Get an update on our real estate market with economist Elliott Pollack of Elliott D. Pollack and Company.
Ted Simons: Phoenix's housing market remains sluggish with supply and demand at relatively low levels. Why is this going on and when will the market pick back up? For answers we turned economist Elliott Pollack of the Elliott D. Pollack and company. Good to have you here. Good to see you again.
Elliott Pollack: Nice to be here.
Ted Simons: Overview, 10,000 foot view, what is going on in the market?
Elliott Pollack: The market is weak. We got down to about 6,800 units, down from 63,000, lost almost 90% of the market and then jumped to about 12,000 units and then it died. It is back to about 11,000 units. No real pick up in demand and there is several reasons for this. First one is that nobody is showing up. That fewer people are moving nationally and of those people moving, fewer are moving to Arizona at the moment. And, so, there is -- without population flow, you really don't need a lot of new housing. What used to happen, low unemployment rate, start to create jobs and that would suck in people from the outside and they bring their own demand for goods and services, housing, clothes, cars, food. 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. We are not getting the spur in population growth we normally get.
Ted Simons: Is that in migration --
Elliott Pollack: Canary in the coal mine for economic conditions nationally. In other words, people still haven't gotten over what happened in eight through '10. Still nervous. Not willing to move. There are reasons they're not moving. About, oh, about nearly a third of the people in this country have less than 20% equity in their homes. Which means they can't sell. You need at least 20% equity, you sell your house, pay the closing costs, need a down payment, need money to move. And without a reasonable amount of equity, that is not happening. So, there is a lot of people, about a third of the housing market really isn't there. People in the penalty box, about 5 million nationally and about 200,000 in Arizona that were foreclosed on between '08 and '12. They can't get back in really until '16 or '17 and even then they might decide we don't really want to. What happened there, 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 are not living in an apartment. You can stay in the same school district, same friends. That takes another 200,000 people out of the game. And that doesn't even include short sale people who really can't get back in the market right away. And so, there is 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, would there possibly be a shortage of homes?
Elliott Pollack: There will likely be a big pick up in housing, yes. The question is how many of them decide, you know what, I don't want to be in a home I own. I like being in a home I rent. For those people, musical chairs. Let me give you an example. All right. I'm in this house. I rent it. Okay. I decide I'm going to buy this house. There is 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 isn't going to last forever. They don't want to be there anymore than their parents want them to be there. They can't launch because they can't get a good job. They are delaying marriage. If you delay marriage, delay having kids, delay having kids, you delay demand for housing. That will change over time. There is no factor that I will discuss with you that doesn't change over time. The problem nobody knows for sure exactly when.
Ted Simons: What about investors, what about those foreclosures? Are -- investors used to be all over this place. Not anymore.
Elliott Pollack: No, no, they're not over this place essentially because the good deals in housing are gone. Housing prices are up substantially from the bottom. And that's mainly because the bottom tier, foreclosures were really 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. So, 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 a -- own your own business. If you're an affluent retiree, try to get a loan. You don't fit in a particular box. You are not going to get a loan. What has happened, government has locked the barn door after the horse was gone. And one of the things they did is called a put-back. 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 they're doing it for loans that were made 10 years ago claiming it wasn't underwritten properly. Nobody knows what is going to happen 10 years from now. Put-back should be for two, three years, and you should be able to correct paper work errors. Also putting back loans that are old for paperwork errors. Somebody forgot a signature, somebody forgot to notarize something. That will change. There will 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: And this brings me back to expectations here. You mentioned, you know, when financing gets better, things will get better. Apple, oranges here? I mean --
Elliott Pollack: 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 in construction employment. That will change when there is more housing and there is more office buildings and more apartments and so on.
Ted Simons: Are there going to be more apartments? There are apartments on every corner -- are we going to see a glut of apartments pretty soon?
Elliott Pollack: No, I think -- demographically things couldn't be better for apartments. A lot of demand for apartments at least for the next decade, because the millennials, as a generation, are as big as the post-war baby boom. There will be huge demand for kids who first go to apartments and then have delayed marriage, and they will be in apartments longer and will eventually buy a house. What's happening in Phoenix, a large number of the apartments are very expensive apartments, along Scottsdale road, near Scottsdale and camel back, and some in Chandler, and they're very expensive. The stuff that is being built that is reasonable, maybe a buck 50 a square foot, that will absorb overnight.
Ted Simons: And that will stay absorbed.
Elliott Pollack: I think it will be difficult for the home market to become a glut for a long time because there is so much basic underlying demand.
Ted Simons: Expectations, temper them a little bit and be patient and wait for the folks in the penalty box to get back on the ice.
Elliott Pollack: Yes, and nobody is exactly sure how quickly they will come back but they are likely to come back.
Ted Simons: Good to see you. Thank you for joining us.
Elliott Pollack: Thank you.
Ted Simons: And that is it for now. I'm Ted Simons. Thank you for joining us. You have a great evening.
Elliott Pollack:Economist, Elliott D. Pollack and Company;