Wednesday, August 27, 2008

Investing in the Market Cycle - Know What to Do When

If you know where you are in the market cycle, then you know what to do to make money in the marketplace. Here is our chart for discussion:

Phase 1 - Seller's Market

This is the no-brainer phase. This was 2006 and most of 2007 for the Utah market. Prices were running up over 1% per month. If you owned real estate you were making money on it. This is where Lemming Investors arrive in droves due to the ease of it all. Notice that there wasn't much of a difference between retail and wholesale pricing. Banks knew if they waited another month their homes would be worth more, so they just listed it at full price and surprisingly, most people paid them that. This was a difficult time to find a bargain. However, there were some out there. In any case, most of the folks who bought during this Phase still made significant appreciation on their homes regardless of whether it was retail or wholesale pricing.

Phase 2 - Transitional Market

This was the end of 2007 to the first half of 2008. In this phase the banks haven't quite figured out that prices are flattening out. It takes them a couple quarters of data to find out what is going on. Therefore, they still price the their distressed homes high. In this awkward stage, prices are sticky for distressed homes lending some confusion to the marketplace. Inventories rise as homes do not sell due to overpricing. We are at the tail end of this phase now. This is a time to be getting your financial house in order.

Phase 3 - Buyer's Market

This is my favorite phase in the marketplace. This is a buyer's market. The best part is that the banks know this as well. Short sales and REO (bank owned) property are very profitable for investors during this phase. This is where you buy homes at 80% of full market price with minor fixup required. You can buy homes at 50% of market price that need lots of fixup. This is the phase that you start binge buying. You can cashflow easily and make equity to cash in when you sell during the next Phase 1. Investors who buy during this phase make a killing when they sell during the next run up in the market. This phase would be analogous to 2002-2004....and soon to be 2009-2011.

Home Prices Plateau

OFHEO came out with the quarterly stats for Q2 of 2008. I plugged the figures into the charts. Here is the results for our ongoing appreciation chart:

As you can see, we are in a dramatic return to pre-boom appreciation rates. In fact, the rates of changes are equal on both sides of this most recent boom. Certainly a lot different than the boom in the 90's when it took a few years to get back to a buyers market. In our current instance we are talking a matter of months from top to bottom.

If we do go negative on house prices I anticipate it will be minimal. Probably around the 3%-5% range if at all.

Here is the price chart. This chart tracks $1 of real estate bought in 1986 and what it would be worth now factoring in appreciation rates over time:

If you zoom in on this chart you can see that we are just at the cusp of a plateau in pricing. 1999-2000 saw a minor dip in prices. We might see a similar correction again this time.

Note: WE WILL NOT SEE A CALIFORNIA STYLE PRICE DECLINE. There are folks out there predicting a doomsday scenario. The fundamentals don't indicate that will be the case. See Utah's Crash Proof Fundamentals for details on why.

Friday, August 22, 2008

Mother-In-Law Compartments

The Ogden City council passed an ordinance Tuesday allowing for the rental of Mother-In-Law apartment space in single family residences. On the surface this has huge implications for the use of space in R-1 Zoned neighborhoods. I contacted several folks on the city council and fortunately got some clarification on what is going on.

It appears that the Mt. Ogden neighborhood above Harrison Blvd. is going to be the first guinea pig for this law.

Here is what the law requires:

1. The home must be owner occupied to allow for renting the apartment space
2. The owner must apply for a business license to rent the space
3. The space must meet minimum requirements (to be determined) for habitability
4. Neighbors are notified by the city of the application for the license to use the space and can provide feedback.
2. The use is not appurtenant to the property but to the owners license which is renewed each year.

This is the information I gathered from talking with the Council folks.

This is certainly an innovative law. I am unsure how the results will be. The intent is to keep some of Ogden's older citizens in their homes longer. By allowing apartment rental, the homeowner will have more income and less upkeep for the entire home. They will be able to stay a part of the community longer. I can see the benefit of this.

Some of the problems I see arising from this is confusion in the marketplace about what is legal and not legal use. Some Realtors out there won't read this post or be fresh on the ordinance and think that these homes are legal duplexes. It will create some problems for some Realtors for sure...I won't name names here. The other issues are still to be seen. I am betting that if these units are too concentrated in particular areas, that there will be some deterioration in the quality of the nieghorhood. Parking issues are will likely be the most obvious problem. There is also the risk of a "bad apple" neighbor wanting to rent out his basement to his "bad apple" friends. That could also hurt the neighborhood.

