25 comments to “Why San Diego (California) Real Estate Investors Should Care About The Hardest Hit Markets”

Vance Shutes on June 7th, 2008 at 5:28 am said:

• Jeff,

  Whether your photos relate to the subject or not, you typically display some incredible shots. Thanks!

  I recall learning, many years ago, that the time to buy is when “blood is running in the streets.” Given the cratering of the market in Florida, Arizona, Nevada and California, as you’ve noted, it’s not really a surprise that astute investors have swooped back into those areas. It strikes me as highly unlikely, though, that any serious investor would shun other growth areas you’ve cited (Texas, KC) in favor of the bloody mess in FL, AZ, NV and CA.

  It was only a couple of short years ago that we were reading of the 20-30% annual appreciation rates in FL, AZ, NV and CA. Sometimes those that fly the highest end up with burnt wings. Which lends further credence to the wisdom of investing in areas not otherwise prone to incredible run-ups in value.

  I’m waiting for your investor pool to, perhaps, re-discover what we have to offer here in Michigan. Sure, we’ve got the mayor of our largest city serving as the butt of jokes on the post-news comedy shows. We also have a State governor incapable of making any type of momentum-changing decisions to help our beleaguered state - leaving it up to us, the general populace - to pull ourselves up by our own bootstraps.

  We do have in Michigan something that AZ, NV, and CA don’t have enough of - water. At least our laissez-faire governor has continued the “Great Lakes compact” with other governors surrounding the Great Lakes, protecting our valuable resource from diversion to the parched southwest.

  As more and more investors stream back into the run-up states you’ve cited, perhaps a few will look favorably upon Michigan - the Upper Hand, as Jeff Daniels puts it in those commercials.

Another Investor on June 7th, 2008 at 5:47 am said:

• The non-speculative demand in Phoenix never really went away. Despite job losses in construction and real estate, other areas of the economy have remained strong. Lack of financing shut the market down for about six months. Once FHA financing kicked in, deals began to get done.

  The real investors, including the local pros, started buying up the foreclosures in earnest in late January and early February. By the end of February, the pick-up in sales activity was really noticeable. Now savvy foreclosure listers price the properties attractively and include a multiple offer form in the listing photos.

  To understand Phoenix, you need to look at it as the most easterly suburb of the Los Angeles megalopolis. Umlike any suburb in California, however, it has low taxes and a business (and landlord) friendly environment. The business conditions have attracted lots of businesses beyond the warehouses and call centers that used to be the largest employers back in the late 80’s and early 90’s.

  It’s tough to cash flow, even at today’s prices. The strongest rental areas close to jobs and good schools just have not come down that much. However, if you are patient and buy in the right areas, you should do well over the long run.

Robert Coté on June 7th, 2008 at 6:59 am said:

• PHX most attractive quality is the “potential” for significant rent pricing authority. They won’t be going through another round of rampant growth in the housing stock for a long time while, as noted, the general economy sans real estate remains relatively strong. I see the reasons for their low rents as slowly going away over the next few years.

Chris Lengquist on June 7th, 2008 at 8:10 am said:

• One word…Charlotte. Trust me. Though my folks tend to stay local you may want to really take a look at Charlotte.

Jeff Brown on June 7th, 2008 at 9:01 am said:

• Hey Vance — At some point we need to have a conversation, right?

  My main objection to Michigan is what you brought up — they’re scary with business. Any state that is so pro union has the potential to end up the way Michigan has.

  Waiting for some scared politician to drop the other shoe isn’t appealing to most investors.

Jeff Brown on June 7th, 2008 at 9:03 am said:

• Vance — Thanks for the review on pictures. I really liked Gehrig congratulating Ruth. Notice how they both act as if they’ve been there before.

Jeff Brown on June 7th, 2008 at 9:12 am said:

• Phoenix has suffered to the extent they partied, know doubt about it. What you guys have mentioned though, jobs, increased population, is what the public for the most part has missed. The region was recently shown as the #! job producing area in the country. Talk about pent up demand, geez.

  What’s stopping most investors is the price/rent ratios, which are still relatively inferior to other regions of interest. When the rents come back, capital will pour in. There’s an awful lot of supply though mucking up the timing on that one.

Jeff Brown on June 7th, 2008 at 9:14 am said:

• Thanks Chris — I’ve been looking there recently. Your endorsement now forces my hand.

  What, no comment on the Mini Cooper?

Vance Shutes on June 7th, 2008 at 9:16 am said:

• Jeff,

  Conversation? You bet!

