For those of you who have been reading Doom since we started in June 2006, you know that the original intent was to track home prices in the Phoenix Southeast Valley, but things kind of snowballed. I have not however, lost interest in local prices, so here’s our monthly Gilbert update.
Thanks, as always, to local realtor Ron Wilczek, who faithfully posts market conditions for Gilbert, Arizona to Realty Times. He reports:
FEBRUARY ‘07 – 2,004 homes for sale; 247 sold (12.3%); 8.1 months inventory
avg. 2,114 sf – price $332,832 – on market 126 days – price per-sq ft $157
This month’s average price of $332,832 is down 4.6% from last month’s 349,451 and down 7.4% from last year’s $359,514. On a square foot basis prices dropped more- from last February’s $177/sq. ft. to $157/sq. ft. for a 11.3% decline. (The difference between the two percentages is due to an increase in the square footage of homes sold.)
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Sales are up slightly from 237 in January to 247 in February. Year-over-year sales are virtually unchanged from last year’s 246.
Inventory has been trending up since the first of the year. Wilczek did not start providing Gilbert inventory numbers until May 2006, when 2269 homes were listed. On March 1 there were 2073 homes for sale. This is well below the peak in September 2006, when 2,554 homes were listed, but is a 9.7% increase from the beginning of 2007.
At a recent meeting at Spectrum Elementary School, Gilbert Public Schools Superintendent Brad Barrett discussed the potential boundaries for the new elementary school to open next summer on Germann Rd. He said that part of the difficulty in fixing the new boundaries is the slowing rate at which new developments are filling in. One subdivision within the area has been cancelled due to the slump.
Slowing growth is a new reality for a community that last year was considered one of the fastest growing in America. We’re going to have to get used to it.
Interesting to see a real estate market that is on the decline, it is fairly usual to see the value of property/real estate rising significantly in most areas in Europe.
Not at all related to this post, but thought you guys would want to know – HW was among the first two or three news outlets to break this story yeseterday…..Fremont will be exiting subprime, and the FDIC came down on the company with a Cease and Desist order for “unsound” lending.
http://www.housingwire.com/2007/03/02/fremont-collapses-will-exit-subprime-lending/
housingguy -
Thanks for that. Afraid I’m in and out today, shoveling snow up here in Halifax. That looks like a significant piece.
rr01-
There are some U.S. cities that are still seeing double digit appreciation, but they are just sitting further back in the roller coaster than we are.
I wouldn’t be surpised if Europe is dealing with the same issues before too long.
this is not news to anyone who has paid even cursory attention to the market this past 6 months. in fact, it seems quite apparent that we are in the second inning of a very long game. in scottsdale, the price reductions are rampant.
if you are buying, sit on your wallet. the deals are coming late this year and 2008- with trillions in ARMs resetting and the market already down- could be an absolute bloodbath like no one has ever seen.
Kid-
I’m still amazed at how many aren’t paying attention. All the sellers I’ve talked to are listed on the high side, but they justify themselves saying that the market is just a little slow now, and things will pick up here in a couple of months.
There hasn’t been enough obvious pain to get the attention of most sellers yet- but it will happen.
Just read the sidebar article about more houses being built in Gilbert.
Wonder what the sales slogan will be after the “spring rush” of buyers is over?
Perhaps:
Stack ‘em deep and sell ‘em cheap!!!
Asset Hunter-
Maybe they will start offering “two-fers”- buy one, get one free!
“in scottsdale, the price reductions are rampant…with trillions in ARMs resetting and the market already down-could be an absolute bloodbath like no one has ever seen.”
“Stack ‘em deep and sell ‘em cheap!!!”
“Maybe they will start offering “two-fers”- buy one, get one free!”
Quit it, you all are going to make Greg Swann and his mother cry. Maybe even his spokesdog.
But~cha~know…
With what I’ve been reading about the quality of some of these new houses, maybe getting a “spare” wouldn’t be such a bad idea?!?!?!?!
(I’ll ask Suzanne what she thinks about it!)
http://youtube.com/watch?v=Ubsd-tWYmZw
Asset Hunter:
Great youtube link. Hilarious!
House-buying 101 for “alpha”-wives.
Even funnier was a sarcastic comment one viewer wrote:
“It’s a new paradigm, and everybody who doesn’t buy, now, will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 30% yearly price increase.
Renters, and anybody born in a future generation, will not be able to afford a $10,000,000 starter home in 15 years. They will live in tent cities, and Hondas.
This asset bubble is different than all of the others – it will never slow down, or pop. The gains are permanent.”
Now is the best time in AZ history to buy a home.
1. Large inventory to chose from.
2. Lots of very motivated sellers.
3. You can buy at bargain basement prices.
4. Little competition from other buyers.
5. Low interest rates.
Don’t wait for the media to tell you the market has hit bottom. When that happens, numbers 1 through 4 above disappear and you’re out of luck!
