Real Estate Market 101- Summer School

The Truth about Real Estate: (or why the house pictured next to this won't go down in long term value...)

EDITORS NOTE; WHILE THIS ARTICLE WAS WRITTEN OVER ONE YEAR AGO, IT STILL RINGS TRUE, EVEN IN THE ADJUSTED MARKET WE ARE IN TODAY. MANY OF THE PROJECTS THAT ARE DISCUSSED IN THE CONTEXT OF THE MARKET THEN HAVE COMPLETED, SOME HAVE GONE ON TO NOT EVEN BEING BUILT. TODAY, A GOOD PROJECT IS A GOOD PROJECT… THE CREATION OF NEW GREAT ARCHITECTURE AND DESIGN ARE SIGNIFICANTLY CHALLENGED BY CURRENT MARKET CONDITIONS. IF YOU WANT UNIQUE, THEY ARE STILL NOT MAKE MUCH MORE OF IT :)

Recent articles in the Arizona Republic, reporter Catherine Reagor (whom I like and respect a great deal) picked up on an item that no doubt came across her desk as a press release.

The headline read: “high-end condos’ low opening bid signal glut”. It went on to cover an auction of four condos in Optima Biltmore and three at The Vale in Tempe. I have to quote a part of it so as to be in context: “Here’s a sure sign that too many high-end condominiums are going up in metropolitan Phoenix: Units at two pricey new developments are being auctioned off, and the minimum bids are half of what the homes originally cost.”

The coverage was really misleading in my opinion and it’s typical of what is being fed to the public almost daily. I am going to include most of what I sent to Ms. Reagor in reaction and will single out The Vale as an example…So here goes my big rant of the year concerning this article and the general state of real estate:

For the record, while there are a number of Luxury condo towers going up in the Valley, I feel it’s a misleading to consider The Vale as one of them and that this auction is an indication of a drastic change in the market. I may agree that we have A LOT of luxury condos, what we do not have is A LOT of condos with unique architecture. And Luxury Condos do not a complete real estate market make.

Visitors to this website will know that The Vale is a Diverse Mixed-use project. Units sizes ranged from 622 sq ft studios to 3 bedroom loft units over 2200 sq ft. They are well appointed, but I would classify the project as “Near Luxury”. None of the units sold new for more than $600K. The Studio units sold in the mid to high $100’s. There are still re-sale units ranging from the high $200’s and right now there is a wonderful 2 bedroom+den that you could buy today at $399K (subject to prior sale of course!).

So honestly, this project should really be considered one of the most obtainable in the Valley. The re-sale prices are running well under $350/sq ft, which is WAY below what the other re-sale and new urban projects are getting. Our average price was in the $300’s so in what way can this project be considered in the same light as the Luxury towers along Camelback? It’s flattering, but inaccurate.

Nor is it new. All units are sold save one remaining commercial office condo space. The project has been completed since September 2005. The clear majority of Buyers are owner occupants that are now happily enjoying a creative urban lifestyle and superb architecture on a daily basis. Most of the die-hards reserved originally and waited, with great patience, for the project to complete.

Most of the units in this “auction” are owned by a sole investor and I am certain that there is a reserve on the units, much higher than the minimum bid. As the sales agents for this project, I am obviously familiar with the ownership on these units. Basically, I suspect this is a creative marketing idea, designed to grab exposure and create an expectation that there might be some advantage to a buyer in this sort of sales setting. I feel that it is very misleading to the public to indicate that the “opening bid” is what these homes will actually sell for. If there is a reserve, it should be stated.

These units had been offered conventionally through MLS. I do not expect this owner will consider any bid that does not return his expectation of profit. This is what is really happening in the market: Sellers continue to expect a return that may be out of step with the reality of available inventory, mostly seen in new construction. In fact, in most cases prices have not gone down, they just fail to sell for what many investors wish to achieve in sales price. If patience and reasonable pricing is exercised, there are still buyers for virtually any home. And a fair return for sellers. We advise buyers and sellers every day. When our seasoned advice is taken, it almost always results in a happy transaction for both buyer and seller. We do not have to result to trickery in an auction setting.

