By Jay Ovalle. http://jayovalle.wordpress.com/ 

“In a home, the site is what matters.”  Lao Tse, “Tao Te Ching” (400-600? B.C.).  Although Lao Tse was making a spiritual point, the metaphor evidently was already in use in the literal sense.  I am sure, very far back, our hairy ancestors had to deal, on a daily basis, with the question of where to locate their temporary shelters.  The proximity to resources, the danger of predators or unfriendly “neighbors” made the consideration of location the oldest and most important criterion in choosing a site for a home.

These days there are no wild beasts roaming around, and unfriendly neighbors don’t really arm themselves to take over your home, but today as eons ago, the value of a location remains central to the value of your home.  When a new home is built, the builder will set a premium for the best locations and a discount for the worst, such as a lot backing to a busy street.  Location, as used in this context, is a very broad term that may include living in a particular city, neighborhood, or a school district. The consideration of location may also include your access to resources, work and transportation.

The choosing of any location is a decision consistent with each and every buyer’s unique circumstances. I remember a client who did not mind buying a home that faced busy 7th Avenue in downtown Phoenix. She said the noise and bustle reminded her of Chicago and that it was very comforting to her.  However, the important thing for homebuyers to remember is that, the better the location the better the investment.  A desirable location is always in demand and your home may sell faster and have a better resale value.

The City

In selecting a city you may want to know its demographics, resources, general plan, main industries, job opportunities, schools rating, property taxes and so many other facts that may be of importance only to you. 

The Neighborhood

Next you must consider a neighborhood.  You may want to know its boundaries and what lies adjacent to it that may diminish its value (Google it).  You may not want to live next to a dairy farm, a smoke stack, a city waste dump, within the noise boundaries of an airport or backing to an obsolete trailer park.  You should check and search online for crime statistics of the area, and for the location of sex offenders in the area as well. 

With gasoline over four bucks a gallon, distances have become very important. Is there easy access to major highways?  How far do you have to drive to work, to the supermarket, to the mall, the airport, downtown, and other amenities?  Is mass transit an available option? I helped a buyer who actually visited the local grocery store, strip malls, a restaurant and the mall, and later decided it was not where she wanted to live.  If you have children, is it a family-friendly neighborhood? Are there lots of  children? Are the schools close? How are they rated? Are you close to the bus stop? Any parks or green areas nearby?

After the vicinity, the pride of ownership should be the most telling clue about a neighborhood. If everyone is taking care of their homes it will help maintain values.  In this regard I must mention the often-despised HOA (Homeowners Association). They enforce the developer’s “CC&R’s” (Covenants, Condition and Restrictions), a document detailing the obligations and rules by which you will abide to be a member of the neighborhood.  Rebels and advocates of free expression don’t do well here.  But a frequent omission in discussing the rules is that they were put in place to extend the vision of the builder and its architect.  Their holistic approach supercedes anyone’s right to express their individual taste.  This integration adds a reliable measure of value to the neighborhood, where you would expect an “enforced” and permanent pride of ownership.  The cons can usually be traced to self-managed (vs. professionally managed) associations made of community volunteers who run for office and are summarily elected with a small participation from the whole. These volunteers are in effect running the neighborhood on your behalf the best they can.  So read the CC&R’s before you buy in one of these subdivisions.

The Home

Now lets talk about the location of the home within the neighborhood or subdivision.  You may not care about some of the following negatives for varied reasons, but when selling, you will narrow the pool of buyers willing to accept a negative location.  Like I said before, these lots originally were sold cheaper as less desirable locations. You got a fair deal when you purchased, and when selling, you must pass it on.  The most objections I hear are:

Backing or facing to a busy street or highway.  Noise, pollution and safety are the obvious concerns.  The worst location being on the corner of two or three busy streets.

Orientation of the home. Here in Arizona’s hot weather a North/South orientation is preferred.

Power lines. Whether on the back or front of the home, they are considered an eyesore, not to mention the perception that electromagnetic fields are a hazard to human beings.

Backing up to commercial or industrial property. Again, noise and safety.

Lack of privacy. Backyard or/and pool face two story home(s).

Being at the end of a street “T.” Oncoming traffic that is more evident in the evenings.

Pests. Scorpions, rats and pigeons can be a localized hazard.

Fissures and Subsidence.  A problem the Valley is facing in some areas as we deplete ground water.  After it is drained, the soil compacts and gives away creating fissures and sink holes.

After finding a home in a great location, you are now ready to buy.  First you must talk to your immediate neighbors-to-be; ask them what they think of their neighborhood.  Neighbors will tell you things about the neighborhood in a more objective way because they’re not selling you anything. In the process you will get acquainted and conclude they could be wonderful neighbors to have.

