Risky Arizona Real Estate

April 9, 2008

Transcript:

Ted Simons:
Tonight on Horizon, attention valley residents: find out what the colors on this map say about the financial risks of real estate in your neighborhood. As kids take the aims test this week, hear what the State schools chief and the Goldwater Institute have to say about the high stakes exam. Plus an update on legislative efforts to ban gay marriage, repeal a property tax and spend forty million dollars on English learners. It's coming up next on Horizon.

Announcer:
Horizon is made possible by contributions from the friends of eight, members of your Arizona PBS station. Thank you.

Ted Simons:
Hello and welcome to Horizon, I'm Ted Simons. Been watching your house lose value and equity while you're trapped in a high interest mortgage? You're not alone. In fact, in some parts of the valley you might be surprised at just how much company you have. Forbes.com recently ranked Arizona number ten on the list of states with the riskiest real estate. The ranking was based on research conducted by Dr. Tony Sanders, A.S.U. Professor of Finance and Real Estate for the W.P. Carey School of Business. Good to have you on Horizon.

Tony Sanders:
Thanks for having me.

Ted Simons:
How did you go about studying this and compiling the data?

Tony Sanders: What we did was we went through, we have a house price index at the Arizona State University broken up by zip code and property type. What we wanted to look at, to see if there's a relationship between how many sub prime loans or Alt-A which are the liar loans or no document loans and see if the type of mortgage product is correlated or related to what's happening in the Phoenix housing prices.

Ted Simons:
Okay. Just housing prices alone? Are you looking at other social factors in terms of anything from unemployment to other aspects of a community or just the real estate aspect?

Tony Sanders:
Oh, no. We're also looking at things like credit availability and credit scores, we're looking at the impacts of race, education, et cetera. So we're looking at a whole broad swath. But it turns out the mortgage ones in is the most fascinating of all of them.

Ted Simons:
The first map is the sub prime concentration. Where is it the worst?

Tony Sanders:
Well we're the sub prime concentration which means the number of sub prime loans in a zip code divided by the total number of loans of all types. Where it's the worst is going to be primarily, of course, along I-10 in kind of older neighborhoods and lower-income neighborhoods. Going up I-17, north up to Metro Center. And then going down southeast to Queen Creek. So we see quite a few sub prime loans out in Queen Creek again, more of a rural area, and out West. So we look out West near Goodyear, Avondale, et cetera, we see a lot more of these sub prime loans.

Ted Simons:
Again this map is of sub prime loans, not necessarily defaulted loans.

Tony Sanders:
That's correct.

Ted Simons:
Okay. We have another map that is the interest only adjustability rates, the arms. And these again are considered risky as well. What are you seeing here?

Tony Sander:
What we see with these is this is what we'll call the Los Angeles model. Because these type of loans we find in L.A. very expensive housing market so people try to get in there on the "the cheap" so they get the mortgage payment or the mortgage contract that reduces the payment amount, which happens to be the interest only, no amortization arm. And the interesting thing is where do we find these? We find these in Scottsdale, Cave Creek, Carefree and then also down in Ahwatukee.

Ted Simons:
I have to say when I first saw this map I was surprised to see so many what could be considered risky loans and mortgages up in some pretty ritzy areas.

Tony Sanders:
Here's the catch: the catch is, lenders when they see an IO-ARM they say to themselves, oh, my gosh, this household better have really good credit and really a lot of income backing it up. So it's a loan you really generally can't get if you're kind of in that hazy gray area.

Ted Simons:
Interesting. We have another map here regarding investment and second homes. And this initially looks a bit like a mishmash but I'm sure you can see something there.

Tony Sander:
Well, with this map, this is again the same type of issue that really hit Florida. And it's hit Vegas and it hit some of the California coast. These are investment loans people from L.A. that have come to the Phoenix area to buy a condo, people who have come in from Canada to invest. If you look at the map more carefully, what you'll see is around the gulf beltway, 51 north, 101 east along the bend to Scottsdale to 202. We have every resort, every golf course has condominiums located very close to them. We've kind of overbuilt those. If you take a look down in Tempe, that's a lot of rental property for students. Or actually condos purchased by parents so their kids can go to -- have a nice place to live. But that's what it is. Kind of a beltway phenomenon. And of course we get some of these out in the west as well, which is very typical, Verrado type area.

Ted Simons:
So again, it looks as though you're talking freeway, you're talking lots of activity for better or worse.

