What’s the Difference Between 2007 and 2010? Buy Low and Sell High!
by By Stan C. Strom
November, 2007

With all the negative media coverage and overall doom and gloom attitude shadowing the real estate and mortgage markets, I want to share a more bullish outlook on the great opportunity before us. Let me first preface my viewpoints by stating that I’ve lived through several real estate cycles. This market is not even close to the devastation I witnessed during the RTC meltdown from the Savings & Loan crisis from 1989 – 1992. All I see is opportunity ahead.

I once asked a billionaire investor if he could share with me his secrets to success in the land business. I expected his response to address impacts from global markets, tax issues, demographic changes, niche opportunities, re-zoning, etc. His response was simply this: “Buy low and sell high”. From that perspective, 2007 is a great time to be an investor of real estate in Arizona because of the low buys now and good times ahead.

Homebuilders are ridding their spec inventories by slashing prices, including upgraded items in the base price, and generally offering incentives to move this inventory off their balance sheets. I believe that builders are able to offer such deep discounts on the homes because current inventory is based on land prices from three years ago. It usually takes 12-18 months to get vacant land through the rezoning and platting process plus months for the construction time of on & off site improvements and models. When all the dust settles, it’s going to cost more to build next year than it did today because of impact fees, higher land basis, raw materials, etc. So, the real number to compare for buying low is replacement cost. That’s why I look to 2009-2010 as a banner year for selling high.

In addition to good buys in new homes, there will be delicious opportunities ahead from “short sales” and trustee sales. Many of the 57,000 homes on the MLS today are vacant re-sales owned by investors. While many of them will lose their investment to foreclosure, deed in lieu or short sales, it’s not like we’re putting families out on the street. And while we’ll cringe at lower appraisals and paper equity losses in the short term, remember that if you have to sell low you can also buy low. That’s the tradeoff.

Phoenix has one of the lowest unemployment rates in the country and there is general confidence among employers of an upward swing. President Bush has offered federal assistance for those who have pending adjustable mortgage rate increases and who are not yet in default. Aside from fallout and lost jobs in the mortgage and construction areas, Phoenix still ranks in the top five housing markets and the commercial sector is as strong as ever.

Arizona has averaged 202,000 new adults moving here in each of the last five years not including winter visitors and illegal immigrants. Of that number, about 140,000 are here in Maricopa County. We lose about 50,000 to job transfers, deaths, etc, so the net migration number in the Phoenix area is closer to 90,000 per year. Every five seconds a baby boomer turns 50 years of age in the US. That buying block of 82 million people has an estimated net worth of $2.6 trillion dollars, not to mention the vast net worth of our Canadian friends. We know that Arizona’s population of 6.1 million now ranks 16th in the nation and will drop to ninth within 10 years. Not only will there be significant impact from retirees, but research and educational opportunities will abound due to the incredible guidance by Michael Crow at ASU and the impact of T-Gen.

What we’re seeing is a much needed correction within the credit sector. And while some caution that housing costs have exceeded wage indexes, that pending FSBO defaults are on the horizon in addition to the overwhelming MLS inventory, and average home prices have fallen as much as $100,000, just remember that the average new home in Phoenix is still less than any of the other seven major western cities except Albuquerque. I interpret that as a basis of undervalue.

So I’ll leave you with some good advice from Will Rogers who once said, “Don’t wait to buy land, buy land and wait”. What he probably understood was that time had a way of making things right. So herein lies the message of 2007 to 2010: buy low and sell high!