Phoenix Area Real Estate Market

I've been noticing a trend in Phoenix area real estate - prices keep going down! 

I'll admit I'm not shocked but I am a little surprised that the market hasn't started to turn the corner yet.  I was looking in the Palm Valley area today at houses and looked at a few properties which are listed on the MLS that would make fantastic rental properties.  One property was a 4/2 and the others were 3/2's.  The most expensive was listed at $105,000 - this in an area with a fantastic school district, great shopping and dining nearby, close to the freeway system and right near Luke Air Force Base. 

The last property I rented out in that area of town had renters calling me the day I put up the sign in the yard - I ended up renting it out within 2 weeks to a great family that is taking great care of the house - and paying on time! (which is always a large plus in my book).  The cash flow on the house is nicely positive even on a 15 year amort loan and that area of town also tends to draw quality family renters who are looking to get into the school district for their kids and settle down.

So going back to the properties I looked at today - and the couple I will investigate further later this week.  If we were to pay market price for a property in this neighborhood (which, of course, we wouldn't) then we are looking at prices of a little over $100k for a 4/2 and $89k for a 3/2 & about 1,600 square.  Using the 3/2 as an example I would legitimately expect to receive $1,200/month in rent on a property like that if it were fixed up nicely to where a family would want to move into it - less fixed up you could rent it out for $1,000 in your sleep.  The 3/2's should be at least $1,100 - at minimum. 

So, for this area of town (paying market prices), assuming you pay cash, then your annual yield would be ($1,200*12)/$89,000 = ~16.2% annually.  Are your CD's or bank interest paying you that?  The stock market has been up but do you realistically expect to make 16.2% on your money?  If you finance this purchase and take advantage of the sub 5% interest rates that are out there now then after your down payment you end up with this cash flow:

Down payment = 25% * 89,000 = $22,250
Assumed fix up cost (Just a guess - I haven't actually seen inside yet) = $10,000
Total cost up front - $32,250

Monthly mortgage payment on the remaining $66,750 balance, assuming a 30 year amortized loan at 5% interest, compounded monthly = $358.33
Average taxes + insurance = $150
So, monthly cash flow = $1,200 - (358.33+150) = $691.67 monthly cash flow
Yield = ($691.67*12)/$32,250 = 25.7% 

Oh, and by the way if financed that doesn't include the fact that the renter is paying off your mortgage.  It also doesn't take into account any appreciation - which its anyone's guess as to when the market will start posting increases but given Phoenix's history of boom and bust I wouldn't at all be surprised to see another strong market back in the valley of the sun - if not within 5 years, at least within 10.