Phoenix Area Homeowners Ban Rentals

In the latest of a string of discussions and meeting on HOAs and Neighborhoods trying to ban rentals from their communities, a new court decision may pave the way. From the article published today, rental houses may soon find their way out of the neighborhood.

Phoenix attorney Beth Mulcahy said the case, decided by the Arizona Court of Appeals in December, upheld a Sun City condominium association's right to change its rules and restrict rentals. "It is an important case" and the first to reach the higher state courts, said Mulcahy, who represents more than 800 Arizona community associations, including some in Chandler. She said more of her clients are looking for ways to restrict rentals, given the influx of real estate investors in Arizona in recent years. The court decision came within days of a Chandler Congress of Neighborhoods at which about 80 residents said governments need to do more to prevent rental homes from becoming eyesores and landlords from skirting taxes and fees.

"The big issue is trying to get compliance with the CC&Rs (community covenants and restrictions)," Dunham said. "There's also a perception that renters are third-class citizens." The Leadership Centre educates residents who want to be active in homeowners associations. At a recent rental summit, speakers urged landlords to thoroughly screen tenants and advised homeowners to include renters in neighborhood activities. "When you have problems in a neighborhood, plan a party," Dunham said. "When you start putting faces on those people, all kinds of good things happen."

What homeowners can't control are market forces that might cause real estate investors to dump large numbers of houses on the market, reducing neighboring property values, Dunham said. Alan Langston, executive director of the Arizona Real Estate Investors Association based in Phoenix, said his organization considers most HOA limitations on rentals to be an infringement on property rights. "We don't like slumlords either," Langston said, and the association concentrates on educating members about cities' property maintenance laws and tax requirements.

Phoenix is Fourth Worst Rental Market

If you are a landlord in the metropolitan Phoenix area you probably know the rental situation quite well. Rents are low and property values are high. This provides Phoenix with the fourth worst price-to-rent ratio in the nation competing with the likes of San Francisco and New York City. It's tough to find a property that you can buy at a decent price and make enough rent to pay the bills.

Commercial Leasing

After a big housing boom with highly appreciated prices and growth, the commercial and retail centers are sure to follow. It's the normal progression of growth and where all the new money and appreciation is going to go. Ultimately, as investors buy new commercial spaces they will need retail tenants to fill the vacancies. Commercial leasing is rapidly becoming the popular topic. Ray Alcorn provides some great advice on how to attract commercial tenants for your retail projects.

The most effective way to approach retailers is to be well prepared when you do. The first thing they'll want to know are three demographic factors for one, three, five and ten mile radii respectively... population (and growth trend since 2000), household income, and employment stats. You can get a full demographic report from a number of free sources, including Loopnet.com and www.freedemographics.com, but the most detailed info are from the paid sources. I use www.sitereports.com, but that's not an endorsement.

You'll should also have a schematic drawing of the center showing the space available, a site plan, location map, and an aerial photograph with major developments (such as big boxes, shopping centers, malls, etc.) and roads highlighted. It's also nice to have an architects rendering of the center. A list of co-tenants is also handy, but if you don't have anyone committed yet you'll have to hold off on that.

Put the above info into an 8 x 11 two-sided, color brochure. That will be your main collateral piece to email, mail, fax and hand out to prospective tenant reps. Be ready with rental rates and build-out allowances.

Then you're ready to talk. The marketplace that brings retailers and developers together is through the International Council of Shopping Centers (ICSC). You can find meetings for your area at their website at www.icsc.org. You'll want to join, as that's also the best source of educational information for retail property anywhere. You can also check out the tenant "haves-wants" lists and databases at www.dealmakers.net and www.crittendenonline.com. (Again, those are referrals, not endorsements) Both specialize in providing current information on retailer expansion plans.

Is Real Estate Speculation Healthy for the Economy?

It's tough to know whether or not the current real estate speculation is going to be healthy for the economy in the long term. A lot of economists don't think it's a good idea to have so much riding on the housing sector.

Speculation or not, the runup in real estate prices raises a basic question: Is it healthy for economic growth? If the market slows, some home owners will be stuck with hefty mortgages, fat monthly payments and little equity. The market is unlikely to collapse, but some owners will be forced to pull their houses off the market or sell for less than they expected. That would create a downdraft that will suck the life out of many investments.

"We find that the red-hot housing sector alone, which typically represents just 5% of the total economy, accounted for an astounding 50% of the overall growth in the U.S. economy by the first half of this year, and more than half of the private payroll jobs created since fall 2001 were in housing related sectors," Merrill Lynch (nyse: MER - news - people ) economists Kathleen Bostjancic and David Rosenberg said in a economic commentary.

"We argue this represents an unhealthy and disproportionate share of economic growth. The over-reliance on residential investment leaves the economy very vulnerable if housing demand and prices cool--prices do not need to even fall, just a slowing in the pace of home price appreciation would have a noticeable negative impact on economic growth--not unlike the fallout following the frenzied tech over-investment in the late 1990s."

