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.

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...

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

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:

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:

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.

Investment Basics: Buy and Hold Money Makers

I have included an illustration today to show why real estate is such a good investment in the long term. Profits on real estate investments come in four forms: appreciation, amortization, cashflow, and taxation. For our purposes today we are going to address appreciation and amortization.

The Utah real estate market follows a stair-step appreciation curve over time on average. There are always local pockets of volatile prices but on the average real estate here appreciates quickly and then flattens out for a while before appreciating rapidly again.

Everyone knows how to make money with appreciation, thats why smart investors bought in 2004 and 2005. The lemming investors bought in late 2006 and 2007. Unfortunately for the lemming investors, they will have to wait to make a killing on appreciation. Hopefully they have amortized loans.

Here is our first chart for discussion:


This chart illustrates how people get rich in real estate. The late night gurus will tell you its about notes and quick profits. The true real estate investor knows that its all about time working on your side. In this example our property is a $200,000 3 Bed 2 Bath home. The red line in this chart represents your debt. This loan is amortized for 30-years and has a $0 balance at the end of its term. The black line is your property value. It follows a stair-step pattern modeled after our own market. 5 Years under 3% appreciation followed by 2 or 3 of 10%. Very similar to our own. The green line represents equity...or the difference between the black and red lines. Your main interest is the green line.

Lets pretend that this is your investment property. The first 5 years are going to be the toughest because there is little equity in the home. You have to sit on it just to make enough equity to sell it at a break even price. The reason this is the case is because you paid full price for this home and at the beginning of a down market. Expect it to take 3 or 4 years just to break even on a sale. Hopefully the rents compensate for the payments so you are sustaining yourself (this will be a separate issue we talk about later) At 7 years the market picks up again and you see some significant appreciation. You have made $100K in equity. Its been a hard slog but you are starting to see some returns. In just 8 more years you are at $200K in profits. Your rents have increased in the meantime so being a landlord seems a lot easier. After 30 years with appreciation and inflation working on your side, your meager home is now worth $700K free and clear. You keep almost all the rents! Now multiply this example by 5 or 6 homes. How nice does retirement look now?

Here is a preferred variation on the model that mitigates risk and provides greater returns and safer positions. This is the model that I find most appealing:




Rather than buying a $200K home at full price, lets pretend you bought a $240K home that was a distressed for $200K. Not only do you get the benefit of immediate $40K equity but you also could sell the place immediately if you had to. A much safer position to be in. Your payments on your mortgage are the same so your amortization pays off at the same rate but now you have a home that is worth more and will appreciate to larger dollar amounts than our previous example. Rather than being $700K. This home will be $850K in 30 years.

NOTE: These large dollar figures for 30 years from now may be hard to grasp but consider that today's prices are almost 3 times what they were in 1975. My parents paid $40K for their first home. That home today is worth around $150K.

Finally lets consider what interest only loans do to your situation:


This chart is a bit inaccurate because lenders will rarely give an interest only loan for more than 5-years. If you look at just the first 5 years the equity increase is insignificant. On top of that, at that time you are forced into a sale or refinance which will consume equity. You could risk making the payments when the ARM adjusts if you bought the property low enough but its risky. If you paid full price for the property you will be in hot water. For this reason, I don't believe ARMS are a good idea for long term investments. Only use an ARM if you buy the home 75% or less than market price. You can now understand why so many OWNER OCCUPANTS who went down this road are in real trouble.

If you have any questions or comments about this let me know.

DOM Rising

Does it feel like its taking longer for homes to sell than a year ago? Your intuition is right.

Days on Market has been climbing for over a year. I expect us to top out again around 80-85 days for the average sale just as in 2000-2001. I can live with it taking three months to sell a properly priced home. Its the improperly priced ones that worry me. Since they don't sell they don't show up on this chart.