The newspapers like to print bad news about real estate (bad headlines sell papers) and, indeed, 2007 brought some bad news for Flagstaff homeowners wanting to sell their Flagstaff homes. In Flagstaff, real estate and home building are a huge chuck of our local economy, so the Flagstaff newspaper takes an evident interest ~ sometimes accurately, sometimes a bit off target, in my view (I always let you know). As we look forward to 2008, the drop in prices and volume of sales over the last year should be put into perspective to fully understand the outlook for Flagstaff real estate buyers in the coming years. In fact, for those looking to live in Flagstaff, Arizona, or buy a second home here, 2008 is most likely the time you should do make the move.
Much of the bad national real estate news during 2007 related not to the intrinsic value of real estate, but to Wall Street greed, according to Lawrence Yun, the chief economist for National Association of Realtors®. Speaking at the November NAR conference, Yun pointed out that Wall Street mortgage bond investors demanded sub-prime mortgages in order to get the 10-12 percent return that those mortgages yielded. Wall Street was dissatisfied with the smaller returns from more traditional mortgage products. Yun’s take on the Wall Street mortgage bond investors: "They gambled. They lost."
Yun's outlook for 2008 sees a shift from speculators to serious homeowners. Speculators essentially abandoned real estate by mid-2007. Yun says 2008 will be a year of opportunity where there will be serious, healthy business. Furthermore, Yun predicted that the market returns to normal by 2009. Others are beginning to predict that “normalcy” may not return until 2010. I'm sticking to my earlier prediction that we'll get back to rising Flagstaff home prices in early 2009, and meanwhile, I don't expect much more falling.
For those trying to decide when to buy, here are some thoughts:
1. First-time buyers should definitely get into the market sooner rather than later. One reason is that interest rates are lower than they are likely to be later in 2008. A more important reason is that renting is a losing strategy. According to Federal Reserve research, between 1995 and 2004, the average renter accumulated $4,000 in wealth. In contrast, the average homeowner accumulated $184,400. Furthermore, the typical homeowner lives in their home for six years. Within this period of time, NAR's research shows that approximately 97 percent of the homeowners will have a positive equity position after that period of time.
2. One challenge to your analysis is that national numbers are pretty much irrelevant. Yun says talking about national averages is about as effective as having a national weather forecast. Like the weather, real estate markets are local. In fact, you may have a buyer's market and a seller's market operating within a single market area based exclusively upon price point. We see this happen in Flagstaff not only based on price points, but on types of housing. The supply of available single family homes above $400,000 may be 13 or 14 months’ worth ~ clearly a buyers’ market. Meanwhile, the supply of single family homes below $300,000 may be under six months’ worth ~ a sellers’ market. To make the right decision, you need to consult with a real estate professional who can give you numbers for the sub-market that matches your housing needs.
3. New building permits: Even though these are dropping, there was too much building in recent years. The market is simply responding to the law of supply-and-demand. In Phoenix, there are way too many builder homes that were built on speculation. There are fewer in Flagstaff and they are slowly being moved to successful closings. Meanwhile, new building permits are way down. This adjustment in Flagstaff will take more time, but probably be finished in 2009. Look for new home building to come back then. Meanwhile, resale homes will be in demand because they will be the “only game in town.”
4. Foreclosures: According to Yun, the 41 percent increase in foreclosures nationally has resulted primarily from investor-heavy real estate purchases in Arizona (mostly NOT in Flagstaff), California, Florida and Nevada. The majority of these individuals are flippers whose investments did not payoff. More importantly, the number of foreclosures in Utah, New Mexico, North Carolina and South Carolina is actually declining.
5. Under-priced real estate markets: Although the coastal markets are still overpriced, Middle America is under-priced. Sales volume there has not dropped. It never took off as it did in other areas and therefore never became “over-heated.” The lesson here is that while Flagstaff may have over-heated, it didn’t boil over as Phoenix and some other markets did. Thus, Flagstaff had less far to go down to reach “normal” than other markets do, including Phoenix.
6. The housing recovery has started: Other than the three states hit heavily by job losses in the automotive industry (Indiana, Michigan and Ohio), the states that first experienced a downturn in the Northeast, are now in recovery. Specifically, Connecticut, Massachusetts, New York and Rhode Island were the first to feel the slump and are now well into a recovery. Furthermore, there appears to be a pent-up demand for first-time buyer properties due to a large number of “Generation Y”s (born 1977 to 1994) that are now buying their first homes. Continued low interest rates will motivate many of these buyers to step into the market now and fuel the recovery.
7. The overall economy is still strong: Corporate profits are still strong with companies as diverse as Microsoft and Jack Daniels reporting close to record profits. Furthermore, the economy has generated an unexpected number of new jobs and wages are rising. (Four million new jobs in the last two years, according to the U.S. Bureau of Labor Statistics.) There is much talk of possible recession, but so far it is not showing up in the numbers. The Federal Reserve’s most recent statements indicate it continues to be more concerned about inflation than about recession.
8. The weak dollar may bring more foreign investment in U.S. real estate. One of the Christmas letters I received noted that on a family vacation to Britain, my friends had paid $97 for five movie tickets to see the Bourne Ultimatum and $20 for a glass of beer. Tourists are flocking to the U.S. because the opposite is true for them – their currencies buy more here than at home. Although the decline of the U.S. dollar will end up costing us more if we go overseas or purchase imports, it has resulted in more manufacturing jobs returning to the U.S. It may mean more foreign investment in U.S. real estate.
If you would like to follow the Flagstaff market, you can subscribe to this blog for my regular Flagstaff real estate market statistical reports. As noted earlier, the overall market numbers, even on a city-by-city basis, can be misleading. If you are thinking of buying, you need to have an expert drill-down the stats to the market segment that matters to you.
Bottom line: Flagstaff home prices are likely to be steady in the lower ranges and falling a bit more in the higher ranges during 2008. The upcoming year represents the best window that buyers will have to find excellent deals with excellent financing in Flagstaff. Sign up now with a good mortgage advisor and excellent real estate team to make sure that you don’t miss the opportunities this real estate market will present. To learn why we should be your choice, visit our website at www.bestflagstaffhomes.com
Thanks for reading, and have a great 2008!
Ann Heitland, Team Heitland at RE/MAX Peak Properties
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