There is an 18-month backlog of buyers sitting on the fence waiting for the TV, radio, or newspaper to tell them we’ve hit bottom. When that happens – and the media is always about 6 months behind the curve – all those fence-sitters will jump back in the market at once and sellers will be instantly back in the driver’s seat again.
There are so many desperate sellers out there you can buy a home at a safe rock-bottom price with no buyer competition, no bidding wars, and enjoy the benefits of home ownership today.
I’ve been through three up and down markets before and if buyers think they can intelligently wait this cycle out they are in for a really big surprise.
Scott
RE broker since 1979
http://www.cr-az.com
Scott –
You forward a compelling argument.
How many of these bargains have you picked up since the first of the year?
scott:
keep pushing. the uneducated masses may buy that bs, but not the folks on this blog. the phoenix market is at least 20% overvalued, perhaps more now that the ponzi scheme that was this market is no longer able to rely on the shills at the bottom since credit standards are re-gaining sanity.
you best bet may be to post in the republic and not waste you time spilling such drivel here.
Scott-
>>Now is the best time in AZ history to buy a >>home.
Really, now? Gawrsh! You really mean that in all of AZ history until the present, we are so lucky as to be graced by the *bestest* time ever to buy a home right now? I guess this means that those people who bought homes four years ago got in at a really bad time, huh? Poor, poor, suckers!
If you have some reasonable statistics and proof that this is “the best time”, then *do* share them with us for our own analysis. You’ll notice that all the good arguments, good blogs do this.
Otherwise, let us know where you ordered your crystal ball, because I’m looking for a flying carpet.
And hey, you wouldn’t happen to be connected to the real estate business, would you? *NAH!* Yet one *more* real estate agent for whom “NOW!” has always been and will always be “the best time” to buy?
Seriously, that is getting very, very old. Cliched, even.
>>1. Large inventory to chose from.
>>2. Lots of very motivated sellers.
>>3. You can buy at bargain basement prices.
>>4. Little competition from other buyers.
>>5. Low interest rates.
Okay, 1,2, and 4 are basically you restating the same thing.
As for 3, no the bargain basement prices are *not* here yet. We’re still waiting. A good sign will be when the builders stop trying to tack on pools and such, and start seriously discounting.
As for 5, don’t you know that is what got us in this mess in the first place? We all know that the low interest rates are largely to blame for the outrageous prices!
Frankly, I would much rather buy in a low-priced market which has been priced that way because of high interest rates, than buy into a high-priced market that has been priced that way because of low interest rates.
Think about it:
Why? In the high interest rates scenario, interest rates can only go down in the future, meaning that the home I have bought then will:
(1) go up in value as interest rates fall
(2) have lower payments to make as interest rates fall (ie: for a variable rate mortgage, or mortgage reset)
Consider the current, low interest rate scenario:
(1) Interest rates have nowhere to go but up, which guarantees the value of my home will plummet. Why would I want a home that is virtually guaranteed to lose value?
(2) Interest rates have nowhere to go but up, which guarantees that a variable-rate mortgage (or mortgage reset) is going to get a heck of of lot more expensive for me.
If I qualified for the mortgage by the skin of my teeth when interest rates were historically low, this means that I am more likely to default on my mortgage as rate rise again, and less likely to make a profit if I want out and try and sell my home!
Don’t believe me? Look around you!
No, now is *NOT* the “best time in AZ history to buy a home”.
It may not be the best time (the best was in early 2004), but it isn’t a horrible time. Interest rates are really low, and if they go up 1 point, affordability will go way down.
Let me summarize.
If you need a house to live in, plan on staying in it for 5 plus years, the mortgage is less than 125% of current rent for a comparable home, and don’t overbuy, it isn’t a bad time.
It isn’t the best time to buy in gilbert. But look at other markets (central phx, tempe, etc), all have solid markets because they have the fundamentals. Good schools, good shopping/services, close to jobs, and aren’t an hour commute on a 2 lane overcrowded highway.
ingydesu:
>>Interest rates are really low, and if they go >>up 1 point, affordability will go way down.
I disagree.
Interest rates do not exist in a vacuum; neither do real estate prices.
In fact, there is a fundamental relationship between interest rates and property prices, that most low-interest-rate cheerleading seems to ignore.
If our historically low interest rates go up (and really, they will eventually have nowhere else to go), real estate prices will go down to compensate.
Real estate prices will have to go down, to allow purchasers to still afford getting into the market, to allow sellers to still sell.
The market will not allow buyers to be priced out of the market by rising interest rates and say, “Oh well. Goodbye everybody!”. No, it will compensate.
This is why our historically low interest rates, in recent years, have led to historically high property price gains.
