Valley 9th in U.S. poll on transportation spending

Bob Golfen
The Arizona Republic
Jun. 20, 2005 12:00 AM

Families in the Phoenix area spend nearly one out of every five dollars on transportation, primarily driving, giving up a larger percentage of the household budget than the average U.S. family does.

Last year, Valley drivers spent $253 per household more just on gasoline than they did in 2003.

That’s the result of a national study released last week, which ranked the Phoenix area in ninth place with an average household spending $8,659 a year on driving or public transit – 19.6 percent of the family budget.

Still, the Valley fared better in the new study, compiled by the Surface Transportation Policy Project of Washington, D.C., than it did in a similar study released two years ago. At that time, the Phoenix area placed second in the nation, with average household spending at $8,910.

The study examined the nation’s 28 major metropolitan areas, as determined by the U.S. Bureau of Labor Statistics. Recent spikes in fuel prices aren’t reflected in the study, which used data on income and spending from 2002-2003. But the researchers calculated that Valley families spent considerably more on fuel during 2004 and even more so far in 2005.

Gasoline averaged $1.60 a gallon nationwide during 2003 compared with an average of $2.09 a gallon during 2005, according to the study. Gasoline prices in Phoenix averaged $2.21 last week, according to Arizona AAA.

In the study, cities with extensive transit systems, such as New York, Chicago, San Francisco and Washington, D.C., fared better than the Phoenix area in the percentage rankings. Even Los Angeles and San Diego placed lower on the list, although higher housing costs may figure into that.

“You are much more dominated by auto travel than other places,” said Kevin McCarty, an author of the study and policy director for the transportation group, which promotes transit as an alternative to automobiles. “Other places that have transit options have the ability to better absorb some of the hits from gas prices.”

Transportation is the second-biggest expenditure for families, behind housing and ahead of food, health care and utilities, the study said. Housing costs represent 52.6 percent of the average family budget in the Valley; nationwide it’s 52 percent.

The highest percentage spent for transportation was found in Houston, with 20.9 percent, followed by Cleveland, Detroit, Tampa and Kansas City, none of which has large transit systems.

McCarty pointed out that the Phoenix area is working to improve its public-transit availability, citing increases in local buses, express and Rapid buses, and the planned light-rail system.

The average round-trip commute in the Phoenix area is 26 miles, said David Cowley, spokesman for Arizona AAA, which is about average for U.S. cities.

Besides fuel, driving costs include maintenance, fees and registration, vehicle purchase and depreciation and insurance.

The study comes at a time when Congress is considering federal transportation legislation that would spend nearly $300 billion over five years. The study authors urge Congress to allocate a greater percentage to public transit than road building.

The Condo Sector Sizzles as Developers, Investors Rev Up Conversion, Construction

By Maria Siakavellas, Contributing Editor

APRIL 01, 2005 — Phoenix—The desert climate is not the only hot thing this city has going for it. The multi-housing sector here has been on fire as of late, helped by healthy employment growth. And the forecast is that Phoenix will continue to add jobs at an aggressive pace for at least the next 12 months.

“With low unemployment rates—due to 60,000 new jobs created in 2004—higher interest rates and a continued migration of people into Phoenix (140,000 last year), the multifamily market here is one of the strongest in the country,” said Brad Goff, principal of Apartment Realty Advisors (ARA). “The fundamentals are strong, and Phoenix is poised for long-term success, which is attracting many investors to the market.”

Goff is heading up ARA’s Phoenix office, which the firm just opened to meet the increasing investor interest in this Southwest city. “Our clients, many of which are very active in condo conversions, wanted us to have a presence in Phoenix. It is one of the most heavily traded apartment markets,” Goff explained.

Perhaps the hottest investment option in Phoenix these days is the condominium. Homebuyers are snatching up for-sale units before the first shovel even hits the ground, and developers and investors alike are seizing every opportunity to build new condominium communities or to convert suitable rental properties.

