Often comparisons are made between the property market and the share market, with the view that because the stock market has crashed, that in some way property prices will need to adjust by an order of similar magnitude.
As yet no international property market has seen a property price adjustment in terms of average house prices anywhere close to the collapses of stock markets over the past year. A commonly used expression to counter this comparison between equity and property markets is that “they are not making any more land these days”.
It was this thought that ran through my mind when I read this fascinating New York Times article on what the reporter sees as a bit of a buying frenzy at this moment for property in what must be one of the most depressed area of US property – Phoenix, Arizona (well one of a couple of markets which would include Florida, California and Nevada).
In this market where as a function of foreclosure (mortgagee sales) savvy investors have recently moving in and aggressively competing to buy up property as the current owners are ready to vacate and liquidate – offering those owners a lifeline at least from a lifestyle perspective. These investors are offering the opportunity for the owner to stay put and tenant the property at a rent lower than their recently re-adjusted mortgage payments, and thereby providing the investor with a secure tenant. This is effectively utilising the well established “sale and leaseback” model much favoured by commercial operations.
There is a great quote in the article from a real estate buyer who got burnt by buying into the falling market a year ago thinking it had bottomed – the classic “catch a falling knife syndrome” he says of his recent purchases:
“You need to buy when there’s blood in the streets,” he said with a shrug. “Even if it’s your own blood.”
The important point here is that unlike shares which effectively have no “floor price” – that is to say at some stage companies in liquidation or other state of collapse have zero value of shares. For property there is nearly always a price / value at which the market will actively and aggressively move in to buy. In this case in Phoenix that price is a massive discount to the once overheated bubble prices of a few years ago and clearly at a level which would show a paper loss for the owner, however the inherent asset value of almost all property does have a market value.
Note - If you have problems accessing the NY Times article a Pdf version is available here