Housing Doom

When no one calls to see a vacant listing for awhile, some agents don’t bother stopping by.  This can be the result: [Thanks L!]

A recent scam reported in the Phoenix area involves tenants moving into a pending short sale listing. The surprised listing agent contacted the owner who had not rented the property to anyone. The tenants (two women with two children) were physically moving in and had turned on utilities in their name. The sign and the lock box were removed, and all locks were re-keyed. 

The tenants responded to a "For Rent" sign in the yard. They gave someone $1,800 as rent and signed a lease. While the short sale was able to close, the unfortunate victims of this scam were out $1,800 with no place to live.
 
This down economy encourages some people to take advantage of others.  Listing agents should check their vacant listings regularly and provide neighbors their contact information in case they observe any suspicious activity.

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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]

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.

Ugh!  Another day, another CNBC "housing has bottomed" story.  The rationale seems to be that things have bottomed because a well paid analyst says so. Far more convincing however, is this CNN story on how home prices still have a ways to fall:

NEW YORK (CNNMoney.com) — If you thought home prices were bottoming out, you may be wrong. They’re expected to head a lot lower.

Home values are predicted to drop in 342 out of 381 markets during the next year, according to a new forecast of real estate prices.

Overall, the national median home price is predicted to drop 11.3% by June 30, 2010, according to Fiserv, a financial information and analysis firm. For the following year, the firm anticipates some stabilization with prices rising 3.6%.

In the past, Fiserv anticipated the rapid decline in home-sale prices over the past few years — though it underestimated the scope.

Mark Zandi, chief economist with Moody’s Economy.com, agreed with Fiserv’s current assessments. "I think more price declines are coming because the foreclosure crisis is not over," he said.

Here’s what they say will likely happen to a couple of my favorite cities:

[N]otable losers include Las Vegas, where prices have already fallen 54.6% and are expected to lose another 23.9% by June 2010. In Phoenix values have already collapsed by 54% and could fall another 23.4%. In both cities, Fiserv anticipates the losses to continue into 2011, but they will be less than 5%.

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To paraphrase an old Pete Seeger song, "Where have all the owner-occupiers gone- long time passing?" Wherever they’ve gone, in Phoenix they’re not out there selling houses.  That market remains dominated by the banks:

Two-thirds of the Phoenix-area homes that changed owners last month were either new foreclosures or resales of properties that had recently been foreclosures. The latest Realty Studies report from the W. P. Carey School of Business at Arizona State University explains a recovery can’t really be established until foreclosure-related activity is not the dominant force in the Valley housing market.

"Although the level of activity appears strong, the market is being driven by either homes being foreclosed or being sold back into the market by the lender," says Associate Professor of Real Estate Jay Butler, author of the new report.

Butler says the current market is similar to the mindset that created a "hyper-market" from 2003 to 2006, when investors were buying up properties, looking for a great deal followed by a big appreciation in values. He maintains a real recovery can’t happen until owner-occupants take control again.

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It’s been a rough year for the travel industry.  California has seen a tripling of hotel foreclosures in the first nine months of the year.  Arizona’s hotels are also struggling, and last month the city of Phoenix asked residents to help:

A new study released by the Greater Phoenix Convention and Visitors Bureau cites tens of thousands of jobs and $166 million in sales and property taxes from Phoenix hotels as evidence of the need to support the industry’s recovery efforts. The city is trying to enlist residents as volunteer sales representatives, asking them to help woo the conventions of associations and other groups they belong to.

Apparently former Arizona governor Janet Napolitano, now with the Department of Homeland Security, is doing her part for her old home state.  How’s this for a novel approach to filling hotel rooms?

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It was tough enough to sell condos in Phoenix in this market.  Now it just got darn near impossible:  [Thanks L!]

New federal loan-guarantee rules imposed to fend off future government losses from plummeting condominium prices have rendered condos utterly worthless, Valley real-estate experts said.

The Federal Housing Administration rules, which took effect Oct. 1, prohibit any new FHA-backed loans on condo units in projects that include more than 25 percent commercial space.

In addition, no single investor - including the developer - may own more than 10 percent of the units in a particular project. That particular restriction alone creates a catch-22 from which condo builders most likely cannot escape, said mortgage originator Jill Hoogendyk of Wallick & Volk in Glendale.

Another rule that has sellers and brokers scratching their heads prohibits FHA loans in condo developments that aren’t "primarily residential," which could be taken to mean the FHA won’t guarantee loans in future mixed-use projects.

"I’m predicting that what we’ll see is whole condominium complexes sitting empty," Hoogendyk said.
 

So why is FHA willing to throw condos under the bus now?  Because, after nearly single handedly financing the recent "recovery" in the housing market, they’ve got problems of their own:

[W]e now are beginning to discover that the boomlet at the bottom of the housing market has been driven not just by the tax credit but by the government’s subprime lending program — FHA. The bailout is coming for that one and it’s not going to be small. In effect, the Congress and Obama administration [As well as the Bush administration before it.] have engineered their own little bubble in an attempt to buy political time and the bill is coming due quicker than they might have imagined. In many respects all they have truly accomplished is to ensure a steady supply of fresh foreclosures which will keep the market in a state of flux for much longer than it might have taken had it been left to its own devices.

