Over-Correction in the Phoenix Housing Market

It’s now looking like over-correction in prices is a likely possibility in the Phoenix area residential real estate market.

Over-correction will cause unnecessary economic damage to home sellers and lenders. The lower home prices go, the more foreclosures there will be and the greater the losses to families and lenders.

Foreclosures Don’t Hurt Home Prices…

This may be trite but it’s true. Foreclosures, per se, are not driving down home prices. What drives down home prices is lenders reselling those foreclosed homes.

I don’t know of any law that says lenders have to resell foreclosed homes immediately. The banks, I assume, could instead lease out some of their foreclosed properties.

“Show Me the Money!”

Banks, of course, want cash to lend not real estate to hold. Perhaps the banks could use the homes as collateral to borrow money at extremely favorable rates from the Fed or Treasury. I’m not a banking guy but that would seem to be key.

The foreclosure problem is much too big, of course, to use this strategy across the board. It can, however, be used surgically.

“Scalpel”

Some zip codes in metro Phoenix in my opinion are clearly well valued or under valued. They tend to be those zip codes on the periphery of the metro area where prices first started to fall and where prices have fallen the most.

What if a group of large banks agreed to NOT resell their foreclosures in those zip codes where the median price per square foot was less than, say, the 2003 median price per square foot? That could very well lead to prices stabilizing more quickly and at higher levels in those zip codes.

And that would minimize the over-correction not only in those few zip codes but in the entire Phoenix real estate market!

That’s because encouraging prices to stabilize in the most over-corrected zip codes would stop those zip codes from continuously pulling down prices in neighboring zip codes. Price stability might ripple out from the stabilized zip codes.

Once home prices stabilize in a few zip codes, the entire market psychology will change dramatically. There are many potential buyers who would be happy to pay today’s prices but think, “Why buy now when prices are still falling.”

If, as well, punitive lending standards and PMI were relaxed in those stabilized zip codes, non-government mortgage money would flow in and the recovery would be well on it’s way.

Race to the Bottom

Lenders just need to change their paradigm about not being landlords or otherwise not holding assets in inventory.

Currently, lenders sell foreclosures as quickly as possible in a competitive race to the bottom with other foreclosure-selling lenders. Lenders, however, could conceivably support prices once they agree the bottom has been overshot in a zip code.

Irrational Pessimism

In those zip codes that have indeed over-corrected, the strategy could help minimize the ultimate amount of the over-correction which would benefit both homeowners and lenders.

Indeed, if the lenders end up keeping truly under-valued assets, the lenders could make a profit in a few years using the strategy.

Comments

[{5U}:]

You must have an interest in Phoenix.

With rising unemployment we still have yet to reach the bottom unless if it is government induced.

In which case it is artificial.

2008 Dec 28 08:30 AM

[Dave South ...:]

What this guys doesn't get is that is that because prices were SO overpriced if the banks rented out these untis they STILL would be losing money. As a matter a fact that why we STILL have more room to drop. A lot of investors are still on the sidelines waiting for properties to yield decent cash flow. Appreciation won't come anytime soon so they must be paid their divident in order to wait.

2008 Dec 28 09:20 AM

[Dr.Jackpot:]

You forgot one factor. Realtors. They want the fastest turnover-------no matter how low the prices. They could care less about America OR the economy.

2008 Dec 28 09:20 AM

[Johnaudio1:]

This is pathetic. The banks get fed money and compete with the guy down the street trying to sell his home against a foreclosed home. The bank meets the buyer to offer financing and offers a "foreclosed" home down the street at a lower per square foot price. Using the feds money - which is ironically the homeowners tax collected money - to compete against the orginal seller is a crime that the fed and the banks are perpetuating on YOU! Why do not people see this scam! When are people going to see that there IS NO FREE LUNCH!!! We are wasting money admin these programs and losing our countries treasure to become the future slaves of the rich countries who CAN save for the future. Bush failed to regulate wall street and the banks. He is an idiot. Greenspan is an idiot. You are suckers.

2008 Dec 28 09:27 AM

[RMC:]

Bank's are required by regulators to "market to market" forclosed properties at least every year and sometimes quarterly. History has shown holding forclosed properties does not prevent the loss just spreads it out... a slow bleed. Furthermore, regulators will force all kinds of burdens on banks if they do not agreesively reduced "non-permforming" assets aka forclosed properties.

2008 Dec 28 09:36 AM

[urbanexus:]

If the "over correction" conclusion is correct, a decision to keep foreclosed houses off the market for awhile could benefit both the lenders and the remaining homeowners in the affected neighborhoods. However, if lenders cooperated on such an approach, it could raise anti-trust issues.

2008 Dec 28 09:38 AM

[urbanexus:]

If the "over correction" conclusion is correct, a decision to keep foreclosed houses off the market for awhile could benefit both the lenders and the remaining homeowners in the affected neighborhoods. However, if lenders cooperated on such an approach, it could raise anti-trust issues.