This is why, when you look at graphs of historically high interest rates, they have always been accompanied by extremely low property prices.
In fact, low interest rates are dangerous, if you consider that as soon as they go up (the only direction they can go), not only does the value of your property go down, but your payments go up. If you barely qualified for your mortgage in the first place, then this puts you in an extremely dangerous place.
The only time I would ever want in because of low interest rates would be when I am the first person in the bank on the morning that the interest rates have gone down. That is, when I can take advantage of low interest rates before real estate prices have gone up to compensate for them.
Let me tell you, in March 2007 real estate prices have long since compensated for the historically low interest rates. So, low interest rates are *not* a good reason to get in on the market.
Low interest rates ARE a good thing, if you are looking to buy a home, and not just flip. That is if you stick with a fixed rate mortgage. By purchasing a home now – you “lock in” your rate for 30 years. Plus, prices have to drop A LOT to compensate for IRs to match. a $100k mortgage at 6% (prevailing IR right now) has a payment of 600. if IRs go up 1 point, to 7%, the price of the home would have to drop 10% to give the same payment.
Historically (last 10 years), mortgage rates have hovered around 8%. Which means that housing values would have to drop 20% to give the same payment.
I agree that low interest rates have led to price gains. However, now we have falling house prices, combined with low interest rates.
Plus your comment about IRs rising causing unaffordability is false. If everyone had an arm sure, but, if you are smart and lock in your rate you will be able to afford a place for you and your family to live.
Take my uncles, one uncle lived in a modest house he purchased in the 1960s, got a mortgage for 5-6%. Not great, not bad. He stuck with his house and always had a place to live. My other uncle, in so cal, traded up frequently, riding the appreciation wave of homes in the 1970s. He was leveraged. Late 70s early 80s – he was stung. House prices were only stable, mortgage rates sky high. Screwed.
IRs have gone up a point and a half to 2 points in the last 2 years. While housing values have decreased 10%, they haven’t gone to 20%. Plus, many parts of the nation (including the pacific NW) are still booming.
My point was, and I qualified this, was that if you buy in a stable area, this is a great time to buy. Unless you get a screaming deal, don’t buy in Gilbert, parts of SoCal etc. You want to buy an undiscovered retro modern close to ASU, sure! Fundamentals are fundamentals. Just because gilbert is having a fire sale, doesn’t mean that rentals w/in walking distance of ASU are suffering, or that vintage homes in Encanto Estates are taking the same hit. If you are looking at these homes, this isn’t a bad time to buy, assuming you aren’t taking a 3 year negative amortization loan!
Interesting points, and thought-provoking discussion!
>>prices have to drop A LOT to compensate for >>IRs to match. a $100k mortgage at 6% >>(prevailing IR right now) has a payment of 600. >>if IRs go up 1 point, to 7%, the price of the >>home would have to drop 10% to give the same >>payment.
….
In recent years, while interest rates were on their way down from the 8% historical rate you mention, we watched prices easily go up 30%+. So, we can see that the price/interest rate relationship I am talking about sure exists when interest rates go down.
If we have already experienced this relationship on the way down, why can’t we experience this same relationship on the way up?
I suppose if interest rates never return to 8%, this will not be a problem. But they will, one day…
>>Historically (last 10 years), mortgage rates >>have hovered around 8%. Which means that >>housing values would have to drop 20% to give >>the same payment.
Again, given the huge gains we’ve seen in the last few years (much higher than 20%, even after factoring in inflation), I don’t see why a 20% drop in prices as we revert to historical interest rates should be such an impossibility.
If prices are already dropping before interest rates go back up, it should not be hard to imagine they can also drop as interest rates go back up.
>>Low interest rates ARE a good thing, if you >>are looking to buy a home, and not just flip. >>That is if you stick with a fixed rate >>mortgage.
Let’s say you buy a $100,000 home at a 6% mortgage locked in for 30 years. You got a great interest rate. Your payments are $600/mth.
Then let’s say that later I buy the same home, but across the street, when interest rates have crept back up to 8%, except that I pay 17% less for the home ($82,800) because of interest rate vs. price dynamics. Then, my payments are $600/mth as well, locked in for 30 years – exactly the same monthly payments as you.
The difference is what happens when interest rates go down again, to 6%.
(1)If I can renogotiate my mortgage (paying a penalty, perhaps?) to 6%, then suddenly my payments are down to $492/mth. That is a savings of $20,000 in interest payments over the 30-year term, as compared to the payments you are making.
(2) At this point the value of the home is likely $100,000 again. If I find myself needing to move out, I have made a tidy profit.
I guess it comes down to whether you believe that a rise in interest rates from 6% to 8% can be accompanied by a 17% decline in prices.
Since we have seen this happen in reverse – and then some – I don’t see why this is hard to believe.
