Real Estate Update

Oct. 30, 2014

Transcript:

Ted Simons: Phoenix's housing market remains sluggish with supply and demand levels relatively low. Why is this going on and when will the market pick back up? For answers we turn to economist Elliott Pollack of The Elliot D Pollack and Company. Good to have you here. Good to see you.

Elliot Pollack: Nice to be here.

Ted Simons: Give us an overview.

Elliot Pollack: The market is weak. We got down to about 6800 units, down from 63,000 so we lost almost 90% of the market, and it jumped to about 12,000 units, and then it died. It stacked to about 11,000 units. No real pick up in demand. There's several reasons for this. First one is, nobody is showing up. Fewer people are moving nationally, and of those people moving, few are moving to Arizona at the moment. And so there's -- Without population flow, you don't need a lot of new housing. What used to happen in past cycles is we have a very low unemployment rate, you start to create jobs, and that would suck in people from the outside, they all bring their own demand for goods and services, housing, they need clothes, cars, they need food, so that would ramp up the number of jobs, and that would bring in even more people. We're now at about 40% of what we would normally be in population growth. So we're not getting the population growth we normally get is.

Ted Simons: Is that a canary in the coal mine for economic conditions?

Elliot Pollack: It certain is a canary in the coal mine for economic conditions nationally. In other words, people still haven't gotten over what happened in '8-10. They're still nervous, they're not willing to move. But there are reasons they're not moving. About nearly a third of the people in this country have less than 20% equity in their homes, which means they can't sell, because you need at least 20% equity to sell your house, pay the closing costs, you need a down payment, you need money to move, and without a reasonable amount of equity, that's not happening. So there's a lot of people about a third of the housing market really isn't there. Then there's people in the penalty box, about 5 million nationally and about 200,000 in Arizona that were foreclosed on between '8-12, they can't get back in really until '16 or '17, and even then they might decide, you know, we don't want to. What happened there is, people -- These people didn't go to apartments. If you lost your house, about 90% of them simply moved down the block to a rental. Why? Because if you have two kids and a dog you're not living in an apartment, you can stay in the same school district, you can have the same friends. So that takes another 200,000 people out of the game and that doesn't include short sale people who really can't get back in the market right away. And so there's a lot of the market that appears to be there that simply is neutered at this point in time.

Ted Simons: When this glut of folks in the penalty box, when they return in '16, '17, '18 could there be a shortage of homes?

Elliot Pollack: There will likely be a big pick up in housing, yes. The question is how many decide, I don't want to be in a home I own, I like being in a home I rent. But for those people it's musical chairs. Let me give you an example. I'm in this house, and I rent it. I decide I'm going to buy this house. There's no change in inventory because I'm simply going here. This house is now back on the market. So those people will not cause a shortage of housing. What will cause a shortage of housing is millennials deciding to buy, which at some point they will, right now about 33% of them are living home with mommy and daddy, that won't last that long, they can't launch because they can't get a good job. They're delaying marriage, and if you delay marriage you delay having kids, if you delay having kids you delay demand for housing. That will change over time. There's no factor I'm going to discuss with you that doesn't change over time. The problem is nobody knows for sure exactly when.

Ted Simons: What about investors, what about those foreclosures? Investors used to be all over this place. Not anymore.

Elliot Pollack: No, Essentially because the good deals are gone. Housing prices are up substantially from the bottom and that's mainly because the bomb tier, the foreclosures were giveaways, and now they're gone. Foreclosures are a little above normal, but they're way down from where they were and headed towards normal very quickly. I don't think that's an issue. The real issue, the main issue I think is financing. You have a smaller market but it's financing. If you are an independent contractor, if you're -- Own your own business, if you're an affluent retiree, try to get a loan. You don't fit in a particular box so you're not going to get a loan. What has happened is, the government has locked the barn door after the horse has gone. And one of the things they did is called a putback. And that is they have the right for any reason to put back a loan to you as the guy who made the loan, and for any reason. And that they're doing it for loans that were made 10 years ago, claiming it wasn't underwritten properly. The putbacks should be for two or three years and you should be able to correct paperwork errors, because they're also putting back loans that are old just for paperwork errors. There was no fraud involved, somebody forgot a signature, somebody forgot to notarize something. That will change, there's going to be enough pressure so that will change. When financing becomes more normalized, then things will get better fairly quickly. Will it get back to 30,000 units? Not at any time soon.

Ted Simons: This brings it back to expectations. You mentioned when financing gets better things will get better. Apple-oranges here?

Elliot Pollack: Absolutely. Absolutely. Because you need the construction employment to essentially start the wheel rolling, getting more people here. The major difference between this cycle and past cycles is there has essentially been no recovery and construction employment. That will change when there's more housing and there's more office building and more apartments and so on.

Ted Simons: Are there going to be more apartments? There are apartments on every corner of the block. Are we going to see a glut of apartments?

Elliot Pollack: No, I think demographically things couldn't be better for apartments. There will be demand, a lot of demand for apartments, at least for the next decade. That's because the millennials are as a generation are as big as the post-war baby boom. So they'll just be a huge demand for kids who first go to apartments, and then have delayed marriage so they'll be in apartments longer and will eventually buy a house. What's happening in Phoenix is a large number of the apartments are very expensive apartments along Scottsdale road, near Scottsdale and camelback and up towards Frank Lloyd Wright, some in Chandler. And they're very expensive. The stuff that's being built that's reasonable, maybe $1.50 a square foot that will absorb overnight, I'm positive, because there's so much demand.

Ted Simons: And that will stay absorbed?

Elliot Pollack: Yes. And I think it's going to be difficult for the whole market to become a glut for a long time, because there's so much basic underlying demand.

Ted Simons: basically expectations, temper them and be patient and wait for the folks in the penalty box to get back on the ice.

Elliot Pollack: Yes. Nobody is sure how quickly they'll come back but they're likely to come back.

Ted Simons: Thanks for joining us.

Elliot Pollack: Thank you.