That was the headline of a recent story in the Phoenix Business Journal, written by Mike Sunnucks. He interviewed an economist Elliott Pollack who states that Phoenix is tied with Riverside CA area for underwater mortgages at 50%. Las Vegas being the leader with 70% in a negative equity position, which is stunning when you realize, according to one asset manager I spoke with recently, that real estate values in Las Vegas have fallen 55-60%. Stop and think for a moment, how many years of appreciated values will it take that market to regain it’s losses? Even if their market suddenly appreciated 10% a year it would take 4 to 5 years and at this point the market is still dropping.
Additionally, ASU economist Lee McPheters said Arizona’s official unemployment rate is 9.3 but is probably closer to 15 percent due to the large number of unemployed who are no longer looking for work. His conclusion, “it may take until 2013 for the state to rebound from its recession job losses”. In my humble opinion that is being aggressive but it depends on his definition of “rebound”. Especially when the Associated General Contractors of America predicts another 430,000 construction jobs will be lost in 2010. Bringing the number of unemployed construction workers to nearly 20% Add to that fact people without jobs don’t buy homes. And people who loss their jobs usually find their credit scores going way down which means, in todays credit market, they are effectively eliminated from qualifying for a future loan when they do find work.
Pollack added this bit of great news, (which for some reason is missing from CNN or MSNBC’s reporting) “distressed home loans in Maricopa County in the foreclosure process stands at 50,000, compared to 28,000 in 2008 and 10,000 in 2007”. Really sounds like the Phoenix market is racing back and the recession as a whole is over, huh. He concludes with this comment, “This is a downturn of Biblical proportions”. If it is a crisis to rival the plagues of the bible or the Noahatic flood then why isn’t the media referring to it as such?
Let me give you the perspective of a Real estate broker and auctioneer who specializes in real estate auctions and speaks on a daily basis to asset managers all over this great country of ours. Most will read this blog post and dismiss it out of hand as an isolated market which had huge appreciations in value and must naturally correct itself during this recession. However, when I speak to asset managers in the Midwest they indicate that eventually there will come a tipping point in their market where crisis in other real estate markets will effect them as well. For example most conservative banks in Iowa will weather the recession just fine, but there were a handful that did branch out in the early part of this century and open offices in Las Vegas, Arizona and Florida and are feeling the effects of those markets. More and more of the asset managers I’m speaking with are becoming very nervous about their markets being sucked down by the wind shear associated with markets like Phoenix, Southern California, Florida, Michigan, Colorado (sounds a little bigger than just Arizona, huh).
If the bottom of the market and future recovery may be years away, how do we get buyers off the sidelines and back into the market? This question is best answered by looking back to the 1980’s Farm Crisis, a different asset to be sure but a crisis none the less. When land values fell from their peak in 1979 and the farm economy tanked (for a variety of reasons to numerous to mention here) values fell like a meteor hurling toward earth. In less than two years values dropped by 65%. And of course buyers fled the market like rodents fleeing a sinking ship. During that crisis the only way to get buyers back to the negotiating table was through auction sales. Auctions provide a time certain date of sale - auction day. They create buyer urgency where absolutely none exists. In a down market urgency is the first casualty and it’s cousin is pricing. Auctions are the only way to solve both of these problems among others. They require the market to act on a specific day and time, and they allow the market to determine the selling price (a fact in good or bad markets). Without such a mechanism markets remains completely stagnate waiting for more price reductions or feeling around for the bottom from time to time.
These markets will recover in time, however, without the use of auctions the market will sink still lower and the recovery will take even longer.
CAUTION: There are many new companies and brokerage firms jumping into my profession, which can be good for everyone. But auctions done poorly are a very ugly site indeed. Finding your auction company at Walmart is not a very wise decision. Look for experience and a few grey hairs, then take their advise and you’ll be surprised how good auctions can work for your portfolio.
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