Great discussion, folks!
funny – here is a link to an article that details the same argument I was making. http://www.mypocketchange.com/2007/02/21/the-housing-trade-off-high-price-now-or-high-interest-later/
Really – the difference lies in what numbers you plug in. I think that housing prices have allready gone down 10%, and while they may go down 10% more, it won’t be 20% more.
ingydesu:
Nice article! In fact, the article details both our arguments, and basically tells the reader to act on the one they believe.
If you believe that prices will (sufficiently) go down as interest rates go up, WAIT, or if you believe that prices will not go down as interest rates go up, don’t wait.
One flaw in the article is that it doesn’t take inflation into account.
Take the article’s question, “Do you think your overpriced $292k house will drop $15k during that [one year] time period?”.
Assuming a 3% inflation rate, then in fact the house must rise 3% in price annually, just to keep up with inflation.
Doing the math, that question should really be reworded: “Do you think you overpriced $292k house will drop $6k during that [one year] time period?”
Finally, several reader responses posted after the article (including the first two) are spot on the exact same arguments that I have been making:
Posted by Chris Hynes:
“One thing to consider in this equation is that mortgage rates will rise and fall over the life of a 30 year mortgage… If you buy in cheap, but with a higher interest rate, odds are that you will be able to refi to a lower interest rate later on. The reverse is not true — if you buy in high and the price drops, there’s no way to make up the difference.”
Posted by miller:
“Chris, that’s an excellent point that I’ve thought about too. 30 years is a long time and rates will probably swing a few times during that period. But exactly like you said, while you can refinance later, once you buy, you owe that much money regardless of what the rates do or the housing market does. Great point!”
Posted by LAMoneyGuy:
…
A couple of additional points that favor a cheaper house at higher rates:
1. down payment. If you are making a down of 10% or 20%, less is required at the lower price.
2. accelerated payments. If you are making accelerated payments, the paydown would be faster with a smaller loan balance”
ingydesu:
One more reader comment from the link you gave:
“It really seems like lower value, higher rate is the lesser of two evils! Unfortunately, that’s the opposite market than what we’re in right now, right? What to do, what to do…
Can anyone think of a good reason to buy in an over-priced, lower interest market?”
Ingydesu, I have to wonder why *everybody* is not asking that exact same question.
Finally, make no mistake about it: As soon as interest rates start going up again, real estate agents across the nation will, in lockstep, abandon the “buy now because interest rates are low!” mantra.
I guarantee you that when that happens, all real estate agents will ignore interest rates and revert to an old mantra: “Look at how prices are dropping! Now is *the* bestest time ever to buy real estate!”
It is really just a cycle, and real estate agents just simplye switch over their reasoning for why “Now” is the best time “ever” to buy.
Okay, one last point I want to make:
If you are buying into real estate now, with prices near historical highs and interest rates near historical lows…
If you are buying real estate in this scenario, *YET* you are not borrowing money for the property, I have to ask:
Are you *INSANE*!?!
If you pay for the property entirely, upfront, you are just going to lose property value as interest rates rise.
At the very least, if you borrow the money at the (nearly) historically low interest rates, then as interest rates rise and your property value lowers you can be slightly content that you still are locked into a very low-interest loan to at least partly make up for the plummeting value of your home.
Meanwhile, the money you originally didn’t use to to pay for the whole property upfront is making increasing returns as interest rates go up.
Again, I still think the best way is to buy at low prices and high interest rates, BUT if you INSIST on buying at high prices/low interest rates, for heaven’s sake no matter how rich you are, take out a loan so that you can *Lock In* the whole driving force behind the high prices!
mike – I agree with you wholesale on the last comment. Affordability is the key. That’s why I qualified my first comment, and probably should have done so more.
As in many places in Phoenix, you can rent for 1/2 to 2/3 the cost of what PITI would be. If that is the case, it wouldn’t be the wisest to purchase a home right now, unless market prices were steadily climbing (which they aren’t). If you can purchase a house for not much more than the interest, taxes and insurance differential (from renters), and you can afford that payment, you might want to do so. This of course assumes that you plan on sticking around for the next few years. In college? Planning on moving to LA to pursue a career in acting? Rent!
The best part about renting is the additional freedom it gives.
I really don’t see housing prices taking a dive to 2003 levels. It just isn’t going to happen. 2005 levels yeah.
Mike – I guess we will have to agree to disagre on whether or not a price drop will compensate for IR raises. I don’t think the “priced out” argument applies, meaning, that I don’t think that if you don’t buy now you will be hurting, but I also think that if you get a good deal now, you won’t be screwed either.
Housing is about housing, not an investment. You should buy/rent a house necessary for your living needs in the middle term (ie 3-5 years). , taking into account your circumstances. Housing, while it can be investment, should best be viewed primarily as an expense for most people.