« The fight of our lives | Main | Book time »

May 07, 2012


Feed You can follow this conversation by subscribing to the comment feed for this post.

This is great stuff! I don't know of any place else in the mass media that offers the kind of inside-dope provided by AZRebel, whose insights I've been thinking over this afternoon.

Even assuming that he is 100 percent correct, I'm not sure that the dynamic is changed. The supply of built but unsold new homes (spec homes) has been reduced to a tiny handful (383 if Reagor's sources are to be believed). The fact that underwater homeowners were willing to exchange their houses for new spec homes, even on poor terms, to the extent of eliminating the vast oversupply of spec homes, is one indication of consumer appetite for new homes in the Metro Phoenix area. The other leg of the equation is the fact that investors have bought up so many foreclosure and short-sale bargain homes, to use as rentals now and to flip later, or else to flip to flip now, which has crowded out family buyers to the extent of driving them into the new home market.

If those insured vacant homes alluded to by AZRebel are off the market for now (as seems to be the case) they cannot contribute to a housing glut and cannot keep prices down. If investors are snapping up all the bargains in existing houses which ARE on the market, especially at the lower end, then homebuyers must go to the new home market, which means new homes will be built for them, which means upward rather than downward pressure on prices, as well as jobs. How big the effect will be is a good question: reports of frustrated would-be family homeowners who are outbid by investors and are turning to new homes now, have been widely reported in the Arizona media: but I've seen no attempt to quantify this, though realtors' anecdotal claims seem to suggest fairly strong demand outstripping supply.

The fact that a shadow inventory exists needn't be a terrific problem, though it could be. Investors are clamoring for banks and similar lender-owners to put their unmarketed inventory of foreclosures on the market, saying that strong demand exists.

"Banks still hold many of the homes they took back through foreclosure in recent years; the rush to buy could push them to put more on the market. 'If lenders are holding back on foreclosures and waiting for a sign the homes will sell, well, the time is now,' said Jim Sexton of Phoenix's Realty ONE Group. 'Real-estate agents and buyers are all frustrated. The demand for homes is real.' "

On the other hand, supporting Mr. Talton's argument:

"Housing analysts say the current buying frenzy may run its course in six months and not create a lasting recovery. Experts say the region's housing market won't really recover until regular homeowners, who can afford their mortgages, feel like they can sell and make a decent profit -- not the profit of 2006, but enough to pay off their mortgage and net a slight profit if they bought before 2000."


The question is not whether the housing market has recovered health, much less pre-recession levels -- clearly it hasn't -- but rather how quickly the two legs of supply reduction (conversion of spec homes and investor purchases of foreclosures and short-sales) will raise prices in the general housing market enough to make fewer homeowners underwater and more able to sell.

The Calculated Risk blog has an item from late February, "Comments on Existing Home Inventory" that tends to support Mr. Talton's skepticism, but pulls up short of it in kind and degree. (Warning, this may be a SLOW link: open a new window first.)


P.S. No more Internet time until tomorrow evening at earliest.

Emil is out of internet time and I am out of patience! After almost 8 weeks of trying to re-fi from 30 years to 15, I'm stymied by the banksters regulations and requirements. After swimming in no-doc liar loans, they're making my life miserable because I don't have much of an income in retirement! Credit is good. Existing equity is good. Financial statement is good.

Leads me to wonder why they'd rather loan to somebody living from paycheck to paycheck and wanting to live in the 'burbs? I may just stick with my modest 30 year and quit aggravating myself! So much for having respect for ones' elders, huh?

Taltons record on calling it is as good as U can get. Good piece Jon. I am just happy I am down to 320 square feet, no property taxes, no yard work and I am mobile.

On a positive note, I talked to a young (19 Maybe) person outside a ice cream parlor after I noted he was reading Sarte's No Exit in paper back form. He was refreshing to chat with.
Before I left I went to my truck and gave him a copy of Desert Solitatie and Blue Desert.

The influx of retirees to Arizona from all parts will be on hold for years. The economic trauma of the past few years from east coast to west coast has dispelled the notion of early retirement. Organic economic growth supporting increases in real wages is needed but will remain lacking in proud to be stupid Arizona. morecleanair's financing hassles will remain a significant near term headwind as well.