So, the jury is out and we will watch and see how this affects some of the more upscale parts of the city. Stay tuned...

Wednesday, August 20, 2008

High-Density Dismay

The Pleasant View city council effectively killed a plan for a high density housing project near the border between its commercial district and residential neighborhoods. The council sited "concern" over the size of the development. Local homeowners expressed dismay over loosing their views.

This same problem has been had in Syracuse as well. A proposed plan to build townhomes recently sent homeowners into a tirade. The folks in Syracuse didn't want "those people" to move into the town and lower their property values.

Since I live in the Urban core of Weber County, I find all these comments by suburban homeowners amusing. The city councils of the communities reflect the attitudes of their constituents as well. What they have not been taught is that high-density housing is good for a community. So long as it is planned and managed in proportion to the rest of the city, it will actually benefit the community to have it.

Everyone needs a place to live. The bank president, the teller, and the janitor that mops up the sticky floors in the bank all need a roof over their head. For a city to say, "We only want Bank Presidents to live here, and putting up a home for a janitor....well...we just don't want that element here" seems to make little sense to me. If the bank is in Pleasant View, it makes sense for everyone to have the opportunity to live close to where they work. Otherwise, the bank will start to have problems getting janitors to service it. They will have to travel too far. At their low wage, it starts to become cost prohibitive. The town's economy will ultimately suffer. Park City is facing these exact problems right now.

The point is that PROPERLY PLANNED high density housing can be a blessing to a community and not a scourge as most suburban minds think.

As a counterpoint IMPROPERLY PLANNED high density housing can be a scourge. For example lets look at the 22nd block of Madison Ave. in Ogden. This street was full of cute Victorian era homes. Sometime during the 60's, in the early years of Ogden's slide into urban decay, someone decided that it would be a good thing for the city to have a couple homes torn down and the large lots made into 30 unit apartment complexes. How Wonderful. It brought more people to an area where there were no jobs for them. Rents declined, property conditions declined, and the downward feedback loop kept spinning. This high-density housing combined with Lyndon B. Johnson's Great Society programs destroyed several of the neighborhoods in Downtown. Suburbanites probably think of these neighborhoods and therefore reflexively reject the idea of high-density housing due to this bad example.

Bottom line: Planned High-Density = Good

Monday, August 18, 2008

Birds Eye View

I went for a hike with a good friend Saturday. We hiked the Ridgeline Trail up to Lewis Peak. We were greeted on the trail by a stiff 35mph wind and temperatures in the 50's. The pictures today come to you at the cost of sore calves, achy feet, and burning quads. It was a great hike.

Here is our first photo:

Click to enlarge. This gives some great perspective on some of the prominent buildings that are in Ogden. You really get a feel for the massive scope of the AmeriCan Building which holds the AmeriSport Company HQ. The river project land next to it is bare and ready for developement. You can see the large construction project being carried out by the church on the lot next to the temple and tabernacle. This large project is going to be an upscale apartment complex like the ones that currently sit to the west of the Temple. They will be very nice with top rents for the market. You can also see the IRS buildings from the previous post. This is just a great photo to see what is going on.

In the other direction I captured this interesting photo:

This is North Ogden. What grabbed my eye was a the huge scars in the dirt north of town. It looks like a developer has been pushing dirt on a new HUGE subdivision. You can see this scar on the mountain from the valley. Only 3 more subdivisions of this size are able to be built before North Ogden is built out. Interestingly, there doesn't appear to be any work going on. I am sure the developer has been sucked into the vortex of the credit storm like most homebuilders. From the size of it, I believe this development exceeds $100M in scope. Lets see what happens. It may take 5-7 years for a project this large to be finished.

Here is a photo of the author (right) and his good friend Ken Coman (left) atop Lewis Peak...Mt. Ogden is in the background:

Friday, August 15, 2008

Ogden City Recruiting More IRS Jobs to Downtown

It was also reported today that the City is hoping to lure more IRS jobs to the downtown area. The report indicates that the city has identified space in the area of 23rd and Lincoln Ave. as a possible target area for IRS expansion. The proposal would be to bring about 1,000 jobs downtown. I cruised down to take a look at the area and I was a little baffled as to where they new offices would be. The northwest corner is already IRS buildings and parking.