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I went to a landscape seminar years ago where the speaker offered a sage bit of advice.  He said that when landscaping a property, it was important to consider the fact that trees and shrubs grow and get larger over time.  That should seem obvious, but too many people landscape a property only considering how the property looks today, without considering how it will look in the future.  He said that envisioning how the landscape will look 20 years from now will prevent mistakes like trees too near walks or foundations where they can cause damage, or large thorny hedges along narrow walks.

There was a time when real estate investment was also considered in a similar manner.  The odds were that you couldn’t get much of a return overnight, so long-term planning and analysis was critical.

During the boom however, long-term real estate investing seemed a quaint, old-fashioned idea whose time had come and gone.  Now that rampant appreciation is gone though [Heck, in most places these days, any appreciation is gone.] you’d think that people would have returned to the old-fashioned, long-term way of thinking.  New ways seem to be dying hard however.

So what got me going on this?  Two rather disparate articles were sent to me yesterday.  One was an article on a couple of bankrupt condo conversions in Tucson, and the other was about the excess of commercial space in Phoenix. [Hat tip to M.R. and L!] What they both had in common was the mind-boggling level of short-sightedness from different "experts".  Take for example this comment from the condo story:

Condo conversions made sense in the hypermarket of 2006 and early 2007, but not today.

Prices were higher in 2006-7 than they are today.  Since when was "Buy high, sell low," ever a great investment strategy?  How can a long-term investment be a good idea at one point and a lousy idea a mere two years later?

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Just when they thought it might be safe to go back in the housing market… [Hat tip Freedom's Phoenix]

WASHINGTON (Reuters) - The federal government and states are girding themselves for the next foreclosure crisis in the country’s housing downturn: payment option adjustable rate mortgages that are beginning to reset.

"Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama’s administration to discuss ways to combat mortgage scams.

"That’s the next round of potential foreclosures in our country," he said.

Option-ARMs are now considered among the riskiest offered during the recent housing boom and have left many borrowers owing more than their homes are worth. These "underwater" mortgages have been a driving force behind rising defaults and mounting foreclosures.

In Arizona, 128,000 of those mortgages will reset over the the next year and many have started to adjust this month, the state’s attorney general, Terry Goddard, told Reuters after the meeting.

"It’s the other shoe," he said. "I can’t say it’s waiting to drop. It’s dropping now."

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I was recently asked about the state of the Phoenix condominium market, which we haven’t looked at lately.  M pulled some numbers for us, and the numbers speak volumes about what’s happening out there.  [So does this picture from the 3rd Avenue Lofts in Scottsdale]

Here’s what M had to say: [Numbers from 9/11]

Active                           5,775      1,997
Under Contract           1,993      1,520
Sold (Past 30days)       860        528
 
The number in red is the total of REO and pre-foreclosure.  76% of the pending sales are "distressed", but only 35% of listings.
 
You and I both know the condo market was a haven for speculation and fraud.  Some of the largest commercial defaults in the Valley are new condo projects and the conversions.

With the overwhelming majority of condo sales being foreclosures, it doesn’t bode well for the other 65% of listings out there.

M also sent me a list of the condominium defaults from the beginning of this year- there were 4546 of them. The value of the original loan amounts was nearly a billion dollars.  When you consider that according to ARMLS, the median price of condo/townhouses was $170,000 in July of 2005 but only $96,600 in July 2009, you can see that there are going to be some serious writedowns. 

Here’s some of the problems now being faced by buyers looking to buy a condominium today:

• Financing is exorbitant for second-home and investment condos — if you can even get a loan. Expect to pay 6.3 percent, for instance, instead of 5.3 percent for a primary residence.

• In the worst-hit condo markets (Florida, Vegas, Phoenix), Fannie and Freddie are constantly concocting ever more stringent regulations.

• Homeowners associations traumatized by rising foreclosures and owner delinquencies are shutting down luxury amenities to preserve cash. It may not be much fun to live in a development that has sacrificed its pool, spa, and golf course to the god of fiduciary responsibility.

• Developers want out, out, out, which means that they’re cutting corners to finish up buildings. Lawsuits abound between dismayed owners of new, flawed units and developers whose projects don’t look like the sales brochures.

Here’s what Dr. Jay Butler of ASU’s Realty Studies says of the current Phoenix market in general:

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It’s Friday, and we finally have a solution to stabilizing the housing market- eat out.  After all, a bad economy makes for a bad housing market, and dining out will help fix that:  [Thanks L!]

Gov. Jan Brewer took the stage Thursday with rocker and restaurateur Alice Cooper to convince Arizonans that dining out is good for the state.

Announcing a three-month public-awareness campaign called Dine 4 AZ, they said going to restaurants
 supports businesses and helps preserve jobs. Brewer noted that restaurants generate 10 percent of Arizona’s tax revenues.

"We are working hard to lead the Grand Canyon State forward and out of this recession, and Dine 4 AZ fits perfectly into our plan," she said. "Please treat your family to a meal and we’ll get through this together."

According to Stephen D. Chucri, president and CEO of the Arizona Restaurant Association:

We’ve been hit hard by unemployment, immigration issues and rampant foreclosures in our housing market, but with the Dine 4 AZ initiative we can all do some simple things to get our economy rolling again.

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