Tony Sanders:
That's correct. So these investment property loans -- and since they've kind of, as we all know, kind of built, we're watching this, too, to see if this is an area where we're going to be seeing kind of a burst of defaults if the market deteriorates.

Ted Simons:
What do we make of these maps? What concerns you the most when you see these data?

Tony Sanders:
What concerns me the most is that in some of the neighborhoods, the sub prime neighborhoods, those are the neighborhoods that we worry about. Because the data from the housing market when we sorted it by zip codes as opposed to community, we are seeing a big dip in some of those communities where you have a high sub prime concentration. On the other hand, in areas such as Scottsdale, Ahwautukee, and going up north to cave creek and carefree, we're seeing relatively low default rates, although the loan type is risky. So that's sort of an income effect. So we're seeing actually in the last year housing prices in the Ahwautukee, Scottsdale areas have actually gone up a little bit. So the premium areas, housing prices are going up, then the lower income neighborhoods they tend to be going down. And that's where the sub prime loans are.

Ted Simons:
Talk about the ramifications of that, that differentiation as far as the future and the economic stability of a region is concerned. That doesn't sound very good to me.

Tony Sanders:
It's not very good. In fact, as we were discussing before we came in here, oil prices. Oil prices are going up. And as everyone that's commuting from the outskirts of town are going to find out, some of these locations in the housing developments out in the Queen Creek area going to Goodyear, that's going to make the commute even more difficult. And so what that's going to do is that's going to increase the incentive to move closer into the downtown, which should have a buoying effect in the middle. Or in Scottsdale, et cetera. But it's going to actually cause some hardship out in the boundaries when gas prices were cheaper.

Ted Simons:
You mentioned incentive for people to do certain things. I think for a lot of folks looking at this from a distance, the real estate crisis, if you will, the credit crisis and all this kind of business, the simple model of demand and supply seems all topsy-turvy when it comes to homes in a speculative market like Phoenix. Is that the impression you're getting as well?

Tony Sanders:
Particularly vacation properties, some of the Carolinas, Florida, Texas shore, the coast, you got Arizona, Nevada, California, anywhere you've got a lot of vacation properties, that's where we saw a big speculative bubble occurring. In the IO-ARMS once again to minimize payment, that just fuels the fire. Again, everyone in Scottsdale and Ahwautukee should thank their lucky stars that Ben Bernanke has been keeping rates low. Otherwise there would be some serious pain on top of the gas prices.

Ted Simons:
Interesting. All right. How does Arizona rank now in terms of delinquent loans in general? The valley in particular but Arizona overall.

Tony Sanders:
Arizona's actually not doing as badly as one would think. Given the fact that we have what looks like a blueprint for a good meltdown. We've actually done pretty well. And the reason for that is that the basic economy of Maricopa County in this area of Arizona is actually good. Compare that with Ohio and Indiana and Michigan which is really kind of a depressed economy which no one really foresees a return of. They're having serious struggles. So when we look at these national reports of what the default rates are doing in the country, Arizona -- we're in much better shape than a lot of other areas of the country.

Ted Simons:
Are you confident, then, that Arizona will bounce from the bottom quicker or sooner than other regions?

Tony Sanders:
I think Arizona, because of its continued attraction, people migrating up from California, people are still migrating from the northeast, I think it still has a very bright future. I think that what's going to happen is that in terms of the mortgage market, what we've done -- and again inadvertently with prices actually coming down in some neighborhoods -- we're creating kind of an if someone loses that's terrible but it creates cheaper housing for some households that want to move in now. So it actually increases the affordability part of moving to central Arizona.

Ted Simons:
Very good. Thank you so much for joining us. We appreciate it.

Tony Sanders:
Thank you so much for having me.

Ted Simons:
You bet. Yesterday state lawmakers sent a bill to the Governor to permanently end a property tax that had been used for education. Today, they worked on a plan to provide funding for English learners. Here with his weekly legislative update is "Arizona Capitol Times" reporter, Jim Small.

Ted Simons:
Jim, thanks for joining us on Horizon.

Jim Small:
You're welcome.

Ted Simons:
Let's start with E.L.L. funding. Sound like we had a little fireworks today?

