Ask the Expert, June 15th 2006

Leading Indicators show pockets of Softening in S. Az market

By: David Kinas, President of Deed & Note Traders, LLC

In April I took my family to San Diego for a weekend get away, and in addition to being splashed by Shamu, I saw firsthand the many "for sale" signs, heralding the housing glut and the softening of the Southern California housing market. (See Chart A) It was just last November that a mortgage broker friend told me about the spike in the number of new foreclosures there, and he said the reason was that so many new borrowers are over-leveraged, which is also spiking the foreclosure numbers nationwide. Many new creative loans came to the market in the late 1990's and have become very popular in the last 6 years. These include no- doc loans, interest only, negative amortization, teaser starts, piggyback loans and an assortment of others. These loans are the backbone of creative home financing nationwide.

Chart A: San Diego House Price Index

Economy.com estimates that at least one million homeowners will see their house payments double in the next two years. As all the creatively designed low payment loans start rising we will also see an explosion of foreclosures on households that stretched their money too thin on either purchases or refi's.

It was the savvy Californians who first jumped at these methods of financing 20, 30 or even 40% more house for the same monthly payment as traditional loans would allow. Once their home values peaked in April of 2005, the downhill rollercoaster ride took their breath away. The smart and lucky Californians who sold out at the top of the market often rolled profits into less expensive second homes or income properties in Southern Arizona. I was at the Disneyland Hotel in the summer of 2005 when I met a couple in the Jacuzzi who had recently purchased a 4-plex in Tucson when they saw how low the prices here were compared to Southern California, and their timing could not have been better. A few months ago I phoned a local sign company to ask why my order hadn't been delivered. The owner answered that he was swamped with sign orders from real estate agents now having to sit at open houses. This is the last thing a good agent wants to do, so you know there are big changes in our local housing market.

Chart B: Arizona House Price Index

The number of homes on the market has greatly increased in the last few months, which reflects both investors and family's opinion that our rapidly increasing home prices are either slowing or have peaked and are starting to slip. Another indicator of a cooling market is the DOM, or days on market that a house sits before being sold. As the mad rush of local home prices increased, the time the average house was for sale plummeted. Likewise, many local agents have lengthened their guaranteed selling times in hopes of getting more listings in their inventory, even though they know the probability of a quick sale is decreased.

Chart C: Tucson Active Listings

Recently we've been getting calls from friends, relatives, agents and even competitors willing to simply walk away from their newly built homes. Builders who platted and sold outside normal demand areas had no choice but to sell to investors. I recently counted 8 newly built homes for sale on the same street as one of ours! Unless you had a pre- existing business model to sell, lease or rent to own these homes, there's a fair chance I'll be hearing from you soon. Some of the subdivisions that are now very soft are Star Valley, Gladden Farms and Continental Ranch. Star Valley, for example, had an average DOM for properties sold in the last 6 months of 76 days.

Artificial price ceilings have already been popping up. Those first to have them are those that had fundamental development flaws to begin with, such as lack of nearby employment, schools and shopping, or poor quality roads as access.

Chart D: Past Years Tucson DOM

Other factors that give builders headaches are increasing fuel prices, lack of nearby higher paying jobs, and the loss of good jobs, as well as increasing raw land prices and the continuing spike in labor and materials costs.

In my constant search for new investing opportunities, I saw an amazing set of comps on Tucson's million dollar mansions. An MLS search done on May 26^th, 2006 for active/pending/sold properties in the foothills priced between 2.5 and 8 million dollars showed that just 2 such properties have sold in the last 6 months. The number of actives in this category stood at a scant 25 homes, with an average asking price of 3.47 million. With just one of these homes pending, investors better factor in some serious mortgage reserves if they're considering a multi-million dollar spec home in the foothills.

Real estate agents and brokers who have been dabbling in part time investing have been calling me for advice recently. When you see newspaper ads for a house for sale noting "owner\agent" it's a good bet that they failed to have a timely exit strategy.

Chart E: Recent Tucson DOM

One interesting deal that came across my desk recently was a home that appraised at 3.5 million with existing financing of 2.8M and an easy monthly payment of $15,950.00. Even with a potential profit of over $500K this was not a deal that we wanted to roll the dice on. I simply agreed to help the owner brainstorm creative solutions before their much-feared next monthly payment. The newly finished home did have incredible city views, and other accoutrements seen only on "Lifestyles of the rich and famous".

Seller Tips

Be prepared to lower your profit expectations if you want a quicker closing. We have also used these strategies recently: Increasing the co-op selling side of the commission (motivates agents searching for their clients to show your property first since they will profit more from the sale) Hire an agent that specializes in the area or type of home you're selling. Prior to signing the listing agent ask about their listing to sold ratio. This will clearly show the likelihood of that agent selling your home within a reasonable time. Also, ask them their average DOM along with the details of the price ranges they have closed. Any of these stats that are more than 6 months old have little meaning in a quickly changing market.

If you need to employ a realtor or broker who's been involved with many newly built homes, then feel free to contact us at: www.Deedtrader.com

Ask your own questions to our Investment Expert at:
InvestmentQuestions4Deedtrader.com

To view prior articles visit:
Buying Foreclosures
Bidding & Foreclosure strategies
New House Investing (Entry Level Homes)
New House Investing (Entry-level homes #2)

www.DeedTrader.com

Helpful Links:

A-Z Real Estate Terminology-
Pima County Recorders website
Pima Express website
AZ Daily Star website