“If you were an investor coming into Phoenix in 2003 with the intent of doing a condo conversion, I would have told you to save your money,” said Julie Vaughn, a senior advisor for Sperry Van Ness in Phoenix. “That is no longer the case. Condos are selling like hotcakes now. And every time I talk to owners about selling their property, the usual response is, ‘I will sell the property only if I get a condo price for it.’”

According to Vaughn, the apartment market lost 2,320 units to the for-sale market from 2003 to 2004. “And that is only what has actually been documented. There are more properties than that being converted, but not all of these have reached the stage [where their units] have been taken off of the list of active apartments,” she said.

In fact, James F. Pierson, a principal with Johnson Capital, a national real estate capital advisory firm, said nearly 5,000 units will be converted to condominiums this year.

The for-sale niche of the multifamily industry has become a large part of Johnson Capital’s overall business—over 30 percent of the multifamily transactions that the firm’s Arizona office is looking at are condominium conversions.

“The attractiveness of the Phoenix market to investors is that they can buy A, B and C properties for $50,000 to $80,000 per unit, and then see condo-sales prices from $120,000 to over $350,000 after a conversion,” Pierson said.

So far, buyers of Phoenix condos have been plentiful. Younger, first-time homebuyers are turning to the condo market due to escalating single-family home prices, while America’s older snowbirds are flocking toward Phoenix’s mild climate to buy a second home or a retirement home, which is most often a maintenance-free condominium.

Developing in the Desert

Fueling much of the interest in new condominium developments and conversions in areas such as Downtown Phoenix, Scottsdale and Camelback is a desire for an urban living environment.

“There is no question that there is a trend toward urban living here in Phoenix. People want more free time and want to reside in an area where they can live, work and play,” said Geoffrey H. Edmunds, president of Geoffrey H. Edmunds & Associates.

Edmunds’ company, once exclusively a single-family homebuilder, is now allocating a good portion of its resources to the condo market. It developed a 13-story condo complex in Camelback back in 2003 and is currently working on 400 for-sale units throughout California and Arizona, the total sales of which will equal approximately $450 million.

“Many people did not believe there was a market for urban high-rise developments in Phoenix. Well, our Camelback community sold out a year before completion. And as a result of that success, high-rise condo buildings started popping out everywhere,” said Edmunds.

The firm’s newest luxury condo endeavor is a joint venture with Opus West Corp. in Phoenix’s Scottsdale submarket. The 198-unit project, to be comprised of two 13-story buildings, will be part of the 11-acre mixed-use community, Scottsdale Waterfront.

“We have a strong register of prospects for that project with 130 individuals on a reservation list along with a list of 400 qualified buyers,” Edmunds said.

He added that 25 percent of the project’s prospective residents are those looking for a second residence; 25 percent are young professionals who wish to live near their place of employment; and 50 percent are moving out of large single-family homes into condominiums because they wish not to deal with the pressures and stress of maintaining a home any longer.

For now, Johnson Capital’s Pierson is confident the condo sector will thrive for the foreseeable future as Phoenix continues to enjoy economic growth and solid demographic trends. And “there is a lot of money in the system to do condo conversions right now,” he said.

As for Phoenix’s apartment market, Sperry Van Ness’ Vaughn explained the popularity of condos bodes well for the rental sector in the long run.

“The conversions will reduce the available number of apartments out there so demand will increase for rentals. Tenants will have to search for an apartment, and occupancy will consequently increase while rents rise as well.”

Irwin M. Stelzer

Wed Jun 1,10:06 AM ET

Washington (The Daily Standard) – “SOME ARTIFACT or some development, seemingly new and desirable–tulips in Holland, gold in Louisiana, real estate in Florida . . .–captures the financial mind. . . . The price of the object of speculation goes up. . . . This increase and the prospect attract new buyers; the new buyers assure a further increase. Yet more are attracted . . . “. So economist John Kenneth Galbraith writes in his “Short History of Financial Euphoria.”

That, worry many observers, describes America’s housing market. Stories of people buying condominiums in the morning, and selling them for a substantial profit later in the day, enliven the financial press. Cocktails parties are made merrier by the game of “whose-house-has-increased-the-most-in-value.” Surely we are witnessing the final stages of a house-price bubble.

