Six months ago we talked about the Phoenix housing market being a "tale of two markets"- a world where homes below $100K were flying off of the shelves and where million dollar homes sat and languished. As you can see, that is still pretty much the case: [Data from ARMLS]
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The most significant change in the last six months was the percentage of sales below $100K. Last March, sales below $100K were 40% of sales, now that percentage has dropped to 29%. Sales have improved in upper brackets, but only slightly:
Where are prices headed?
Let’s take a look at supply and demand. I am not a big fan of the term "months supply", because in some ways that term is misleading. It is however, as a ratio of listings to sales, a useful number. It tells us how balanced supply and demand are.
The National Association of Realtors considers a six month supply of homes on the market "balanced". Let’s say then, for the sake of argument, that you would probably expect prices to rise when months supply drops below the six months supply, and lower when months supply rises above that.
If that were the case, based on the above chart, we can expect a lot of downward movement in home prices over $400K. As those homes only represent 7% of sales however, they can fall substantially without having a huge impact on the median price, which was $145K in September. Just because the median isn’t crashing though, doesn’t mean that the marked is "stabilizing". Minimal sales at the upper end will drive foreclosures and mean big losses for lenders. According to RealtyTrac:
In 2006, about 55 percent of foreclosures were on subprime loans; in 2009, subprimes represent just 35 percent of foreclosures, while another 35 percent are in the middle tier and 30 percent are in the top tier.
Inventory is down- at least the "daylight inventory"
Last March there were 34,581 single family homes listed at the end of the month. At the end of September there was 25,301. It sounds like a significant improvement, but the question is, where have the homes gone? Some have sold, sure, but not all of them.
For example, there were 1183 homes listed for $2M or more last March. 81 homes have sold in that price bracket since then. You might think that there would be 1102 or more homes listed or more, depending on how many new homes were listed. There were however only 774 homes listed in that price bracket at the end of September. The rest of the listings have expired, been canceled, or perhaps the price of the home has been dropped below $2M. That’s a 35% reduction in the $2M+ inventory, but only 7% was due to sales.
Why the inventory drop?
There are multiple reasons- sellers become discouraged and pull their homes off of the market; some go into foreclosure and possibly, banks are moving them from active listiings back into "shadow inventory". RealtyTrac said of the national housing inventory:
We know when the banks are taking properties back it’s taking longer for them to put them back on the market. "Last year our analysis found that only 31 percent of bank-owned properties were listed for sale. We’re assuming, given part of the market dynamics this year, it’s closer to 50 percent.
Given that the rate of foreclosures in Phoenix is well above the national median, it is possible that ratio could be even higher here.
So with sales rising and price drops moderating, is the Phoenix housing market looking better? In a word, no. While some price ranges and areas might be looking better, you could fly a 747 between the current housing market and "recovery". There’s still a lot of pain to come.
but i thought the tax credit was gonna fix all of this? lol…aparently there sre still some that feel the credit is working, and should be extended in time and scope??? http://www.cnbc.com/id/33398833
AZSALUKI – The tax credit is a fixed amount, right? So it would have a much higher impact at sub-100k homes than higher up ($8k off a $1 million home.. oo sign me up quick!). So the scary thought is, the credit -is- having an effect.
Who’s buying these homes? The higher-priced homes aren’t selling, does that indicate no one is selling their homes and buying larger ones? It could be that there’s a lot of renters who finally decided to pick up something cheap, but part of me wonders if it’s only “investors” – otherwise, where is the new group of homeowners coming from, if no one is trading up? Of course, the way things are going, all the foreclosures in the high end of the market are getting loans again and buying up cheaper homes..
I have a question. I am wondering how many “pending sales” there are out there. I believe there are tons of these “pendings” that have been taken out of inventory that are “short sales” that sit in pending status for months and months and never really close.
I also have a question. I’m planning on retiring to Phoenix early next year. Does anyone have a feel as to how home sales are being effected in communities like Sun City Grand and Arizona Traditions? I see them dropping somewhat but not to the extent of the rest of the Phoenix area. I’ve also noticed that a lot of the houses have been on the market for what seems to be every selling season. Are they just wishful thinkers or are they truly “riding the market down?”
TIA
Frank B.
I have a couple observations, all of which may be useless:
1) Anecdotally, investors are very prevalent in the low end in both Vegas and Phoenix (Everybody should read that Diana Olick blog entry from last week regarding Vegas foreclosure feeding frenzy). I believe the reason for the heightened sales activity is investors believe they can get a decent cap rate by charging rent in an amount that old or new renters *expect* to pay on a house. In other words, you don’t find too many, if any, 1500sf houses renting for $600-$700 a month because renters will pay more and the investors know it. An equilibrium rental rate on low-end houses (to get them all occupied by an owner or renter) may be as low as $400-$500 per month, but I doubt we’ll see that level, because if we do, it will prove that the banks/lenders are even more insolvent than they are now.
2) I’m still a big believer in the idea that banks are holding back inventory with an understanding from a complicit Fed/Treasury that the big money print job will throw a floor under prices in the long run, thereby lessening the need for seizure or liquidation of a number of lenders.
Agnostic, I hadn’t even really thought about the banks waiting for the ensuing massive inflation as a reason for holding properties off the market/on their books, but it definitely makes sense and is very plausible. Previously, I’d just figured that they didn’t want to take the loss on their books so they held short sales up for extremely lengthy periods, sending them into shadow inventory, thus giving us a false sense of security that the “market has bottomed,” since it appears that inventories are going down when that’s nowhere near the truth, at least not in the Phoenix area market.