Housing Bubble

There is no doubt that housing prices have taken off, but it's really starting to catch on. Entreprenuers are selling t-shirts making light of the current real estate bubble. It is very relevant in markets such as the top 50 most overpriced markets.

Phoenix Arizona Grabs Top Real Estate Appreciation

In the second quarter of 2005, the median house price for the Phoenix-Mesa-Scottsdale (East Valley) area had the highest level of annual appreciation at 47%. This equates to a median house price of almost a quarter million dollars.

The strongest price increase in the nation was in the Phoenix-Mesa-Scottsdale area of Arizona, where the second quarter price of $243,400 rose 47 percent from a year earlier. Next was Cape Coral-Fort Myers, Fla., at $266,800, up 45.2 percent from the second quarter of 2004. Third was the Palm Bay-Melbourne-Titusville area of Florida, with a second quarter median price of $204,000, up 40 percent in the last year.

Reactions to a Bubble

Ray Alcorn, a regular writer on Commercial Real Estate Online" (http://www.real-estate-online.com/commercial-real-estate/wwwboard5/index.html) has some interesting reactions to the real estate bubble many talk about.

I’m reminded of a quote; “We tend to over-estimate the effects of change in the short run and under-estimate the effects of change in the long run.”. I see you must have read Mr. Mauldin’s latest “Out of the Box” memo with a highlighter at the ready.

Many of your comments also echo the thoughts from Barry Ritholtz’s blog piece, (“Real Estate Begins to Cool” at http://bigpicture.typepad.com/,) linked from the OotB article. While I agree with the thinking in a broad sense, in my view the conclusions you’ve drawn are beyond the limits of the data offered as support.

First, the stats he uses to support the assertion of the coming RE bust are based on one residential MLS database in one New York market, plus some anecdotal comments from residential brokers in a NYT article. If I understood the context of the blog post correctly, Ritholtz is a market strategist for an investment house, and views the housing slowdown as an indicator of the coming macro economic slowdown and posits some possible effects in the context of what to stay away from in the investment universe. In re, stay away from Home Depot, Lowes and homebuilder stocks, because they are directly in the line of fire. I have very little knowledge about stocks, but that makes perfect sense. However, I can’t agree on the conclusions and would point out that anytime outsiders begin analyzing my field of expertise I fairly jump at the chance to prove them wrong.

What I know is real estate, and a basic fact of that business is that commercial real estate is driven by different dynamics than single family residential real estate. Extrapolating data from one sector to the other creates major blind spots for both. More on that in a moment, but first, let’s remember that we’ve been here before, and quite recently.

I wrote an article in 2000 that predicted “the highest appreciation gains in real estate ever seen will occur in the next eight to ten years”.

Boy, I nailed that one. However, in full disclosure, I that same article I badly missed the prediction on manufactured housing. But I wrote those thoughts in the face of the media stories of the day expounding on the rapid rise in home prices and that real estate was headed for a crash. Yes, it started way back in the nineties, lest we forget. The point of that article was, contrary to the prevailing wisdom of the time, real estate was positioned perfectly to gain value like never before. My reasoning then was that commercial real estate value was being driven by what was then a very strange concept... stability in the RE capital markets.

And that, my prognosticating friend, is what makes the RE world go round. Nothing has changed in that reasoning except that what was then theory is now history, and the results speak for themselves.

In a nutshell, when capital isn’t happy, no one in RE is happy. The volatile periods in the real estate markets were all caused by major disruptions in the capital flow. We are so far from that scenario that I can’t even see it from here. This is not a matter of believing “something is different this time” is the death rattle of investors blinded by the light. There has been a sea change in the CRE sector that is not going to just disappear at the first hiccup in GDP.

What has changed is the very capital structure underpinning the majority of real estate assets in the country. CMBS financing, with strict underwriting procedures in return for low cost capital, revolutionized commercial RE investment across the board. CMBS loans now account for almost a quarter of all CRE lending, and over 75% of residential lending. The effect of these CMBS pools of loans is that the risk is now spread evenly with pricing. That takes a huge chunk of uncertainty out of the picture.

Next, the concurrent rise of the REITs changed the face of the equity side of the equation. Over 25% of all CRE is now owned by REITs capitalized with very low leverage and relatively low return expectations. They now own almost 75% of the class A and B assets nationally, and they are well poised to weather a downturn in occupancies, an increase in rates, and as in every business cycle there will be winners and losers.

Those factors, combined with a global surfeit of capital in a desperate search for yield, have been responsible for the “re-pricing” of commercial real estate I mentioned when we talked in June. But to gauge the effects of rising rates on real estate in toto is a fallacy from the start. Not only is there no national real estate market, neither is there no one “real estate” market. The major blind spot for most “investment managers” and economists is that they lump all dirt into one category, and attempt to make predictions for the whole sector, just as they do with industry segments from utilities to semiconductors. I’m sorry, but it ain’t that simple.

