Ted Simons: Good evening and welcome to "Horizon." I'm Ted Simons. An amazing development at the U.S. capitol today. Representative Gabrielle Giffords was on hand to cast her vote in support of legislation raising the debt ceiling. It was Giffords' first public appearance since she was shot in the head by a gunman in Tucson back in January. Giffords appeared today in a wheelchair. She waved to her colleagues, who gave her a standing ovation. Giffords voted in favor the debt ceiling bill, a vote her office says she insisted on making, considering the importance of the legislation.
Ted Simons: The latest U.S. census shows that about 460,000 Arizona homes were empty in 2010. That's a vacancy rate 61% higher than a decade ago when the last census was taken. We recently talked about all this with a couple of real estate professionals, including one who believes the market has yet to bottom out.
Cindy Sessions: I don't think it's hit bottom yet. Because the banks have been holding back on foreclosed homes. Haven't yet dumped them. I don't know the percentage rate, a lot of homes still in the foreclosure process, basically, they've been living in their home for a year and a half, two years, without making payments and the banks haven't taken those back yet.
Fletcher Wilcox: There's a lot of people that the bank hasn't filed the notice of trustee sale yet. But I don't think we'll hit the numbers we hit last year. The numbers going into foreclosure are down about 25-30% compared to this time last year.
Cindy Sessions: The banks so far have not gotten rid of all of their foreclosures. You see -- I see people hanging on as long as they can hang on and you're going to see another group that are saying, I can't hold on any longer, I'll let this house go. And that's what is going to happen the next couple months, a whole influx of foreclosures.
Ted Simons: Joining us now to share his views is real estate analyst and economist Elliott Pollack, the CEO of Scottsdale-based Elliott D. Pollack and Company. Thanks for joining us.
Elliott Pollack: Thanks for having us.
Ted Simons: The idea of a whole other influx of foreclosures and the idea that banks are holding back which means we could see a flood of them. What do you make of all of it?
Elliott Pollack: It's like rearranging the deck chairs on the titanic. It's irrelevant information. The reason is I have a house and I'm foreclosed, I do -- leave town, go to an apartment or, three, a rental home. Most who are in a house go to a rental home. The average household size for a single family unit that is owned, roughly 3.3 people. For an apartment dweller, 2.2 people. The average size for a single family rental is 3.7 people. If you have two kids and a dog, you've just moving down the street to a rental house. There's no change in absorption, the issue of foreclosures doesn't change anything. The issue is people showing up. There are two problems. One, the number of vacant units. And two, people moving to town. Part of people moving to town, the ancillary problem is during periods like this, the average household size increases because there's fewer households created. You get the knock on the door and you’re 25 year old kid says -- I'm moving back in. Two guys that were living separately now moving together and essentially household sizes grow. In fact, if the average household size was back to normal, you'd have no excess vacancies in greater Phoenix. It's a function of cyclicality. And there are no jobs. And when jobs come back, two things will happen. People who have been doubling up will get their own places and we’ll be able to suck in more population, and that’s what’s missing—an improvement there, and that is over the last 12 months, we created about 8,000 jobs have been created in greater Phoenix. 12 months before that, we lost 30,000, and the 12 months before that, 155,000 jobs. There's been an improvement and sizeable, but slow relative to what we're used to. You don't see it, but we're past the worst.
Ted Simons: This whole conversation, that one and this one are predicated on the census numbers, 16% of all housing in the state is vacant. Maricopa County, that is 49% of the vacancies in the state. Are you surprised? What do you take out of this?
Elliott Pollack: You can't look at it 61%. And the reason is that in 2010, there were two million 2,844,000 homes. In 2000, there was basically less than 2.2 million and you have to look at what the number would be if you had the same vacancy rate as 2000. In 2000, 13% of all homes were vacant. In 1990, 17.5% of all homes were vacant, including apartments, and now you're at 16%, 16.3% vacant. You're going to have a base level of vacancy to keep the market fluid. If you assume the 2000 number, 374,000 vacant units, so the relevant number is the difference between the 400 some odd thousand, 463,000 that the census and the 374,000, that's about 89,000 excess units in the state. Half of them in greater Phoenix. Quite frankly, our analyses are that about 24,000 are apartments which would only leave about 30,000, 40,000, single family vacant homes, which is much lower than we think it is, not higher.
Ted Simons: Sales and leases are up. House sales in June up 10,000 some odd sales. Lots of investor activity? What's going on?
Elliott Pollack: The investors are saving the market in that regard. What's happened is prices are so ridiculously low, especially for foreclosures and short sales; the investors are coming in and buying them. They'll fix them and flip them or have them as rentals and that's great news because all of the people being foreclosed on are mailing in their keys, need a place to live. If it's you, your wife and dog, you'll probably go to an apartment. If it's you and two kids and a dog, you go to the rental down the street. The kids are in the same school and same friends. So most of the people moving out of single-family homes are moving into single-family rentals.