I don’t know, I’m just trying to figure it out. Reading the articles and blog entries here is definitely helpful.
As I think twist has admirably represented here (or at least pointed readers in the right direction), the number of homes in foreclosure, or “on the way” to foreclosure (as shown by RealtyTrac) is waaaaaaaay more than the houses that are actually for sale. Whether you want to call that “Shadow Inventory” or “Bulldozer Fodder” depends on your viewpoint. Either way, the notion that the Maricopa County housing market will have a V-shaped recovery is just plain nuts, IMO. Keep renting. Or step up and pay full ask on one of those former $1.2MM jobs now listed as a “steal at $975,000.” Whatever.
And I don’t think there is any question but that the bankers, in conjunction with the Obamanabile economics squad, is counting on time and money-pumping to allow them to keep their companies, jobs, and moneymaking privileges by not forcing insolvent banks into failure. Particularly in the banking system, the privatization of profits and socialization of losses stinks like you-know-what. I don’t know why anybody would want to maintain any banking relationship with any institution that took TARP money, whether Paulson forced it down their throats or not. There is a time to say no, and specifically, some of that group of nine chickens utterly failed to man up (including some of the guys who are worshipped in the media as paragons of American capitalism. Whether you paid it back or not, Dimon, Blankfein, etc., you took it, and that, my friends, isn’t capitalism). The notion that all of the nine should take the money so that none of the nine would appear stronger or weaker than the others, IMO, would make Jefferson and Adams cringe. The government should never pick winners or losers, but that is exactly what it did here. Yes, I know Paulson was a member of the Bush League, but the problem has to do with structure, risk, and reward, not parties. Shame! Shame!
People in this country need to realize that politics is about nothing but power, and power doesn’t necessarily have the long-term economic health of the country as its primary interest. Look at the debt, people. AS A COUNTRY WE HAVE GOT TO STOP REWARDING AND SUBSIDIZING FAILURE AND BAD BEHAVIOR.
And yet now we hear utter bovine scatology about eliminating the “procyclical nature of mark-to-market accounting which embellishes the highs and exacerbates the lows,” well, good luck in finding anybody willing to invest in a bank or other enterprise that assumes risk (oh, that would be all of them). But, of course, we should have mark-to-myth accounting for every public company, that way earnings could just be what everybody wanted them to be, and home prices and stock prices could go back to the airless stratosphere.
How’s that for a late-night rant?
Love it, agnostic, great rant, and absolutely spot on, unfortunately. I came here seeking knowledge/information and advice and I have been amply rewarded already.
So, in your opinion, (anyone with an opinion please feel free to respond), a person with a good income and a good amount of savings living in the Phoenix metro, should, at this point in time, continue renting rather than buy a modestly priced home (in relation to income?) My lease is up in December so I am trying to determine the best move. I think I know what is right and I think I know what most posters here would say, but I would love to hear from any and all of you, as second, third and fourth opinions are always very welcome and much appreciated…
To me the only way buying makes near- to medium-term economic sense is as a hedge against the possibility that the government will print as many dollars as it takes to prevent a deflationary debt spiral, international value of the dollar be damned (which it is being, over the last couple months). Or unless the next big government economic program is purchasing a bunch of bulldozers from Caterpillar and training and paying the unemployed to bulldoze a house.
Having said that, I understand and agree that there are non-economic reasons to own a house…as long as it is affordable.
I am a renter, and will remain so for at least another year.
rentingaz,
i think it depends on your situation and budget. i wouldn’t buy anything now, especially higher end stuff. however, i don’t think it was a horrible decision for those that bought in the 100K range and got that $8k tax credit….if they plan on living there for quite a while. to me a home is a home, not an investment. so if you plan on living there for a long time, and the mortgage is less than the rent (which is still not typically the case) then i don’t feel that buying is an awful idea. again though, i’m talkin lower end houses. a $100K house can drop 10-15% more and it’s not the end of the world if you’re going to be in it for a while. but if your $500k home drops another 10-15%, that’s an entirely different story. fyi…i bought in 2004 and don’t know for sure, but am prolly a bit upside down right now (refi’d once for a better rate, but pulled no $ out ever). however, i’m ok with the fact that i may be a bit underwater as i love my “home” and have no intentions of moving in the near future. i also know that my mortgage, taxes, and various upkeep of owning (or rather “borowing”…lol) my home is very comparable to renting a similiar home in a similiar neighborhood. i have been blessed thus far though. i would definitely be in a pickle if i HAD to move for some reason.
Thank you agnostic and AZSaluki for your advice/words of wisdom. I will try to keep to the low end of the price spectrum in my searches, and then, if the mortgage payment would be less than rent, I may just pull the trigger and buy an inexpensive home, that, if I was to lose 10-15% on, I wouldn’t have to commit hari kari over. I am also going to concentrate on homes that, if I HAD to move for some reason, would be easily rented for enough to cover the mortgage so I wouldn’t have to sell at a firesale price. Everything you are both saying makes so much sense and is basically just reaffirming what I know/feel to be true but it really helps on big decisions like this one to have some outside advice. Thanks again!
“So, in your opinion, (anyone with an opinion please feel free to respond), a person with a good income and a good amount of savings living in the Phoenix metro, should, at this point in time, continue renting rather than buy a modestly priced home (in relation to income?)”
I am in a similar position in the same metro. To me, it is not even a close call. Yes, there are significant price declines still to come in AZ. But that is not the only factor. Neighborhood upheaval is a real phenomenon. And Phoenix area neighborhoods often do not age well, even absent economic depression.
A “good amount of savings” may prove useful in coming years.