The full force of austerity which might occur in 2013 will kill any rebound in Arizona housing.

There can be no real economic strategy here because that would violate the right-wing narrative that only markets should direct capital. For Arizona, a devolved real-estate economy had that virtue. There was no need for powerful leadership class, which Arizona mostly lost in the 1990s. And certainly no need for "industrial policy", which is usually portrayed as a sibling to socialism. There is, instead, a powerful ideological faction led by The Goldwater Institute restraining governments and politicians from exercising any kind of leadership. The legislature mirrors that ideological compulsion. Proposition 207, approved by voters overwhelmingly in 2006, further crippled our collective capacity to control our future.

The vortex of ideology overwhelms any other impulses that might question this arrangement. Given how Arizona's median income ranking has fallen over the past two decades and how exhausted the entire "miracle in the desert" storyline has become, it's odd that there's no discussion outside some academic circles about Arizona's uncertain future. But this is how rigid ideological polities behave. Arizona cannot fail. It can only be failed. Now, let's cut taxes even more before people notice that none of this works. Housing has to come back if only to prove heretics like Jon Talton wrong.

To avoid serving my Arizona life sentence, one more housing bubble oh universe. Faith not reason shall deliver ye and me from the hellish heat of paradise lost.

It is amazing how wireless and internet allow one to live a homeless life. Head to Flag to beat the heat. Swimming pools in Scottsdale are chocked full of those without rent or property taxes in the winter. Just watch out for the local police:)

A thousand people decided to build their house (that they probably want just so) in a metro area of 5mil. Wow!

The investors may count on the desert and its low humidity as a preservative for their bulk investment (and the corpses). They may also count on population growth, first timers, refugee renters from underwater houses. All those vectors will not propel a return to the historical highs of 2005.

Where are the young people? Well, they're looking for jobs while carrying around an average debt of $25,000. Student debt (non-dischargeable) has passed $1 trillion, higher than credit card or car debt. Aside from $10,000 shacks a lot of those people will never buy a house unless the job market turns around double-fast - their debt servitude will be cemented. The loan sharkery will prevent a 'healthy' market and the real impact will be felt over the next 10 to 20 years. Meanwhile, is population growth or immigration a good supplier of fresh customers for 'homes'? Maybe on the cheap side.

More renting however is a sign of normalcy (like a thousand people getting a building permit). But normalcy is not a solution for the overhang, underwater houses, and dependency on settlement growth. This has gone as far as it can go and it's game over. The cost and suffering will be diluted over the decades. Notions of rebound are ridiculous. The only thing that will rebound is massive pain.

Based on "observations" on the ground, the housing markets in AZ, NV and FL are still in doomsday mode.

The commercial property markets in FL, TX - primarily Houston, AZ, NV are still in doomsday mode.

In the "good ole days" we would insure a vacant build and it would soon be re-occupied in a matter of 2 to 3 months.

We now have $10,000,000 vacant commercial properties going on three plus years vacant with no sign of potential occupancy.


A shadow inventory is not a free-market principle, it is market manipulation.

It is noticeable how many more empty store fronts and strip malls there are. The rebound is not happening. The local boosters remind me of the marketing gurus here at work - they count every contact as a sale (potential customer: I'm thinking of buying 10 of those; salesman: I just sold 10! Schedule them for production!; more level heads: where's the contract?; salesman: It's a done deal!)

A friend asked how I was doing in Seattle, said she had been here a couple of times. Cool downtown, she said, but she was surprised by the traffic congestion.

Sure — if you choose to live a Phoenix lifestyle.

Seattle is a dense, walkable city with heavy transit use. I hardly ever drive. The James Beard Foundation just named Seattle's Tom Douglas the outstanding restaurateur in America:


Douglas has restaurants within a block-and-a-half from my home. All 13 of his restaurants are within walking distance. This is just one example.

I'm not OT. Within the city of Seattle, real estate is booming, and not just the skyscraper mania downtown. Houses in the city are selling in bidding wars and the inventory is low.

Out in the suburbs, especially the tract-housing, must-drive-a-car places...not so much.

According to the news this AM, Gilbert is in the middle of a new home construction boom? Well, even the Ayran Brotherhood needs a place to live.
PS I hear Oliver Stone may make a movie about JT Ready and is looking for a catch title.

