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Arizona After The

Housing Bubble

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Housing markets across the country are recovering, but not as quickly as some would like. Photo by Casey Serin and used under a Creative Commons license.
Experts Opine About The Recovering National And Local Real Estate Markets, Yet Few In The Industry Realize The Boom Was Fool’s Gold


By John Guzzon
Modern Times Magazine

Aug. 17, 2012 — If one would mention Phoenix and housing in the same sentence to most any person in the country, the most common reaction just might be a cringe.

After all, home values that had risen by more than 80 percent from 1998 to 2006 have lost most of that gain thanks to declining values and increasing foreclosures. The culprit? Well, the common targets are adjustable rate mortgages, risky investments from public and private groups alike and a plethora of other factors.

Heck, many Valley homeowners might cry if you mention the past few years. Many have been foreclosed upon.

But as bad as it has been individually, the real estate industry has taken perhaps the biggest beatings. It has fundamentally changed the real estate landscape. Thousands of new agents that flocked to the industry in the “gold rush” days before the bubble burst are now all but gone. Left behind are the veterans with just enough contacts to get them through this recovery.

Wednesday at Arizona State University, nearly 80 of them filled the Cronkite Theatre at Arizona State University to hear a variety of experts expound on the current state of the housing market. Panelists included some of the smartest people on the issue, including: Dean Baker, co-director of the Center for Economic and Policy Research; Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office; and Michael Orr, director of the Center for Real Estate Theory and Practice at the ASU W. P. Carey School of Business. Also included were Michael Johnson, Phoenix vice-mayor, William Shaw, Phoenix field office director of the Department of Housing and Urban Development as well as the illustrious Sen. John McCain.

Orr is a fixture among the policy wonks usually quoted about the Valley housing market, but Baker and Holtz-Eakin are renowned nationally and internationally for their work.

Holtz-Eakin even acknowledged that while he often doesn’t see eye-to-eye with Baker on much aspects of economic policy — Holtz-Eakin has worked for, or with, republicans most of his career and now runs the American Action Forum, a conservative think-tank — Baker was the first to yell “fire” in the crowded theatre that was the housing bubble.

“Nobody saw the housing crisis sooner, talked about it more vigorously, or was more right about the housing bubble than Dean Baker,” Holtz-Eakin said.

So where does the soothsayer who predicted the crash in 2007 stand on the current state of the Phoenix housing market?

“The idea that we are going to get back to the prices at the height of the bubble is just ridiculous. What we can expect to see is moderate price increases of around 3 or 4 percent. But the general direction is going to be upward,” Baker said. “We have turned the corner, but we still have a lot of issues going on and we are far from saying everything is good.”

Better news to be sure, but not exactly what the crowd wanted to hear.

Orr, who, like most Valley wonks, is ‘too-close-for-comfort’ cozy with most builders and real estate brokers, was a bit more enthusiastic, and said fears of banks dumping thousands of homes on the market and causing another precipitous drop are unfounded.

“The direction is very positive and there is no sign of a large addition supply coming in. Almost everybody has this fear that banks are going to flood into the market. I actually count these homes, everyday,” Orr said. “They don’t have a very large number and even if they do dump them it will have very little effect on the market.”

Orr said banks own about 5,700 homes in Maricopa County right now with 2,700 of them in the midst of being sold already and the other 3,000 are being prepped for sale.

What those in the real estate industry need to be worried about, Orr said, is delinquencies. There are still many out there who remain dangerously close to foreclosure thanks to the bubble or that they qualified for a loan they would never be able to afford long-term.

Stagnant income growth is a big reason for that, Holtz-Eakin said.

“We need better income growth and we have had bad income growth in this recovery,” he said.

One thing they all agreed upon, though, was that without the influence of deep-pocketed investors which have descended upon the Valley to swoop in and grab the foreclosed homes, things could have been much worse.

“They were the only people willing to catch the falling knife,” Orr said.

But their positive influence appears to be waning as a full recovery will only be realized when a better balance is reached.

“I think we have bounced back faster than most areas, but the situation that concerns me the most about the current state of the housing market is that investors have the upper hand. Without investors our market would still be down, but it would be nice to get a better balance so private buyers could compete effectively,” Orr said.

Baker said what could happen is something akin to a mini-bubble where investors artificially drive sales prices up as the competition begins between private buyers.

“What I worry about in in regards to investors is that a lot if investors are plucking up properties with the expectation that they will be able to flip them at profit and you could see a lot of up and down which is not a great story,” he said.

Part of the difficulty that the private buyers have in competing with deep-pocketed investors is the impression that it is much more difficult to obtain financing than it used to be. With more than 1,100 pages of new regulations implemented for federally insured home loans since 2008 — including careful checking of risk from the private buyers — the lending process has become more thorough in order to prevent another bubble.

Yet, many feel that has not allowed private buyers the flexibility to compete despite the fact that ‘too-easy’ qualifications was a prime cause for the bubble.

When the three-man panel of Orr, Baker and Holtz-Eakin opened the discussion to the audience, the first question was nothing less than evidence of why those regulations are in place.

The question was whether government “interference” in the financing process was impeding the recovery. Most in the crowd pricked their ears, obviously also wanting to know when an endless supply of cash would again come to pay their commissions even if a foreclosure followed a year later.

“We had a really big problem with very poor regulation in the last decade, so we need to look at what regulation we are looking to escape,” Baker offered, much to the chagrin of the audience dying for unending sales.

But what the real estate industry and the thousands of agents throughout the state have to realize is that what happened from 1998 to 2006 — while it was a boom time — was fool’s gold.

“If we go back to more more normal times — say, the mid ‘90s — there is really not much of a difference compared to now,” Baker said.

Those who are actually creditworthy are getting loans, although the proof of that might take a bit longer to prevent those who cannot truly qualify from slipping through the cracks.

The regulations are — for the most part — only stopping those not worth the risk.

Unlike what happened from 1998 to 2006.

Recovery is here and it will get better. But the hopes of most in the real estate industry for the Phoenix real estate market to be like it was from 1998 to 2006 is folly.

For if it was, another bubble would be secretly building.

And we all remember what happens when that bubble goes pop, don’t we?

John Guzzon is editor of Modern Times Magazine.
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