, especially since it was so hot in the Valley this last week (a few 110+ days). I would like to do the same thing in Flagstaff in the future to compare the experiences.

Now for the market information:

This is a graph of what home prices have done since the 80's. I added a trend line showing our long-term average appreciation at 4%:

This next graph shows the rate of home value change annualized on a rolling 3 months. In other words, it takes data from an housing value index that averages out price changes for hundreds of homes Valley-wide and charts it based on an average value of the current month and the month just preceding and following it:

The title of the chart says rolling 5 months but I changed it to rolling 3 after finding out the source for my data (Case-Shiller home price index; S&P 500) already averages a rolling 3 months in their data...

The second graph shows us that maybe just maybe the rate at which home prices are falling in Phoenix has hit its terminal velocity and the rate of decline is not accelerating any more. If this proves to be true, we could be about half way down in terms of price declines in this cycle. That is significant for 2 reasons: 1. It doesn't make much sense to buy a house in Phoenix right now... more price declines are coming (look for the second graph to come back up to zero before our depreciation stops...) 2. We will likely fall a bit under our long-term average home price appreciation trend line (estimated in exhibit 1). This means for the value investor, there should be some good buying opportunities on the horizon. For the average homeowner, it means reale estate will be offered at a discount in real terms.

This will likely be the most severe real estate correction we will see in the next 30 years or so. The next one will almost certainly be more mild.

Something else to consider: Most people make a home purchase decision based on a monthly payment they can afford (at least that's the way it was done before the craze and the way it will be done once lenders are done racheting up their qualification requirements...) When the interest rate moves from 5.5% to 8% suddenly the $1500 per month home payment buys a $180,000 mortgage instead of a $240,000 one. When interest rates rise (not if) to 8%+ again we will see further drops in value of real estate. It is the combination of stricter lending requirements (shrinking demand), huge numbers of homes being taken back by banks and sold at clearance prices (additional available supply) and higher interest rates that could create a very favorable buying market by late 2009 or 2010.

Some insist we can not call the bottom of the market. I agree. However, it is my opinion we will bounce along the "bottom" for several months if not 1-2 years. If this occurs, patience will reward the prudent home buyer and the discerning investor. I will be looking to put together an investment fund in 12-18 months to take advantage of the opportunities at that time... 'til then I am working hard to find the motivated land sellers to put a quick close deal together with buyers with cash.

Back to School

A week ago Friday I made the decision to go back to school to get my MBA. There are no immediate and obvious advantages to me professionally, but overal I think I will be happy I did it. Plus, Meagan will be covered under ASU health insurance through Aetna, which could save us money if we have another baby.

I flew to Vegas to take the GMAT on 3 hours sleep Tuesday after studying 3 days and scored an unofficial 690. That was enough to get me in the program which I start tommorrow. It is the evening accelerated program. I will have classes M/W nights from 6-10 and probably have 2-3 team seesions during the week. Life will be very busy these next 18 months but I seem to thrive under busy and challenging conditions and I look forward to the increased pace.

Real Estate:

This last week I secured my first multifamily land listing. It is 5.34 acres on Power Road just north of McKellips--adjacent to MCC Red Mountain Campus. List price is $2,500,000. I feel confidant I will find a buyer that will put it in escrow. The deal would take up to 12 months to close. I am optimistic it will partly because I think the shadow market is dissipating and despite lack-luster job growth projections I think the increased demand for rental units over the next two years will outpace the additional supply offered.