"And this doesn't even account for the Midwestern baby boomers who even want to retire to "the Valley" but can't now, and will have to work until they're 90, if they can get a job, in metros that actually have family wage jobs."

Have you priced just the costs of moving recently? Most of us will be stayin' put for a long while.

"Executives at Bank of America say they will begin mailing 200,000 letters offering certain customers mortgage principal reduction...the offer is real, and eligible borrowers could get as much as $150,000 knocked off the balance of their mortgages. It is all part of the $25 billion settlement reached this year between federal and state agencies and the nation’s five largest mortgage servicers over fraudulent foreclosure document processing (so-called “robo-signing”)."


AWinter, lending standards have been tough before. They became easier because there was a strong financial incentive to lenders in doing so. More loans mean more interest payments and that means more income for lenders. It is fundamental to the system and so there is still a strong financial motive.

Regulatory requirements are subject to the whims of regulators, and regulators are subject to lenders and their lobbyists under the campaign finance system we now have, all the more so since credit is the lifeblood of an economy and politicians are under strong pressure to increase economic growth.

Lenders will relax standards under the camouflage of rigorous income checks on prospective borrowers (whether or not such checks are actually rigorous), particularly once the housing market regains its health and asset prices can be counted on to rise.

Regarding the possibility of shadow inventory keeping prices from rising for very long, my sense is that institutional holders of unsold houses held back from the market are savvy enough not to undermine their own positions by dumping excessive quantities on the market just when prices start to rise. They'll probably dribble it out a little faster than they're already doing at present. (There is some indication that lenders in possession of foreclosed homes are currently metering releases of inventory onto the market.)

Ordinary homeowners who want to sell but have taken their homes off the market while waiting for prices to rise are another matter. They have no sense of market fundamentals and are completely independent of one another. They'll try to sell as soon as they smell a chance to pay off their current mortgage with or without a bit of profit. The size of this group is therefore particularly important, but I don't have any figures.

In any case, the stock of "shadow inventory" is finite and will eventually run out. It may take Arizona's housing market ten years to recover, but it seems likely to do so by next decade.

"I hear Oliver Stone may make a movie about JT Ready and is looking for a catch title"

Could be Kevin James breakout role!

Title: Border Ready

I came across this Bloomberg News story dated January 19th, 2012 about Canadian investors expressing frustration that their bargain hunting was drying up in Arizona as supply became tighter:


The story also contains this item, which begins the "mystery" of disappearing Arizona jobs:

"The state added about 45,000 jobs last year. At that pace, it will take until 2015 to reach pre-bust levels, said Lee McPheters, director of Arizona State’s JPMorgan Chase Economic Outlook Center."

By March, 2012 this had become:

"Arizona added an estimated 37,800 jobs, according to an analysis of recent U.S. Bureau of Labor Statistics data by research professor Lee McPheters of ASU’s W. P. Carey School of Business."

Then this becomes:

" 'If the state economy continues to perform this way going forward, we could be on track to add twice as many jobs this year as last year, when employment was up by 23,500 for the year as a whole,' McPheters said."

This isn't really a mystery: these stats are subject to revision and that's an important lesson to remember. Nor am I picking on McPheters. He actually seems to have called it right (whether fortuitously or not) back in December of 2011:

“After three consecutive years of lost employment, about 23,800 jobs were added in 2011,”


Cute, but wrong predictions for 2011:


I do not believe that there is an accurate figure for jobs lost in Arizona since 2008. And the construction industry flacks will say most anything to rosy up a bleak scenario.

With all due respect to the Urbanization folks here, I hope Phoenix and Tucson Shrink. Seems back a few post ago someone mentioned Tucson as a possible Mega City. I see it as a dusty little outpost between Mexico City and Los Angeles. I hold NO hope for Phoenix, it will eventually dry up and the Sonoran winds will sweep the desert clean of bones, steel, concrete and ugly, ugly asphalt..

You are correct Mr. Cal and here's the algebra to prove it.

U = undocumented workers paid cash under the table

M = multiplier of cash spent by undocumented worker for housing, food, electicity, etc.

J = jobs created by U X M.