Jim Small:
Big happening from the E.L.L. funding issue. The idea is to settle a lawsuit that's been going on since 1992. We've talked about this before, about $40 million in funding was requested by the department of education to allow schools to implement new models and new ways of teaching English to students who don't speak English as their primary language. The house today, they heard the bill in committee. They added the $40 million in funding. They debated it on the floor and voted it on the floor. And it was really kind of an interesting debate. You had democrats on one side opposing it because they said it's too little funding, the models aren't practical. They don't work. School districts don't like the models. Teachers don't like the models. They brought up a whole host of objections to it. Republicans said, look, we need to pass this by April 15th. We've got $2 million in fines coming if we don't pass it by the middle of May, $5 million a day in fines. At a time when the state is facing $3 billion in deficit, really they said it's impractical to put ourselves in the position where we're going to get fined. Ultimately, democrats tried to amend the bill. They tried to move the funding around. They tried to remove the requirement that schools use these new English models. They were unsuccessful. What ended up happening when they put the bill up for a vote, democrats were hoping that enough republicans would be uncomfortable with the idea of kowtowing to a federal judge and giving up on the issue of state's rights versus federal rights. They were hoping some of these republicans would cross over and would vote against the proposal. And for awhile there it looked like it might have happened. You had about 25, 27 republicans who voted for it. The voting board just kind of sat there, didn't move at all. Democrats refused to vote. What ended up happening was the house republican leadership made a roll call vote which is permissible under the rules. They went name by name down the list of representatives who hadn't yet voted. Everyone ended up voting. And the measure passed pretty solidly.

Ted Simons:
I was going to say, that sounds rather unusual, that roll call vote for a situation like this.

Jim Small:
Yeah. It was. It's something that you don't see too often. The last time I remember seeing them do a roll call vote was actually because the electronics mall functioned on their voting board and representatives sitting out on the floor couldn't see the actual board so they went name by name to finish up voting that way. I don't remember in my time having seen a roll call vote to force people to vote because they were stalling.

Ted Simons:
So it's $40 million. Is this going to be enough to get the governor to go ahead?

Jim Small:
Well, I think that's going to be the important question. There's a lot of thinking within some of the republicans that I've spoken with that governor is most likely going to let this go. Either -- she may not sign it into law but she may let it go into law. Something she's allowed to go do. It can go into law without her signature and the funding can be appropriated. I would imagine if that happens the word I've gotten from some of the democrats that I've spoken, she likely views this as a first step toward solving the problem. I wouldn't be too surprised if there was some kind of a letter she issued or something she files with the court to say, we're going to let this go into effect, and we're going to let you decide on whether or not this is really adequate.

Ted Simons:
All right. Senate votes to prevent the return of the property tax. Surprised that a democrat, Ken Cheuvront, went to the other side and we had two republicans, Carolyn Allen and Tom O'Halleran switched over to the other side as well.

Jim Small:
I think the timing of Senator Cheuvront announcing he was going to support the republican effort to permanently repeal this property tax caught people off guard. Up until now the bill had been stalled because you have 17 republicans and two of them had said they weren't going to vote for the bill. And all the democrats were in line opposing the bill as well. And since you need 16 votes to get anything passed, it kind of left things at a log jam. And you couldn't really get the bill out of the senate. And on Monday, senator Cheuvront came out. He's a small business owner. Very pro-business voting record. Votes with republicans on a number of business issues. And he came out and said, "I'm going to go ahead and support this and make sure that we don't burden small businesses with this property tax."

Ted Simons:
Wasn't this also his way of saying if cities are going to give big companies and big corporations, shopping malls and these sorts of things all these tax breaks and incentives, then I guess a little guy ought to get something, too?

Jim Small:
There's been some talk around that that might be part of it. He was recently defeated at the legislature trying to get rid of what's called a government property excise lease tax which is where the cities can give sweetheart deals that he called them to big developers in order to build property downtown, a lot of the towers downtown.

Ted Simons:
Okay. Last one here, the effort to tinker with voter approved initiatives. Russell Pearce's efforts to do that. Where is that standing?

Jim Small:
Was heard in the senate committee yesterday. Senators talked about it, they found a number of problems with it. There are some issues they were very concerned with some of the ramifications and how it would be applied ultimately and what it would really mean to the legislature and to the voters intent when they passed certain measures. And so they held the bill and they're working on some amendments. And all indications are that it will come back in the next week or two and probably be amended. But we're going to have to wait and see exactly what those amendments do.

Ted Simons:
Greatly changed?

Jim Small:
I think it's talk it will be pretty significantly changed, at least in ways that for the time being Russell Pearce would consider significant.

