The Other Really Big Show

by francine Hardaway on January 9, 2007

Everyone else I know is either at MacWorld, where Jobs has announced the iPhone, or CES, where they’re looking at 108″ LCD screens. But I’m sitting in a room full of 800 people in the Phoenix Convention Center listening to a presentation on Arizona’s real estate outlook for 2007.

It’s a day long series of updates on the most vital industry in the fifth largest city in the country, and it alternates between global and local issues.

The first presentation, on global perspectives, tells us what we in technology already know –growth of China, the failure to educate our children, etc. White noise for those of us in tech.

But now the speaker is on to something not so familiar: from a real estate perspective, half the world is now urban. That’s how we get our productivity up: take a farmer off his farm and develop it. That’s a shocker.

That certainly has happened in Arizona. Arizona is now the most rapidly growing state, having edged out Nevada because of slightly greater housing affordability. Jobs and people are coming here, and that’s keeps the state’s economy growing.

77% of Arizona’s population and jobs are in Phoenix. That’s another shocker. 1 out of every 20 jobs in the country has been created in Phoenix. Presently we grow 10x the national average in jobs. But that’s because the US is not doing very well. Another shocker. (This is eight hours long. I’m only going to report the shockers.)

In Arizona, retiring baby boomers will mean more demand for second homes. We’re one of the only states where legitimate second homebuyers will come as people begin to retire.

Those retiring baby boomers will also bring changes to our capital markets: a shift away from equity to fixed income investments, defined benefit plans going away, and more capital going into commercial real estate and commercial mortgages. Money will flow into commercial real estate. That means more money available for more deals. Hmmm…wonder what the quality of some of those deals will be, as retiring baby boomers who know nothing about real estate try to invest in income properties. (Remember when doctors invested in real estate for tax shelters…?)

Even with all our built-in advantages, Arizona’s rate of growth is slowing, however, and we’ve passed the peak of growth for this cycle, heading for a recession. Next year, our growth will be about 3%, compared to 4.5% last year. In a recession, we still grow, albeit more slowly.

Housing prices are the 800-pound gorilla in the room. For the first time, we’re not the cheapest market in the West. We are no longer affordable compared to Austin, Dallas, or Denver.

Arizona has had two major historical blips in the price of housing: one in the 50’s, when people wanted homes after World War II, and again in 2000-2005. Both were due to an imbalance of supply and demand. Prices go up when there is less than a two-month supply of available houses. Now the market is making an inventory correction. We have eight months of supply. We will grow our way out of it by 2008.Nationally, the last four downturns in the housing market lasted somewhere between 17-35 months, and we are 18 months in.

Here, the worst of the housing market, however, is yet to occur. It will happen when we begin to have fewer closings because we have fewer homes built, and this year we have half the permits we had last year. 2007 will be a bad year. The worse it is, the more quickly we will get through our issues.

This morning, all of these speakers in the housing market are trying to cheer each other up.

“We only have 45,000 finished lots on the market. That’s not an oversupply.”

However, there are about 200,000 lots that are not finished. Those might end up being sold for $.50 on the dollar.

“There will be a reduction in the price of land off the 2005 prices, but it’s just not happening — yet. “

“Once the land prices get more affordable again, housing prices can come down. This year, Phoenix will once again have homes from $130k-195K. Last year, there was nothing being built at that price.”

“The buyers are out there, but they all want a deal.”

The biggest new housing demand is for mixed use (housing, retain and hotel) within walking distance of amenities—the urban living pattern idea. And yet two panels tell us that these projects are hard to build, hard to finance, hard to locate properly.

After lunch, we listen to Daniel Pink, who tells us about the abilities we need now. No longer do societies value engineering, accounting, or legal skills, the left-brain skills, as much. The more important skills are design, symphony, story, empathy, and play- abilities more characteristic of entrepreneurs, inventors, designers. The economy is moving from logical linear thinking to more intuitive, simultaneous thinking, largely due to abundance, Asia and automation. That means high concept and high touch abilities matter more. You must do something that can’t be outsourced or automated, and that means feel and express!

We tech people, we already know all this. Sofware development and X-ray reading went to India a long time ago.

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