B = Bullshit(in tons) spewed by both sides of the immigration argument.

Solve for U

U = B x 1,000,000 / J x U x M

"I hear Oliver Stone may make a movie about JT Ready and is looking for a catch title"

Title: Ready Not

So, assuming all you have written is true, what does it mean? What are the ramifications for the Phoenix economy going forward? It's not going to be 2000-2006 all over again. So it's going to be...?

The urbanists among us are the best friends of tha "sahuaros" because we want compact, walkable cities, not sprawl.

See you in Phoenix next week.


more like "Borderline".

I think the Phoenix Metro area could shrink or become less dense thanks to the sprawl. Saw B. Palin sold her house in Maricopa for a couple thousand more than she paid (a similar house went for 30K less).

Some nice titles for the JT Ready biopic. Too bad Vincent Donofrio (sp?) is too old. I image Ready looked like his character in Full Metal Jacket when he takes out the DI and himself.

Jon, I ll give you Compact with height limits. ( like one story as in Willow)
And lets start telling Stanton, Infill and also buying up desert adjacent to parks like South mountain to be kept from commercial and residential development.

I think a meeting between and you and Stanton would be a good thing. You can take Petro and Soleri along as Consigliere's and AZ Rebel and I will keep your back.

Hope to see you soon but I may be in Austin.

This is probably the saddest sentence in Talton's post:

"Yes, "investors" are buying plenty of cheap tract houses in Phoenix"

My experience in living near rented homes has been disastrous. Neither Renters nor Rentiers give a tinkerer's damn about the neighborhood. You say no one washes a rented car? I say, no one improves a rented home.

The upshot of all this is the condensation of wealth in fewer hands and tenement delapidation. The Rentiers assert they are doing the culture a favor: Buying up derelict homes, mending them, and putting roofs over families. In truth the do the absolute minimum repairs to get the house back on the market, and care nothing about the neighborhoods going forward. The same can be said concerning the renters. They too have no skin invested in the communities future.

All told this is another cultural disaster in which a few leeches see great profit at the expenses of many.

Why the "leech" word? Well that's personal. Not long ago a house got foreclosed in my neighborhood. Everybody around me has pride of ownership. The houses are maintained, gardened, swept. Into the middle of this a "leech" saw opportunity. He could buy the house, rent it out, and not give a damn about anything. Because all the houses around "his renter" were maintained, the value of his rented property would go up even if he let it go to weeds. He could in fact, leech off of the elbow grease of the neighborhood and sell in a few years for profit.

You can call him an "investor" if you want. I'll call him what he really is: a worthless lazy republican-voting leech.

Koreyel, "Everybody around me has pride of ownership. The houses are maintained, gardened, swept. "

Given the tightness of your hood you all should be able to sit all all over this "leech."

Mr. Talton wrote:

"So, assuming all you have written is true, what does it mean? What are the ramifications for the Phoenix economy going forward? It's not going to be 2000-2006 all over again. So it's going to be...?"

Good question. I don't like making grand predictions with so many external factors complicating things. It isn't just Arizona, but the rest of the country, in turn affected by the world economy.

The short answer: I don't know. I don't even know that it won't be "2000-2006 again" in another 10 or 15 years. Am I missing the big picture? Could be. I like discussing these things because it helps me get a better handle on the issues, but I don't claim to have authoritative knowledge.

I suppose that as a matter of simple logic, if Arizona doesn't continue as it has since the recession, and also doesn't return to boom conditions, that implies healthy but not excessive growth. But bubbles and the boom and bust cycle are intrinsic to capitalism as we know it. Of course, the details of this dynamic change, as economies and political conditions change.

Land and housing are such fundamental needs that I can't imagine their value as assets undergoing a permanent decline, much less as populations grow, immigration continues, and long-existing population centers decay and send waves of emigrants to surrounding areas and to other states.

Energy prices are a big X-factor in all of this, but adjusted for inflation gasoline is about the same price as in the early 1980s. Cars continue to increase fuel economy.


Will wages and salaries in a more healthy economy include cost-of-living increases, as they have in the past, thus partially or wholly offsetting rising gas prices? Will this in turn be passed along to consumers in the form of higher prices for goods and services produced by the companies paying these wages and salaries? How will that play out in terms of consumer demand?

