DRIVING IN THE FOG

Have you watched any financial news lately? - Real Estate representatives will argue that we are through a correction and the worst is behind, with expectations for steady improvements during 2008. Most Economist will on the other hand expect we are in for a long painful recovery with prices still to fall 10-15%. However, both will agree that Real Estate is local. This is key to understanding the Tucson market. We'll get back to that later.


But first lets gauge the big picture. Things don't look well by most standards: Consumption that are the main driver of the U.S economy has for the last 5-6 years been on steroids fueled by an environment of easy credit and cheap money creating unparallelled appreciation in most asset classes, particular housing. One cannot underestimate the effect financially and psychologically when upwards of 200 million folks throughout 5 years see significant increases of the Real Estate they hold title too AND act upon it by cashing out for consumption. This has spurred a strong growing U.S economy, albeit largely funded by consumer debt.


Since homes were a significant source of cash generation and since this trend has plateaued and are set to reverse - the economy will slow in quarters ahead like the rings from a stone in the water. This is however not the biggest problem - just part of a natural housing /economic cycle.


The more tricky part is the nearly frozen up credit markets and the lack of confidence in the entire credit system. As you may be aware big investment banks sold U.S sub prime mortgages domestically and to the rest of the world repackaged through financial alchemy into prime debt with a much higher credit rating than there was cover for. Surely the sub prime market is a relatively small part of the entire "loan balance sheet", but the confidence in the credit markets has been severely battered. Eventually these issues will be resolved through regulation for transparency and some major law suits, but expect more problems and turmoil during the first half of 2008 when the bulk of adjustable mortgages will reset and the foreclosure situation get worse - dragging more banks, not to mention homeowners through the mud.


The Tucson real Estate market has so far shown remarkable resilience. It is clear by now that Tucson is not as hard hit as Miami, Las Vegas and Phoenix - also we did not appreciate as much. (the higher you fly the deeper you fall). It is important to understand that Tucson is a resort town, a place to where people retire, meaning we have a steady influx of people wanting to buy property here. The reason they'll keep coming besides intristic values such as weather & beauty, are cheap property taxes, and relatively inexpensive housing compared to other resort/retirement destinations.

I predict the Tucson Real Estate market will continue to limb along at a somewhat sleepy pace, not far off from the pre boom years. During the next 12 month the news will be on the gloomy side but prices wont plummet, sales will slow further and during that time prices will drop up to 5%, once adjustet for inflation. In the big 10 year picture, the time to buy will be during this slowdown. Homes in Tucson will resume a solid appreciation and in 10 years, people at a cocktail party will say: "..oh year we were lucky and bought during the slowdown back in 07/08"