 By: Jay Ovalle, jayovalle.wordpress.com
 A few days ago I was chatting about real estate (what else?) with a total stranger at the gym, and he said to me: “I know the real estate market is close to bottoming out… my mother has lost money on her last 3 homes, she always buys and sells at the wrong time…and she just sold her house that she bought in 2005. So I know the market is about to change.” Well, maybe his mother has her intuition out of sync, so it was great news nevertheless.
 
 Since April, numbers point to a sustained activity in most areas of the Central Valley. The recently published report by the ASU Morrison School of Management: “Greater Phoenix resale numbers up for April, median prices down” indicated a rise in the number of sales across the board. Then in May, a second month full of action, Phoenix and all but one of the East Valley cities, posted significant gains in the number of homes sold. Inversely, inventories finally were diving at a good clip. The number of listings in the MLS¹ has been hovering around 55K for months. In May the number slipped down to 52.7K. That is 5.74% down since February 08 and 3.13% from April. Mesa was the only city where sales dropped 15% from April and its inventory inched up a bit. The average months of inventory of single family, patio homes and townhouses for Phoenix, Scottsdale, Chandler, Mesa, Tempe and Gilbert fell by 14.6% or to 8.42 months of inventory! Most insiders consider 6 months as a stable inventory.
 
 Short sales remain the nightmare and probably one of the many reasons why so many homes are being foreclosed. First, the seller’s financials must show a justifiable hardship and secondly, it is a lot harder to negotiate a modification to a note when it may be part of a packaged investment and/or the holder might be in another country. Those transactions are taking forever, and then some, to close. They can be an opportunity for investors or buyers that can wait that long.
 
 The other interesting news was the continued decline in the median price; an indication that most of the inventory that is moving has been heavily discounted. The lenders are finally getting into the groove to dispose of so many “repos.” From April 1 to May 31 the average price of a home sold in the MLS declined 10.31% in Scottsdale², 4.41% in Gilbert, 3.72% in Chandler, 1.37% in Mesa, 1.27% in Phoenix and .6% for Tempe. I am sure this is at the heart of the spurred activity in the last couple of months. It is a reminder to sellers — making their Custer-esque final stand against the avalanche of bank owned properties — that they don’t have a prayer, and that they stand to loose more the longer their homes remain on the market. If they want to ignore this reality, then they should take their home off the market; we don’t need another overpriced home languidly skewing the numbers. 

 
 ¹. The activity of the Multiple Listing System (MLS) only represents a portion of the total homes sold on the market. It does not include For-Sale-By-Owners or discount brokers’ sales that were not in the MLS. However, most of the activity takes place through the MLS, so it is considered a very good indicator of trend.
 
 ². The Scottsdale number is kind of an aberration because the highest drop of the average sold price occurred at the price level of $1M plus. The average drop from April to May in this range was approximately 20%. From $500K to $1M the drop was .03% and from $0-$500K there was actually an increase in the average of .78%.

  

  

   

 

 

 

 

 

 

   

  

 

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Again, I have to take issue with the Arizona Republic (AR) in its reporting of the state of the local market. This time in “Today’s Buzz,” J. Craig Anderson, an AR reporter, quotes local real estate market guru RL Brown asserting that: “(RL)… expects the April median price of $211,00 for used home to drop at leat $60,000 to $70,000 before it stabilizes.” Holly macaroni!!!  After loosing sleep for several minutes I decided to contact our venerable soothsayer myself.

“Dear Mr. Brown:

I just read this morning in the Arizona Republic’s Today’s Buzz you being quoted as saying that you expect the median price of used homes of $211,000 to drop “at least another $60,000 to $70,000 before it stabilizes.” That’s 33.18%.(!) The S&P Case/Shiller Home Price Index forecasts an 18.3% drop of the median price for the Phoenix market over the next 12 months. The paper did not mention the time span of your assessment. Are you being misquoted?

Sincerely,
Jay Ovalle (a supporter)
1ST USA Realty”

To my surprise, a swift response:

“See The Phoenix Housing Market Letter Vol 282 …Resale prices, on the other hand, will continue to fall due to supply pressures from distressed home sellers, including those lenders with REO. Resale prices will not stabilize until on a neighborhood by neighborhood basis parity between supply and demand is reached. This has already happened in many neighborhoods, and will be a long time coming in other places. The median resale price could fall from this month’s $211,000 to as low as $140k - $150k or so before market-wide “recovery” is experienced. That was where resale median prices in metro Phoenix were in were in late 2002 and early 2003.