Four minutes left online this session is not enough time to continue.

Emil; so as to not lock yourself in. just take a guestimate as thats probably the best anyone can do.

My guess.
I here Dante calling!

The desert will reclaim what is hers.

Since the energy cost question (in particular, the cost of gasoline) is central to Rogue Columnist and the Kunstlerian models it offers more than a passing nod to, it's worthwhile to examine that question in greater detail.

As noted above, the inflation-adjusted per gallon cost of gasoline isn't the only factor determining driving costs today; there is also increased fuel economy. Let's "do the math".

The average mileage of the U.S. passenger car fleet in the 1950s was about 15 miles per gallon.


Largely because of the nation's first fuel economy law, enacted in 1975 and phased in through the 1980s, the U.S. car fleet average mileage increased to about 25 miles per gallon as of 2010.


Note that these are CAR fleet averages, which I offer to make historical comparisons as close as possible. There are far more SUVs and light trucks on the road today than in the 1950s, so current total U.S. vehicle fleet averages are lower than 25 mpg. If more households switched from SUVs and large pickup trucks to (say) something the size of a 2011 Honda Civic (combined city/highway 29 mpg) or the 2011 Honda Civic Hybrid (combined city/highway 41 mpg) today's fleet mileage would be higher.


The cost of gasoline per mile driven = the cost per gallon / miles per gallon.

The average annual cost per gallon in inflation-adjusted dollars in the 1950s was about $2.50, and today about $3.50.


Gas cost per mile 1950s: $2.50 / 15 = 16.66 cents per mile.

Gas cost per mile now: $3.50 / 25 = 14 cents per mile.

So, gasoline is actually cheaper now when the combination of inflation adjusted gas prices and increased fuel economy are considered together.

Using simple algebra, the cost of gasoline necessary for per mile gas costs to equal those of the 1950s can be determined:

X = 25 times 16.66

X = $4.17 per gallon

If the U.S. non-commercial vehicle fleet had average fuel economy equal to the Honda Civic Hybrid (a realistic premise if future technological advances in fuel economy, combined with consumer shifts toward smaller vehicles, are assumed), gasoline would need to cost $6.83 per gallon (in today's dollars -- more in nominal future dollars due to inflation) to be equivalent in cost to the 1950s.

This certainly doesn't sound like we're going to Kunstlerian hell in a handbasket.

How expensive would oil need to be to support a gasoline price of $6.83 in current dollars?

According to one source, as of February 2012 crude oil prices made up 72 percent of gasoline prices (the rest depends on refinery and distribution costs, corporate profits, and federal taxes).


Since one barrel of oil equals 42 U.S. gallons, we can derive a simple algebraic equation to determine oil price based upon this model:

Gasoline price per gallon = (oil price per barrel / 42) times 0.72

Gasoline price per gallon times 0.72 = oil price per barrel / 42

(Gasoline price per gallon times 0.72) times 42 = oil price per barrel

Setting gasoline price at $6.83 we obtain an oil price per barrel of $206.53 so evidently we have a bit of wiggle room before the price of gasoline catches up to 1950s gasoline cost per mile, given perfectly reasonable, currently technically possible increases in fleet mileage.

There's my "guestimate", Cal. Post complaints about premises, reasoning, and/or math errors here.

Those are interesting numbers, Emil.

There are some factors that may ameliorate the savings that today's driver "enjoys" over the 1950's motorist (although I will not attempt to quantify these factors.)

One is that there are probably more miles driven per household today, 60 years on in a period of evolving car culture. While the automobile was certainly experiencing serious boom years back then, we're certainly more chained to the auto now, both for economic and lifestyle reasons.

Just the development of the two-family income as a middle-class baseline would count for a lot of that. I suspect we do more recreational shopping/quick tripping with our cars as well.

Perhaps this, along with the "SUV factor" that you pointed out, erases some of those gains.

I'm still surprised by your numbers, it's not as "bad" on paper as I would've guessed, and thanks for doing the hard work.

It's going to be a puzzling dance between diminishing resources and demand reduction, so you're probably right if you are positing that gasoline won't be priced out of the practical family's budget anytime soon.