There are distinct differences in the types of real estate that must be accounted for when trying to measure effects. The first and simplest division is between residential real estate (e.g. single-family homes) and commercial real estate (income properties).

Is there a housing bubble? Yes, in some places. Are people going to get hurt? Yes again, but it will not be on the scale of a national meltdown. My belief is that the correction is already happening, but more along the lines of the market wringing out the excesses of a drunken binge on cheap money. And just like any addictive behavior, the severity of withdrawal pains will be in direct proportion to the amount consumed.

The speculators are getting their comeuppance already. Anyone riding empty houses and condos with floating rate debt and betting on 20%-30% overnight appreciation is getting burned as we speak. No surprise there. At Ed Garcia’s latest workshop, there was an investor in just that position. The real shame of his predicament was that both Ed and I had warned him several months earlier that he was playing a dangerous game. He didn’t listen, bought more condos, and is now faced with some very unpleasant consequences.

Will higher long-term rates cool the housing market? You bet. But the effect is going to be felt on the supply side first, and the caveat above for homebuilder stocks is dead on. Starts are projected at a very healthy (and non-boom like) 1.374mm this year. History as recent as 2001 indicates that 7% mortgage rates (an increase of 150 bps from today’s 30-year fixed rate) will support 1.3mm starts, hardly a decrease of crash proportions.

But before you jump to the conclusion that home values will move inversely in lockstep with increasing rates, examine the existing homeowner’s options. If they wake up one morning and their house is worth 20% less, what are they going to do? My bet is they will stay put, ride it out, and hope for better days. Will some pay the price of foreclosure for using adjustable and interest-only mortgages? Yes again, but assuming they have a job and can still afford the payment they signed up for, they will live with those decisions. Some will most certainly be caught short, and blazoned all over the media as “victims” of ruthless realtors and bloodsucking bankers (I love alliteration!) “forcing” them to reach for more than they should have.

But the real nub of the issue is that it is assumed that a slowing housing market will cascade into reduced spending, hence lower production, hence less jobs, and tailspin into a full-blown recessionary nightmare.

I strongly agree that there is a recession coming sooner than later, and last year I said (in a lengthy post here, which I can’t find the link to right now) it would begin in the latter half of ’05. As you mentioned, the leading indicators are all negative or trending that way even though the summer numbers look fairly strong at the moment. So I’m right so far, but that’s a minor point. How severe, how long, and the long-term effects of a recession are questions we can’t answer with any accuracy until we are closer to it.

My view, just as I wrote in 2000, is that money can be made in real estate with deals that make sense. I’ve made more money in the last five years than any other period of my career, and I did it by staying ahead of the trends. I wrote a post in 2004 about the same topic, and countered the doom talk with my own strategy of niche plays, developing when acquisitions are impossible, and sorting through the myriad of deals to find the ones that make sense.

Real Estate Site Takes Off

[link=http://www.rentincome.com][/link]

Every industry needs great tools to help innovation and productivity and the RentIncome.Com web site is one of those great tools. Best of all it's free! You can instantly calculate your potential real estate investment online and get quick answers on NOI (Net Operating Income), Cash Flow, DCR (Debt Coverage Ratios), GRM (Gross Rent Multiplier), ROI (Return on Investment) and many more. The site presents a very nice utility and it just got a nice presentation overhaul with a flashy new logo. I'm sure there is more great things to come. If you are considering real estate investments be sure to consider RentIncome.Com before you buy.

Valley Real Estate Hits Peak

It was only a matter of time before the Phoenix area real estate market would slow down. The National Association of Realtors already sees signs of slowing and houses prices and sales are at an all time high.

U.S. home sales are "close to a peak" and prices will rise next year at about half the rate of 2005, the National Association of Realtors said. The median price of an existing home will increase 5.2 percent to $215,200 next year, the smallest gain since 2000, when prices rose 4.1 percent, according to a forecast today by the Washington-based trade group. Sales of previously owned homes are forecast to fall 3.6 percent and sales of new homes to drop 4.5 percent.

ROI Exceeds Expectations

Sam Lieber, fund manager of Alpine U.S. Real Estate Equity, has been very successful in leveraging his investor capital to create excellent return on investment. Double digit returns every year is the norm and he doesn't see anything less for the next three years. While most people see a real estate bubble, Sam Lieber sees an opporunity with home builders and possibly hotel chains through the end of this decade.

What's driving demand? A number of things, including the low cost of financing, the fact that many people have escaped the stock market in search of what they perceive as safe investments, immigration, population growth and so on. Supply simply has not kept up with demand, so prices have to go up. It's economics 101.