 It is important to understand the difference between market-wide median prices and the “values” of individual homes.RL Brown

 Home Builders Marketing, Inc.
Builder’s Research Institute, LLc
623-523-0188
www.rlbrownreports.com“

    Of course, omitted from the reporting was: “…This has already happened in many neighborhoods” and “It is important to understand the difference between market-wide prices and the “value” of individual homes”

These little fragments of great news — which most of us realtors are aware of — would provide a valuable insight to the buyers sitting on the fence, wrapped in apprehension about the future of home prices. It is a total disservice to the readership to provide this kind of halfburroed information.  What confidence could one muster from this type of reporting.  It’s like listening to Harpo Marx quip: “Who are you gonna believe, me or your own eyes.”

“There are three kinds of lies: lies, damned lies and statistics.”  (Benjamin Disraeli)

In everyday English, significant means important, while in Statistics significant means probably true (not due to chance). A research finding may be true without being important. Many reporters get very excited when they have discovered a “statistically significant” finding, without really understanding what it means. When a statistic is significant, it simply means that you are very sure that the statistic is reliable. It doesn’t mean the finding is important or that it has any decision-making utility. So it is the case of the latest report form the Arizona Republic: “Southeast Valley Foreclosures Skyrocket. Numbers surpass 1,000 percent in 2 Tempe ZIP codes.”  Absolute useless rubbish.

Significance is a statistical term that tells how sure you are that a difference or relationship exists.  In the above report we are treated to the accustomed hyperbole of the local press for the sake of sensationalism.

“The number of foreclosed homes in two of Tempe three ZIP codes posted 1,000 percent increases, an unfathomable number that is hard to comprehend because of the way percentages are calculated.” 

Percentages are a straight and simple math operation. There is nothing hard to understand. However, to say that a significant (unfathomable) difference or relationship exists only tells half the story. We might be very sure that a relationship exists, but is it a strong, moderate, or weak relationship? After finding a significant relationship, it is important to evaluate its strength. Significant differences can also be large or small. It just depends on your sample size, and when comparing different groups, what is the relationship between these.

Statisticians  use the word significant to describe a finding that may have decision-making utility to a user. From a statististical viewpoint, this is an incorrect use of the word. However, the word “significant” has virtually universal meaning to the public. Thus, many researchers use the word “significant” to describe a difference or relationship that may be important to a user or, as in this case, to the local reader. In these situations, the word significant is used to advise, to take note of a particular difference or relationship because it may be relevant. The word “significant” is not the exclusive domain of statisticians and either use is correct in the business world. Thus, for our local real estate reporters, it may be wise to adopt a policy of always referring to “statistical significance” rather than simply “significance” when communicating with the public.

Every day, in newspapers and TV news reports, we are inundated with facts concerning our local real estate market. We constantly get bombarded with information about how bad things are,  information usually generated to stimulate a response that leads to the financial benefit of those providing the information.  Bad news sells!

It is easy to get befuddled by statistical facts if you do not understand the correct way to interpret them. Unless you are a statistician, you can easily misinterpret (see innumeracy) numbers  thrown your way. You must understand statistical significance in order to make good judgments relating to statistical facts.

Let’s examine some of the skyrocketing figures about the foreclosures in the Southeast Valley.

They show that Zip code 85281 had an increase in foreclosures of 1,367%! during the same period over last year, when there were only 3 foreclosures vs. 44 this year.  What is the significance? If we consider that there are 21,511 homes in this particular Zip code, the percentage of homes going to foreclosure boils down to .2%. Two tenths of 1%! What is the significance of this number?  Compared to Zip code 85201, where the increase over last year was the lowest at 267.5%, we find that in this area of 21,274 homes, the percentage of homes being foreclosed  is .3%, actually one tenth of one percent higher than Zip 85281. A total meaningless difference.  A much different picture emerges when we calculate the number of foreclosed homes as a percentage of the total homes in each Zip code. 

Below are the five Zip codes with the highest number of foreclosures as a percentage of the total homes in each code.  One can then conclude that the higher rate of change is not necessarily where one will find the higher rate of foreclosures. The numbers show a significant difference compared to the negligible .2% in Zip code 85281 with the “unfathomable” 1,367% increase.

In order for consumers or readers to fully benefit from this kind of reporting, it is necessary to have a clear objective in mind. If it is to be of value to the average reader, then the statistics must be meaningful. We ought to be able to infer and to draw valid conclusions from the data presented.  The information must make sense and be useful. 