Unless they build a parking garage on this site, I don't see how they are going to fit any more office space on this block.

The north east corner is Teleperformance or the old AOL Building. That's a viable business so unless they are planning on relocating, I don't know if that is a great option. I am unsure its ready for re-development.

The southeast corner is Lindquist Field. They aren't touching that for obvious reasons. Our last consideration is the southwest corner. There is a vacant lot bounded by barbed wire. There is also a very unassuming looking one-story building. It is next to Decente's building which happens to also be by the redeveloped American Food Stores building occupied by the IRS . I am unsure what this unmarked business is since I could not see any clear signs. However, this does look like a reasonable location for redevelopment.

One concern I have about this is that such a heavy load of jobs in Ogden would be government related. In the past, the railroad was the major employer in the town. When that passed into economic history so did the town. Heavily betting on one sector to support the local economy tends to promote boom-bust cycles. My understanding is that the jobs are already here in the area and that they would simply be moving from one part of town to another. In this case, that may be ok. I am all for the city's efforts to bring more jobs closer to the urban core.

Midtown Expansion

Today's paper reported that Midtown Clinic has contracted to buy adjacent property to expand its building and provide greater services. The adjacent property is a bombed out triplex on the 22nd block of Adams Ave. This may be a good thing for the block. I would prefer that the triplex be converted to a single family home instead. However, given the poor condition and lapboard construction of the property, I believe that may be a lost cause. The remaining homes on the block should be good enough to save. Here is a picture of the home to be torn down:

Friday, August 8, 2008

East Central Bench: Mysterious 2-Year Cycle

I ran the sales volume numbers going back to September 2000 for the East Central Bench Historic District in Ogden. I plugged a 6-month moving average into the figures and here is our result:

Anyone see a pattern in there? It looks like we just completed the 3rd iteration of a two-year cycle. Sales on our moving average all peak in the last quarter of 2003, 2005, and 2007 with a significant dip after peak. It almost reminds me of a EKG heartbeat. I know about the one-year seasonal cycle for the market in large but this market activity defies description. If anyone has a clue as to why Downtown Ogden would follow this odd 2-year pattern, chime in!

HOA Mismanagement

The Standard Examiner reported on its front page yesterday that an HOA for a condominium complex had not paid the water bill for the units it manages. This, despite receiving $75 per month in dues. This is the worst case I have seen of an HOA going bad. The owners in this complex are filling their bathtubs with water as they wait anxiously for a resolution. What a crappy situation. I bet there are criminal charges pending.

This is one of the perils of HOAs. Home Owner Associations are often volatile political entities that are charged with levying fines for violations of CC & R's (restrictive covenants). The officers are usually neighbors who are elected by those who participate in the HOA. Like in many political institutions, these folks may not necessarily be competent. For this reason, some HOAs are farmed out to professional HOA management companies that do the management for many neighborhoods at once and are more impartial and less political.

Unfortunately, Utah HOAs have a history of becoming meaningless institutions after about 7 years in a particular neighborhood. Most new subdivisions come with CC & R's and an HOA to enforce them. As the subdivision is built out, the builder no longer cares about the neighborhood. Most folks in the new subdivision follow the rules. Then a neighbor moves and rents out his home. The renters could care less about the CC & R rules and store their demolition derby car on the street in front of the home. In steps the HOA to enforce the rules. The landlord is friends with the HOA VP so the enforcement is lax. The neighbors complain but nothing happens. Another neighbor decides to buy an RV and parks it in front of his home. Since the HOA didn't enforce the removal of the demolition derby, they now have no ground to stand on to enforce removing the RV. As time rolls on, and this "culture" develops in the neighborhood, the HOA looses its authority to enforce the rules. Hence the CC & Rs become void and the HOA drifts into obsolescence.

You will see that this cycle has a direct impact on property values and desirablilty of a neighborhood. This cycle is why the middle-class is always running away to the newest suburbs to escape the slow erosion of quality of life in the once-new suburb they lived in.

Strong and capable HOAs make for better neighborhoods.