Ted Simons: And that's why we're seeing leases up in June?
Elliott Pollack: Yes, that's why leases are much higher than normal and that market will be strong for another 3-5 years until people regain their creditworthiness.
Ted Simons: Let's talk about how hard it is to buy or sell. Some folks say it's too hard for a lot of folks who would qualify or on the cusp. It’s too difficult right now, is that a valid argument?
Elliott Pollack: It is, and the pendulum, like everything else, swings. In 2005, if you were breathing, you qualified. You didn’t have to give much information. They are called liar's loans. Now the market swung the other way where banks want to be paid back so they want people who are well qualified. There aren't that many people who are well qualified. People have to get their financial house in order. Once they do, they'll be able to get new homes.
Ted Simons: That includes investors.
Elliott Pollack: That includes investors. They're mainly cash buyers, by the way. When they rent them out, they know get a positive cash flow.
Ted Simons: Are lenders making it easier to do short sales?
Elliott Pollack: No, they're being a pain. They’re talking a good game, but every Realtor I speak to says it's a long, involved process and ultimately, it works and ultimately, the market will clear, but the real issue is when the jobs pick up significantly, because that will suck in -- two things: Suck in population, which gets rid of the vacant units and allow the average household size to decline, those people who doubled up get their own household and those two things will cure the market. Everything else is irrelevant. Yes, foreclosures are down, all of that stuff, it's irrelevant. According to ASU, there are roughly 88,000 vacant single family homes in greater Phoenix, two years ago—there were about 108,000 vacant homes. The number is improving. A normalized level is about 30,000. We think 50, 55,000 excess vacant units. How long it will take to absorb those excess units, is the issue. We believe it’s 2014-15.
Ted Simons: Is this the indication that the homebuilding business in Arizona is in for continued tough times?
Elliott Pollack: It's continued tough times until the market starts to clear. When the market starts to clear, by definition prices goes up. Like any manufacturer, when they over-produce, what do they do? They put everything on sale until they get rid of the excess inventory until prices bounce back. Same with houses. This is a great time to buy.
Ted Simons: And we're not getting customers like we used to because folks in Wisconsin can't sell their homes to get out here, or if they could, they can't get a job once they're out here.
Elliott Pollack: Right, once you start getting 15, 20, 30, and 40,000 new jobs a year, the problem goes away in no time.
Ted Simons: Compare what's going on now to the depths of the recession. How far have we come?
Elliott Pollack: Basically, like I said, between 24-36 months ago, we lost 155,000 jobs in greater Phoenix. That's mind boggling. When we -- over the last 12 months, gained 8,000. You say that's almost nothing. That's a swing of 160 some odd thousand jobs. Retail sales are way up. Fewer excess homes. You have fewer excess lots and population growth, if you look at the APS and SRP data, on net residual hookup, while it’s not great, it’s passed the bottom, it appears that 2009 was the bottom for population. But the -- it's just that it's a long process. And -- and it's going to take a while, but we have definitely turned the corner. Things will get better. But they're going to get better slowly and that's the bottom line.
Ted Simons: OK. Kind of an ancillary idea. Used to be that first-time homebuyers, young folks, whatever, priced out of the market. Bemoaning the fact, couldn't afford a $300,000 starter home in 2007. We don't have those starter houses anymore. Are first time home buyers picking up, are we seeing that activity?
Elliott Pollack: The answer is there's never been a better time to buy. They're keeping the numbers -- I've got them to 1995 and the previous highest level of housing opportunity was 75%. It's now up to 85%. It's huge. The houses have never been more affordable. By the way, in 2006 and 2007, it was down to 30%. That meant that basically only 30% of the population could afford the median priced home. Now 85% can afford the median priced home.
Ted Simons: They can afford it, but are they trying to buy --
Elliott Pollack: Well, there's three reasons why it's slow. All right? One, fear. Have we reached the bottom? And from that standpoint, I would be a buyer. And here's why: If housing goes down another 10%, but mortgage rates go from 4.5% to 6%, you're behind the eight ball. It's all about payment, not price. And your payment at 4.5% goes up 25% when you get to 6%. Houses are not likely to go down another 25%. I'd be a buyer. Secondly, it’s all about jobs. People, until they're financially comfortable, until they feel they have a job that's steady, income that's steady, they're going to delay buying. And the third thing is simply, that basically, you know, creditworthiness. It's tough to get a loan if you didn't take care of your credit like it was your baby and a lot of Americans in the first half of the last decade did not do that and now paying the price. Three, four years from now, two things will happen. People will revamped the debt situation and all of a sudden banks will decide we're going to look at people who actually walked away from their home or foreclosed on and the pendulum will swing the other way in terms of credit availability.
Ted Simons: Good stuff as always. Thanks for joining us.
Elliott Pollack: Thank you.