Ted Simons:
Interesting. Hey, Jim, thanks for joining us.

Jim Small:
Thank you, Ted.

Ted Simons:
This week, kids all over the state are taking the AIMS test. It's a high-stakes exam meaning Arizona high school students must pass it in order to graduate. That's how it's supposed to work, but for the last two years students have been allowed to augment their aims scores with bonus points for passing grades in their classes. But this year there is no more extra credit. High school seniors who don't pass aims will not graduate. However, State Representative David Schapira, a Tempe democrat, is sponsoring a bill to change that by bringing aims augmentation back.

David Schapira:
My concern is that there are folks that have serious anxiety issues when it comes to taking a high stakes test. You and I didn't have to take a test like that when we graduated high school and most Americans didn't have to. So we don't understand what's involved when you take a test where 13 years of your education hinges on the result of that test and whether or not you graduate hinges on the result of that test. So I think it's important for students that have proven successful in their coursework and have really tried -- not students that took the test only once and didn't do well and think that they should still graduate -- but students that have taken it every time it's offered, have done tutoring to try to improve their scores and in many cases have paid out of their own pocket for tutoring. If many of those students fall short, a couple points short, I believe they should still be able to graduate high school given those bonus points augmentation.

Ted Simons:
Joining me to talk about the aims test and other education issues is State Superintendent Of Public Instruction, Tom Horne, and Matthew Ladner, Vice President of Research For The Goldwater Institute. Tom, let's start with what we just heard. Student who really tried, good students, good kids.

Tom Horne:
We call this the volleyball amendment. If you do well in volleyball you get extra points on your math test. The whole point is to demonstrate objectively you have the skills that we expect of a high school graduate or you don't graduate. This is counterproductive to that it also puts pressure on the teachers to give grade inflation. Grade inflation is already a problem. I noticed David was talking about kids who suffer anxiety. Parents say that to me. I say, did they have too much anxiety to pass the written driver's test? No. Every single parent that ever talked to me their kids passed the written driver's test because they were motivated to do it. If they're motivated to pass it they'll do it if they study.

Ted Simons:
Matthew, good student, good grades, good kid. Really tries to pass AIMS. Simply can't pass an aspect of it. Is it fair they don't get a diploma?

Matthew Ladner:
I think ultimately it is fair. But it's important they think we should focus these sort of policies on the early grades. The research shows that kids who don't learn how to read in the early grades are basically lost. It's very difficult to ever catch up once you reach a certain age. Florida has done this. They start testing kids in the third grade. If you don't have the sort of reading skills you need in the third grade they'll actually make you repeat the third grade. That's addressing the problem where it is, in the early grades and in setting kids up to succeed rather than to fail.

Ted Simons:
Go ahead.

Tom Horne:
I was going to say I totally agree with that. And in the school district where I used to be on the school board we did that and school districts can do it now. I think ultimately the state should do it. We have to get the public first to accept the high stakes test at the high school level and then I think we'll be able to do it at the lower grades as well.

Ted Simons:
Let's get back to the political aspect. Is there political will not just for what was mentioned in Florida but just for what, 4,000 or so high school student say, sorry, you got good grades, many of them, but we just can't give you the diploma?

Tom Horne:
It's important to know we don't give up on any of the kids. They can take the test in July. I persuaded the state board to let them take it as many times as they want at state expense. As soon as they pass and know the skills that we expect at graduation they get the diploma. We don't give up on anybody. But it also makes sense to not send somebody into the world with a diploma when they don't have the skills. We're fooling them.

Ted Simons:
Political will there?

Tom Horne:
Like Yogi Berra said, it's hard to make predictions especially about the future. My idea is it's not a good idea. That they demonstrate the skills and knowledge on an objective diploma.

Ted Simons:
You think the legislators are ready to say sorry to 4,000 kids?

Matthew Ladner:
I'm not sure. But I am sure we need to address this problem a lot earlier in the 12th grade.

Ted Simons:
In general, what's working and not working when it comes to AIMS?

Matthew Ladner:
Well, I think that -- I mean, I'm concerned about -- and we can discuss this when we talk about No Child Left Behind, that there has been significant lowering of the cut scores on AIMS, the state board of education did that. Mr. Horne voted against it. But nonetheless, I'm very concerned that the test is on the road to becoming a bit of a farce as a reform measure. If we are giving tests that kids more or less -- and this is not the case yet but could be someday -- pass when they sign their name, that's an extremely alarming prospect. And unfortunately, the No Child Left Behind law actually contributes to that.