This is bad news to me - while I have considered the possibility that Peak Oil might have been a possible "safety valve" against us completely destroying the ecosystem in spite of ourselves, it occurs to me that it's depressingly probable that we'll be able to "afford" to disinter carbon well past the tipping point. (Which I increasingly suspect may have already been broached.)

Of course, oil reserves for filling gas tanks is only a small part of the story. There're energy and materials overhead in manufacturing and maintaining vehicles and the roadways as well. And cost pressures in these and other areas would surely be reflected in the cost of refined fuels.

And, there are other systemic failures on the horizon, sure to thin out traffic just as efficiently as rocketing fuel costs...

OK, I feel a little better now.

Sorry, funny little brain-fart I had with that last calculation. I got the right answer ($206.50 per barrel of oil given a per gallon gasoline price of $6.83, given the premises) only because I made two errors which cancelled each other out exactly: putting the "0.72" on the wrong side (first error) and then multiplying on both sides instead of dividing on both sides (second error, which corrected the first error).

The first line should have read:

Gasoline price per gallon times 0.72 = (oil price per barrel / 42)

This would have made the second line redundant, yielding the third line:

(Gasoline price per gallon times 0.72) times 42 = oil price per barrel

And as I stated:

Setting gasoline price at $6.83 we obtain an oil price per barrel of $206.53 so evidently we have a bit of wiggle room before the price of gasoline catches up to 1950s gasoline cost per mile, given perfectly reasonable, currently technically possible increases in fleet mileage.

The tacit issue is the fact that a barrel of oil, despite being 42 gallons, will not distill into 42 gallons of gasoline, due to inefficiencies in the distillation process. That said, this *seems* to have been included in the "0.72" factor (see article linked above for details). In any case, seems sufficient for a reasonable "guestimate".

Only 1/2 hour tonight (less) to get to library, post, and get back to last bus. More replies tomorrow.

Petro, there will necessarily be economic disruptions before American consumers are driven to downsizing into Civics from Escalades. But choices will need to be made between smaller cars with higher fuel efficiency, or simply spending less on other things. At least the choice remains.

If households drive more total miles because of two-earner, two-car families, they also have more income therefrom. And the real gasoline cost per mile is still lower.

I'll think about your other points and get back to you when I have more online time.

Mr. Talton wrote:

"As the Calculated Risk blog wrote, 'fewer foreclosures at the low end could lead to higher median prices, even if repeat sale prices are still falling.' "

An Arizona Republic story from April 27th, 2012, "Price of homes in Valley up 20%" had a pull-out table whose figures seem to support Mr. Talton's skepticism in this regard.

The interesting thing about the table's figures is that it breaks down average home price per square foot BY TYPE OF SALE, comparing March 2012 to March 2011 and providing a percentage change.

Average price per square foot for new-homes sales (only a tiny fraction of current sales) was +2.3 percent, a modest improvement but nearly flat.

Average price per square foot for "normal resales" was actually DOWN, -5.4 percent.

Average price for "investor flips" was up +9.8 percent.

Average price for "short-sales and pre-foreclosures" was down -2.9 percent.

Average price for "bank-owned sales" was up +16.7 percent.

Average price for "Fannie Mae and Freddie Mac foreclosure sales" was up +20.1 percent.

So, while the total for all sales was up +14.4 percent, the average price for ordinary sales (new homes and normal resales) was flat or down; the total was buoyed by an increase in price in investor purchases (which I assume figure prominently in the "bank-owned sales" and "FM/FM foreclosure sales" categories as well as in the "investor flips" category).

It may yet be that upward price pressures from investor activity will spill over into regular sales, but to what degree or for how long, if so, remains to be seen.

Re: Emil's oil analysis and the recent discoveries of oil all over this country.

I wish I could see the look of surprise in the faces of those who supported drilling our way out of high oil prices and high gas prices.

Wait till the oil companies continue exporting more and more gas overseas while keeping the price of gas high here in the US.

Did they really think oil companies would lower the price out of the kindness of their hearts??

Supply and demand, baby. Supply and demand.

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Your comment could not be posted. Error type:
Your comment has been posted. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.


Post a comment

Your Information

(Name is required. Email address will not be displayed with the comment.)

My Photo

Your email address:

Powered by FeedBlitz