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.