“In God we trust. All others must bring meaningful data”

I know beforehand that I will be a voice in the wilderness. Carnal use of the word aside, I can’t see how “immoral” applies to the effort to try to help a tiny percent of Americans whose only sin was to want to own a home.  This is America.  In America we are threaded together by want.  Want what your neighbor’s got or better.  It is Consumerism in its distilled form.  It is the engine, the soul, that powers Capitalism. 

Let’s see. The last time I looked up the word immoral it meant: corrupt, wicked, evil, unchaste, impure, reprehensible, unworthy and many other synonyms too many to mention here.  But is this effort really immoral because it was so easy to get a mortgage when the market was hot, because we didn’t read the small print, because we weren’t able to foresee the downturn, because we used our equity to buy more stuff that, in turn, kept the engine humming, or because we were plain greedy?  It is the American way.  We were just being ourselves, a country of spendthrifts with a negative saving rate.

I read with dismay that in a recent poll conducted by CNN/Money,  48% of Americans —and the number is still growing — believe that homeowners in trouble should not be bailed out.  Congress is also split on the issue, with most Republicans opposing such legislation and Bush promising to veto it.  In SmartMoney Jonathan Hoenig argues, among many things, that:

“...the real reason to oppose a bailout isn’t that it’s impractical, but that it’s immoral.”

He goes on:

“In America, we have the right to “life, liberty and the pursuit of happiness,” but not the guarantee we can live in the four-bedroom Colonial that’s priced way beyond our means. It might sound cold, but homeowners who can’t pay their mortgages should not expect to be able to keep their homes.”

Well, I agree that it is very American to have free-markets were businesses compete with minimal government  interference, as it is the responsibility of these business to bear the cost of high risk investments gone sour.  While we all embrace the free-market idea, the spirit of Adam Smith is nowhere to be found when it comes to government bailouts. 

Let’s review some of these. In 1971 Congress passed a $250 million loan guarantees to prop Lockheed Martin, which eventually recovered and merged with Martin Marietta in 1995.  Chrysler in 1979 was virtually bankrupted and was rescued by Federal Government Guarantees totaling $1.2 billion.

In the early 1980s the Federal Government bailout of the Savings and Loan industry ultimately cost the taxpayers  $125 billion.  I think we are still paying for this one.

In 1984 the FDIC and the Federal Reserve rescued Continental Illinois Bank.  In 1991 the Bank of New England was quietly funneled a billion dollars  by the U.S. Treasury to boost its liquidity.  In 1998 the Federal Reserve orchestrated a bailout of Long Term Capital Management Hedge Fund at the tune $3.6 billion.

In 1995 President Clinton went to Mexico’s aid after a rapid devaluation of the peso, persuading countries and banks to lend the country $50 billion guaranteed by the U.S.

In 1998 the U.S. and the International Monetary Fund bailed out  South Korea. Total package $57 billion plus an additional $10 billion in emergency aid.

In the days after the attacks in 2001, the airline carriers estimated that losses would come to $24 billion as people elected not to fly. Congress quickly authorized $5 billion in cash infusions to shore up the industry, with the funds apportioned according to each carrier’s size. Then it followed with $10 billion in loan guarantees and set up a government compensation fund for victims of the attacks.

In an opinion column The National Review quotes. Scott Garrett (R-N.J.), one of the very few members of Congress questioning the federal bailout of Bear Stearns:” Government isn’t supposed to be in the business of picking winners and losers,” Garrett remarked in a phone interview while en route to Washington from New York. “But here we are. Hardly anyone seems to mind.”

Given the well documented pattern of moral hazard among corporations, banks and even countries, it is hard to understand the harsh feelings being generated against Lilliputians homeowners in financial distress. There are approximately 102 million homes in the USA and a little over 1.5 million are in trouble with their mortgages. Approximately a third of these are small investors and there will be no help for them. The plan (H.R. 5830: The FHA Housing Stabilization and Homeownership Retention Act) that just passed Congress approval yesterday, will only back loans to re-structure existing loans on principal residences and lenders will have the option to participate.  It is $300 billion in guarantees over the next 4-5  years.  I understand the Congressional Budget Office estimates such a measure would end up insuring approximately 500,000 borrowers. Estimated cost to taxpayers: $2.7 billion!

So what’s the big deal?  Considering the planned $300 billion in subsidies to rich farmers, the annual $8 plus billion in amoral subsidies to oil companies or the $ 50 billion a year we give away to other countries, most of which don’t even like us or the $3 trillion for the war ( 1 trillion still unacounted for), or the crushing national debt at $9.2 trillion, the $2.7 billion over 4 years for helping fellow Americans, is just less than pocket change.