  I’m with you on the business climate in Michigan! With a laissez-faire governor, and a legislature that couldn’t find its way out of a brown paper bag, no wonder an investor would shy away. The climate in our state government is like tossing a bullet into the campfire - you don’t know which direction it will go off!

  That said, plenty of new businesses come to Michigan, in spite of the climate. They place their bets and get in the game. You can’t win if you sit on the sideline.

Robert Coté on June 7th, 2008 at 9:17 am said:

• Drilling down into the data:

  Arizona 248.6 mBTU/capita
  Michigan 313.3 mBTU/capita
  Texas 506.0 mBTU/capita

  If we are in an era of expensive energy this bears further attention. (Shaking my head disbelieving that I just made a better case for Phoenix.)

Jeff Brown on June 7th, 2008 at 9:23 am said:

• Robert — Those are stats apparently not impressive to the BIG money investors pouring their dollars in at the rate of 10 figures per swing. They are interesting though.

Robert Coté on June 7th, 2008 at 10:08 am said:

• Bawldy,
  First, the dearth of Mini Cooper comments is just jealousy.

  Second, blame inertia. Careful investment plans take time to formulate and execute. [I’m telling you!?!] What I mean is this spike in energy costs is very recent and isn’t yet sure to be persistent. I’m watching to see if the next series of investment trends take energy intensity more into consideration. The idea of the oil man charging near $1000 every month Nov-Mar to fill your 250 gal home heating oil tank in places like Massachusetts is not conducive to investment opportunities.

Mark McGlothlin on June 7th, 2008 at 10:12 am said:

• Jeff, another very well thought out post; I’ve been inspired reading your work here and on BHB – I’m going to stop drafting my posts in crayon by the end of summer and try to up my standards.

  My team has drawn some of the same conclusions that you have, and we’ve recently taken some heat for our recommendations to watch closely several of the most troubled markets in Florida and Arizona in particular. We analyze markets for both multifamily and single family assets, and it’s amazing how out of phase those two asset classes can be in a given market, particularly a market spilling blood in single family.

  We don’t mind being a “stealthy contrarian investor” when key fundamentals (population growth and demographic mix, job growth with attention to the supersector leaders, and SFH affordability among others) are improving due to sustainable changes in the market.

  We even agree with Vance that there are some very attractive market features in some of the Michigan markets, though the union / right to work influence on business growth and state level taxation burdens there are deal breakers (in our humble opinion) at this point compared to other venues of opportunity. Vance - it’s time for the general populace to revolt up there and turn the ship around…it can be done

Jeff Brown on June 7th, 2008 at 10:16 am said:

• I’m thinking this is a bubble like every other bubble. Still, sometimes there are paradigm shifts. (Lord I can’t stand that phrase.) Texans usually fare far better than the rest of the country when energy is the issue, don’t you think? At least they have historically. That said, they also suffer worse than others when their economy has been singularly energy/oil based. This is why I and so many others are now so pro-Texas — they’re economic base is now diversified with a capital D.

Jeff Brown on June 7th, 2008 at 10:22 am said:

• Mark — An ally! My faith or lack thereof in Florida remains strong. The reason? Their long history of boom/bust reminds observers like me of the middle east oil cartel’s invisible hand, ah, fist in the energy market. It goes up and down wildly and seems absolutely indifferent to market laws.

  The opposite is AZ with it’s incredibly strong fundamentals.

  We need to have a conversation sometime soon, don’t ya think?

Another Investor on June 7th, 2008 at 11:31 am said:

• Hi Jeff:

  I’m not sure what you mean by “when rents come back” in Phoenix. Rents and tenant quality went down and vacancy went up in 2004 through mid 2006, when anyone with a pulse could (and did) buy a house. Rents started to come back in late 2006, although not in a straight line. Rents generally went up in 2007, and have pretty much stabilized at their old levels. A few places have done better - think Tempe and a few other close in locations with the schools and amenities folks want.

  If you are thinking of rents as a percentage of value, the price drops have helped the ratio. However, I haven’t seen one percent per month since sometime around late 1997 and I don’t expect to see it anytime soon. Rental vacancy rates are down, but there are still too many amateur landlords out there betting on appreciation and not worrying about cash flow. In addition, a lot of tenants will become buyers again as prices and financing availability stabilize.

  I have to say I’m surprised you dropped the fence around Texas and are now the “Texas Evangelist.” To me, Texas is like Florida - wildly cyclical. I still see most cities in Texas as having undiversified economies with no physical or governmental limits to growth. Can you be more specific in identifying the factors that changed your mind?