It’s my opinion that considering this auction as an indication that the values of these homes are dropping, or that there is an air of market desperation is completely inaccurate. What I believe is really happening is a real estate firm taking advantage of an opportunity to capitalize on negative press, so as to create a sense of urgency in Buyers. It is no more a marker of true market conditions then a broker open house. It is a method of marketing, no more. The low opening bid does not signal a “glut”, it signals a sales tactic.

I received many an inquiry about the project these last few weeks. A handful of misled persons were under the impression that you could buy at the Vale for less than its market value, which I cannot even remotely see happening. The Vale remains one of the most affordable urban in-fill projects in the area. It has world-class architecture, innovative floor-plans, diverse unit types, and superb location being just 8/10ths of a mile from ASU and Tempe Town Lake. It is still priced considerably less than new construction along the Mill Avenue corridor. I spent the weekend there and had a delightful time; the spaces are fantastic, the light wonderful and the neighbors friendly. Another recent article categorized this project as “empty” or something similar. It is not, and even if it was, they are all sold. Just wait until fall, people return after the summer.

Which goes to show that if buyers want real values they don’t need to attend an auction to do it: they need look no further than their seasoned real estate professional that can show them MLS inventory representing a majority of reasonable sellers offering quality homes at sensible prices.

All of this adds up to my big prediction: Anyone who wishes to buy a unique home, and can, should do so now. There will not be a better time. I am basing this opinion on lots of information and a fair amount of experience…

Consider the following:

• Steel, plastic and concrete: We are still facing increasing costs of materials and these is still world-wide demand for some construction materials that has not decreased, nor is likely to in the next 24 months. I have two thoughts: New Orleans and China.
• Bullets and bombs use a lot of copper. So do hybrid cars, plumbing systems and electrical wiring.
• Oil: not cheap. Gas not cheaper…
• Construction Plastics such as Carpet, paint, insulation, PVC are all made from oil…
• The cost of these materials will keep new construction costs from going down.
• Nationally, interest rates are still historically very low but are likely to go higher rather than lower.
• Large amounts of people are still moving here. Even if the number slows for 2006, it’s still staggering.
• Outlying suburban neighborhoods have historically been the most affected value-wise in a real estate market slowdown. If you want a stucco tract home in Pinal County, you can find several….that acre lot in Paradise Valley? How many are there left without tearing an existing home down?
• In the worst real estate recession since the great depression, home values in Paradise Valley went down about 6%. When they rebounded, they went up about 10%.
• Building permits are down, which means eventually inventory will drop.
• The economy is good and employment rate is about as high as it gets.
• There is finally an actual inventory of unique architecture being developed and constructed. Celebrate this fact!
• If the market does actually soften, there will not be any new ones being developed for a while. That would be very sad.
• They are not making any more in-fill land, mid-century modern classics, Ralph Haver houses or Al Beadle homes.
• They are not making any more in-fill land, mid-century modern classics, Ralph Haver houses or Al Beadle homes (just in case you missed that last point…)
• ASU Downtown and the Light Rail have not even been built yet. Just you wait…
• Connecting Tempe with Phoenix via light Rail in going to create an urban powerhouse never seen here.

The same machine that delighted in covering increasing real estate frenzy will no doubt cover any possible negative effects of same, to their great profit. They are almost at the point where they are creating, or at the very least, spinning real estate issues to support an assumption that they hold about the market. It is interesting that we take information form the same source that sells real estate advertising as gospel. Consider this simple equation that even I can follow: Slower market = more advertising $.

Buyers are being frightened by stupid press. There’s some amazing misinformation out there right now. We see a lot of buyers who feel that things will come down further, but realistically, this won’t happen on anything they want to live in. Interest rates are probably going to rise so what will happen is that they will miss the window of opportunity to buy at a fair price and at a great rate!

Truthfully, the current market could be an amazing opportunity. Most Sellers who are sincere are pricing accordingly. Always remember that good Architecture in housing is a scare commodity. Way-cool houses are selling just like normal. Remember, much of what we represent cannot be duplicated, either because of talent or cost of building. If it’s unique architecture you’re after: there’s only so much after all…