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Minyan Mailbag: Real Estate

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Keep it real!

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this exchange between two worthy Minyans with that very intent.

Todd,

I know you have been tracking the Arizona Real Estate market, as have I, you recently pointed out the 23 year old investor story from the Republic. I agree there is a mania, but there is not a limited supply problem, witness the Toll Brothers developments, along with the massive developments planned for the West Valley (Verrado, etc).

Instead, I would like to point out a micro case study. Consider a house in the Grayhawk development in North Scottsdale. The house sold for 345,000 in January of 2000. The homeowner took out a 30 year mortgage at 7.5% so they could live in a nice house for the lowest monthly cost possible. Fast forward to present day. The same 30 year mortgage rates have dropped to 5.625%, which means for the same payment, the house could be valued at $425,000. However, the financial services industry, always looking to expand market share and since they are paid a percentage, the larger mortgage, the better. Now the homeowner can refinance with a 5 year ARM, interest only, which for the same payments as the 30 year, would value the house at $595,000. That house recently sold for $550,000. Bubble? I would say no, just a revalue.

The bubble is in the number of real estate agents. It is believed 1% of all Maricopa County residents have a real estate license.

One final note, the idea of a real estate market in bubble is where everyone makes money. Ask Jason Kidd if this is true, he lost 200K on his house before commissions.

Sincerely,
Minyan Raymond

Todd,

Thanks for passing this along. For the most part, I agree with Mr. Dingman. As I've mentioned to you before, I find that the Arizona housing market is somewhat anomolous in that we have a few important tailwinds working in our favor should we see a national softening: 1. the weather and affordable living (magnified by relatively low but steadily rising property taxes) makes it an attractive retirement area for the aging baby boomers 2. the quality of healthcare here makes it more attractive than Florida (my micro case study there is the fact that it took 3 cardiologists to put a stent in the wrong artery during my grandmother's surgery and the list of horror stories goes on and on) and 3. unlike much of the strength we've seen in housing around the coasts that is, at least in part, being driven by foreigners taking advantage of a crushed dollar, the growth of Arizona is mostly attributable to U.S. citizens moving inward from the coasts for a better quality of life, and to take some money off the table on properties that they have had and roll it into a similar property at a fraction of the cost. California is the primary driver in this phenomenon.

The one thing I will say about North Scottsdale and Grawhawk in particular is that agents are literally walking door to door making unsolicited bids for houses to satisy clients who have, as I mentioned above, sold a house they bought in Marin County 20 years ago for under $300k, for over $1 million dollars. Grawhawk is a well known community, and the buyers that are looking there are gladly paying prices above appraisal because they are paying cash, and throwing in a $30,000 sweetener to make make sure you don't get outbid seems like a bargain given their newfound fortune. Additiionally, the city of Scottsdale is done issuing building permits. So my suspicion is we could very likely see a California-esque appreciation of residential property here.

However, the fact that Jason Kidd sold his house at a loss either makes him, or his real estate agent (b/c I'm sure he didn't have the time or inclination to deal with it) a complete moron. Also, if you think there's a bubble in the real estate broker market, then we need to start taking a head count of the number of people in the mortgage broker biz... you don't even need a license... just a smile and a will to make more than you did when you did when you were a school teacher.

Kind Regards,
Minyan Adam

No positions in stocks mentioned.

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