Jeff Brown on June 7th, 2008 at 12:14 pm said:

• Investor — My last ‘boots on the ground’ survey showed even Tempe to be a tad weak on rents. Not real weak, but touchy nonetheless.

  The supply of new condos bought by those amateurs you mentioned are now for rent, competing like crazy with the predictable consequences.

  Texas? I dropped the fence ‘cuz their fundamentals changed radically. Nobody familiar with the various areas can say their job market is not very diversified now, and that job creation isn’t pretty impressive.

  Texas has now become a destination state. I’m a strong advocate as a result of these basic, but hugely positive changes.

  The character of Texas has evolved big time. I’m definitely a bull, and not many were harder sells than I was, that’s for sure.

  1. Job creation is strong and growing.

  2. Job diversification is now very impressive and statewide in nature. The Texas of today isn’t much like it was 20 years ago.

  3. The population is now also undergoing a change — more and more they’re transplants. Folks are moving their on purpose, and smiling.

  4. The state itself and the cities/counties are massively pro business which is now being reflected in the billions pouring in because of it.

  5. Ironically, it reminds me of San Diego a little bit, after we lost two huge employers in the middle of the S & L crisis. It turned out to be a blessing in disguise, as we’re now far more diversified in our employment, and not nearly as vulnerable to problems in defense spending for instance. Texas is making itself far less open to problems in energy than in years past. Investors have seen this and responded with pictures of dead presidents.

Chris Lengquist on June 7th, 2008 at 1:03 pm said:

• Oh, I noticed the Cooper. I just figured it was a nod to those of us cool enough to drive one.

  I’ll be in Charlotte for a few days in the end of June. My dad lives there. I’m always amazed at Charlotte’s strong job growth, affordable housing (certainly by east coast standards) and infrastructure. I may be doing a little research between beers and hamburgers.

Jeff Brown on June 7th, 2008 at 1:07 pm said:

• Very cool — keep me in the loop, and tell your dad BawldGuy said hi.

Mark McGlothlin on June 9th, 2008 at 6:36 am said:

• Jeff, you are very correct in your assessment of the Texas economy. It’s now a far cry from the energy sector dependency of the 80’s (think Houston’s bust two decades ago); Texas has led the nation now for 6 years in a row in manufacturing exports. If you look at the leading markets in terms of job growth in each of the 11 DOL supersectors, Texas cities make up a very impressive part of the top 20 in almost every category. Their state tax free environment breeds high property taxes, but is very attractive to lots of businesses and folks near or in retirement. It’s not perfect down there but the growth in the Lone Star state is dynamic, broadly based, and accelerating.

  And yes, I’d love to chat this week; I’m tied up almost all of Monday but I’ll track you down later in the week.

BawldGuy on June 9th, 2008 at 9:45 am said:

• Works for me, Mark.

» The Contrarian Multifamily Investor Part 1: To Be or Not To Be… Redfish Emerging Markets.com: Helping Good Investors Make Better Decisions on June 9th, 2008 at 11:48 am said:

• […] We’ve enjoyed reading of late a blog called The BawldGuy Talking – written by Jeff Brown of Brown and Brown in San Diego.  Jeff posted a thoughtful and insightful post last week about why people should be thinking about the hardest hit markets around the country.  Without putting words in his mouth, I think based on his post and subsequent discussion that he agrees there are some lessons to be learned and some potential pearls of great value to be gleaned from some of the most troubled markets around the country.  […]

BawldGuy on June 9th, 2008 at 2:49 pm said:

• Are comments accepted on Redfish?

Kenneth Cox on June 24th, 2008 at 1:42 pm said:

• very interesting topic, I’ve been traveling the blogosphere trying to read up on other real estate opinions on local market conditions. This about sums up the current trend across the globe. I’ve noticed the same indicators in the Dallas Fort Worth Market. Lots of savvy investors are taking advantage of some of the best market conditions to build the real estate portfolio. I’ve noticed a sharp increase in investor activity in the local DFW market. Most investors I’ve run into live in the New York or Cali area.

  I’ve come across many articles that put Dallas in a place much better than most larger urban areas as far as depreciation and loss in home sales, due in most part to the steady appreciation Dallas has experienced over the past several years. Areas such as California have shot up so quickly and significantly, the current foreclosure and mortgage crisis combined with other less than desirable market conditions has placed cities in these states in compromising situations where they are vulerable to a bust in the real estate bubble.

BawldGuy on June 24th, 2008 at 1:55 pm said:

• Kenneth — Thanks so much for coming. It’s always nice to get backup from ground zero.

  Please, don’t be a stranger, ok?

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