Well, not so surely. Perhaps we are seeing only “a little froth in the market,” to borrow the phrase used by Federal Reserve Board Chairman Alan Greenspan in his recent speech to the Economic Club of New York. The man who is famous for saying that if anyone understands what I am saying, I must have misspoken, handed down this model of clarity, “Without calling the overall national issue a bubble, it’s pretty clear that it’s an unsustainable underlying pattern.” Froth, it seems, consists of “a lot of local bubbles.” Meaning: In some areas prices are due to come down, but there will be no nationwide collapse in house prices.

So spoke the man who finds it a “conundrum” that his repeated increases in short-term interest rates have failed to prevent rates on 30-year mortgages from falling from 6.30 percent to 5.71 percent in the past year. Or to cool what everyone is now calling a “red hot housing market.”

Last month, sales of existing homes rose 4.5 percent, and single-family homes commanded a median price of $203,800, a jump of 15 percent in the past year. That’s the fastest rate at which prices have increased since 1979. New homes are also selling at a torrid pace: sales in April were up 13.3 percent over last year, and the median price rose by 3.8 percent. Little wonder that builders increased privately-owned housing starts by 11 percent in April from the March levels, and stepped up their applications for permits to build still more homes.

What worries some analysts is not only the speed with which prices have been rising, but the way Americans have suddenly begun financing their purchases. Until recently, the typical buyer sought a fixed-rate, 30-year mortgage that set total monthly payments at an unchanging, predictable, and affordable level.

Times have changed. More and more Americans–two-thirds of new buyers, by one estimate–are opting for variable rate mortgages, or choosing to pay only the interest due in the early years, leaving repayment of the loan for a later date.

This stores up two kinds of trouble. First, if interest rates rise, so will the required monthly payments. Second, after the first five years, the borrower must start to repay the principal, which just about doubles his monthly payments. Unless, of course, an increase in the value of his house allows him to obtain a new, interest-only mortgage.

More worrying to those who see a bubble in America’s future is the willingness of homeowners who have built up equity in their homes to borrow against that equity, either to finance a spending spree or to invest in real estate. Economy.com estimates that Americans borrowed some $705 billion against their homes last year, up from $266 billion in 1999.

But before deciding that the housing market is another example of the bubbles that are scattered through history–tulip bulbs in the 17th century, John Law’s Louisiana land scheme and the South Sea bubble in the 18th century, share prices in America in 1929–consider this: House prices have not fallen in any year since the Great Depression.

There is a reason for this. Despite the emergence of some investors who have become the equivalent of day-traders in shares, most homeowners live in the properties they purchase. When prices ease, there is no mass dash for the exit, as with tulips and shares. So a fall in prices does not result in a sudden increase of the supply on the market.

Furthermore, and despite an increased flow of funds into markets by investors rather than occupiers, many property markets are local. A bust in the market for Florida condominiums, where speculators are active, need not have an effect on house prices in rapidly growing Nevada. And hard times for investment bankers have in the past caused a lull in the upward movement of prices in New York, without affecting property values in Phoenix.

Perhaps most important is the strength of the underlying demand for houses. Newcomers to America are providing a boost to demand at the “starter home” level. More affluent Americans are buying second homes. A jobs market that has created new jobs for 23 straight months is giving consumers confidence and, equally important, paychecks with which to pay for first or bigger homes. Those paychecks have benefited from unexpectedly large increases in worker income: up 10.4 percent in the fourth quarter of 2004 and 6.9 percent in the first quarter of this year.

Does this mean that perpetual double-digit increases in prices are assured? Certainly not. Does it mean that prices might never decline? Of course not. They will react negatively when mortgage rates rise significantly. Will some homeowners who are over-extended find themselves in financial difficulty, and face foreclosure? Very likely.

But for most homeowners, a decline in the value of their homes would only reduce the gains they have made since purchase, and perhaps make them rein in their borrowing as they feel less rich. They will still have the same place in which to live, and if they plan to trade up, or down, will find that although they can get less for their house, they will pay less for the house they buy. In short, there is life even after a bubble. After all, the dot.com bubble burst, but we still have the Internet.

Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.