Tom Horne:
But we did have a 8-to-1 vote on the state board and I was the no vote. But in defense of the other members, what they were defending was a process which is we don't just sit and decide, okay, we're going to dumb down the score. We get a test -- group of teachers from around the state and follow guidelines. They list the questions from easiest to hardest. The teachers choose what constitutes proficiency without knowing the numbers before they make the choice. Then the state board can accept or reject that. I recommended that we reject it because I thought we should set a higher standard. But the reason they didn't was because they wanted to respect the process that we had. The only way I could get the teachers to recommend a higher score would be to have a less diverse group of teachers and I don't think that would be right.

Ted Simons:
I know you as well had some problems with the National Assessment Of Education Progress Test. You still have those problems?

Tom Horne:
I do with the math and reading. I like the writing because we did well on it. Our non minority kids were in the top two states as far as the amount of improvement and at the national average. Same was true of our African American kids. Our Hispanic kids aren't yet at the average but they were sixth in the country as to the amount of improvement. On the other tests I have a problem. But I think we'll ultimately solve the problem. The problem is nonalignment of standards. On math, for example. We teach our kids in fourth grade to do Venn diagrams. That's not in their framework. We teach them that, they don't test it. On the other hand, they test them on what it looks like when you cut a solid object. We don't teach that. So they're getting tested on things that they're not taught and not tested on things that they are taught on that particular test. And so you don't get a good view of how much the kids know. The aims test by contrast, we're testing the standards that kids are taught. So here we're getting a test result for what the kids have actually been taught. This year we're reforming the math standards to make them more like the NAEP standards. By 2011 you'll see that.

Ted Simons:
Valid criticism there?

Matthew Ladner:
That could be part of why Arizona doesn't score well on the nape. But NAEP is the nation's most highly respected source of testing data. And the fact of the matter is that NAEP shows that we have real problems in this state.

Tom Horne:
Now, this is an area of disagreement that Matthew and I have. Because 3,000 kids take the NAEP test on any given subject. 600,000 kids take the Tara nova test, another national test where our kids performed well in the national average. We have some disagreement as to what's the best measure. But I really do think that once we reform our standards the kids will do as well on the nape as well.

Ted Simons:
No Child Left Behind. Should the state opt out?

Matthew Ladner:
I think they should. Everyone is talking about the $600 million the state would lose if it were to do so. But No Child Left Behind has a fundamental flaw. And that flaw is that the Congress basically said by 2014 every single kid, 100%, have to score proficient or else. There are sanctions. Meanwhile they left the definition of proficient up to the states. And thus we see not only Arizona but other states starting to lower their standards of what it is to be proficient. The state board of education here made the changes they did with the federal gun pointed to their head. And this isn't a drafting error of No Child Left Behind. It is a fundamental flaw. On the one hand we say congress we want you to do something about schools on the other hand the we have state and local control over schools. These are difficult to reconcile.

Tom Horne:
The process I talked about that the teachers did and the state board respected the teachers. As far as the No Child Left Behind goes, I have written a speech they gave nationally at the Heritage Institute. It's on our website. Where I outlined a lot of areas where No Child Left Behind is dysfunctional. The solution is to have the congressmen and senators get it changed. It's not to opt out. Because the $600 million we would lose goes to our poorest schools so we can't give up those resources. But we do need to reform No Child Left Behind. Our Arizona system, Arizona learns, much more rational system for judge schools than No Child Left Behind.

Ted Simons:
All right.

Matthew Ladner:
There is ultimately only 2% of the state budget, though. So it's not inconceivable to think about.

Ted Simons:
We'll stop it right there. Gentlemen, thank you so much.

Ted Simons:
Phoenix Mayor Phil Gordon has spoken out strongly against Maricopa County Sheriff Joe Arpaio's crime suppression efforts. He calls them publicity stunts than end up endangering the public. Hear directly from the mayor tomorrow evening at 7:00 on Horizon. That is it for now. I'm Ted Simons. Thank you so much for joining us. You have a great evening.

Announcer:
Horizon is made possible by contributions from the friend of Eight, members of your Arizona PBS station. Thank you.

In this segment:

Dr. Tony Sanders:ASU Professor of Finance and Real Estate, W.P. Carey School of Business;Tom Horne:State Superintendent Of Public Instruction;Matthew Ladner:Vice President of Research, The Goldwater Institute;