2008 Dec 28 09:45 AM

[chasman:]

sure the banks could lease the houses out, but that would require them to hire new staff to manage a portfolio of houses, and get into the rental leasing business. more added costs, right?

cost benefit analysis and time value of money in this environment where every bank needs as much cash on the books would lead them to the quickets solution - sell as quick as they can, and get rid of inventory to raise cash. same thing every retailer is doing by slashing costs this holiday season - sell inventory as quick as possible b/c it is not stabilizing anytime soon. if they aren't buying now, then what pushes buyers to start buying in the next 6 months. especially with estimated 500k more job cuts per month over next 3-5 months.

phoenix was the poster child of quick "noveau" money - home equity, real estate developers, brokers, agents, construction, etc. everyone wanted the quick buck now, to further their glitzy Hummer, 5 BR Palm Springs like lifestyle, with nothing put away for savings, nor any real thought to real value creation. Phoenix is one big house of cards. Scary part - the movie Pump up the Volume was a great foreshadowing of the damage to come.

if you throw out "easy" solutions, do some more due diligence on what it actually takes to implement those solutions.

2008 Dec 28 11:12 AM

[Aryamehr:]

Only an idiot and I emphasize an idiot, regardless of lax lending standards, would have not seen a bubble in the Real Estate market in 2004. Why? Well, a little intelligence would have manifested that peoples incomes and home prices were out of sync., while home prices were leaping 20% a year most incomes continued their snailed pace growth and the few that enjoyed substantial growth in their incomes generally had a parasitic relationship with rising real estate values and the refinancing bonanza. Just because the bubble didn't burst in 2004 does not mean that we weren't in a bubble. A gov't or central bank can apply many fiscal and monetary tools to buttress its economy but it can not avoid the necessary downturns necessary to correct its economy. In a capitalistic economy we have Expansions, Peaks, Contractions and Troughs. This being said a recession in a timely manner is a healthy remedy to any bubbles emerging in the economy. When gov't policy tries to prevent this cycle from occuring by lowing interest rates, printing excess money and permitting lax lending and regulatory standards under the pretext of Supply Side economics then we end up in the chaos that we are in today. Bushonomics has nothing to do with Supply Side economics and the real Republican party needs to stop touting idiots as future leaders of the party if they wish to save this country. They need to look at IRAN and Israel to a lesser degree, to see the consequences of religious governance. In the first case you have regressive living standards, stagnation and repression. In the latter you create an environment of hositlity amongst your neighbors and constant fear of a possible holocaust of your race. This is why most western nations avoid direct involvement of their religious bodies in politics and it would be wise for the US to heed to history.

2008 Dec 28 11:13 AM

[sunnsea:]

Prices must drop to 1997-98 levels in all markets, period. The banks must be held accountable for this mess and they must suffer along with everyone else.

Also, the 1997 tax exemptions on home sale capital gains ought to be repealed. This was an underlying factor and rarely discussed incentive for the price bubble. If and when prices do stablize, we do not want to trigger off another bubble with this ill-advised exemption.

2008 Dec 28 11:41 AM

[D. McHattie:]

"What if a group of large banks agreed to NOT resell their foreclosures in those zip codes where the median price per square foot was less than, say, the 2003 median price per square foot?"

That would be collusion. That would be a criminal act. Only a total scumbag would even think of such an anti-competitive, socialism-for-the-home... policy.

Have you ever heard of a home buyer? Do you not realize that it is innocent, responsible home buyers that you hurt when you seek to maximize the price of a basic, necessary good: shelter?

2008 Dec 28 12:10 PM

[John Wake:]

D. McHattie makes an interesting point. One of the major causes of the housing bubble was the Community Reinvestment Act which required banks to make sub-prime loans in order to increase homeownership. Now, however, any measures to support the banks or home prices would make homes less affordable than otherwise. The advantage of a possible over-correction is more affordable housing. The bust could do more for affordable housing than the Community Reinvestment Act.

2008 Dec 28 12:39 PM

[thatguy57z:]

this will give you some in site how it is going to start working. and how they've all ready have it moving foreword. youtub.com/new world order

copy and paste to your web browser

2008 Dec 28 03:00 PM

[thatguy57z:]

this will give you some in site how it is going to start working. and how they've all ready have it moving foreword go to.
www.youtube.com/watch?.... copy and paste to your web browser

2008 Dec 28 03:14 PM

[David Fischer:]

Housing overshot up, and now will overshoot on the downside. Fair value? What and how can anyone especially this guy dertermine is fair value? If it were only that easy then we would all be so rich. The fact is foreclosures to add to dropping prices, the fact he retorts this is plain dumb logic.

Usually after bubbles of that magnitude, the overshoot the other way can be huge. One only has to look at the Naz or any other bubble that has occurred. Real estate in Phoenix, Florida and especially Las Vegas have a ways to go still to the downside.

Too many clowns get stomped on trying to call bottoms. If you cant handle a 10% drop in prices from here or more, then why try to catch a falling knife.

2008 Dec 28 05:28 PM

[scotty1560:]

good comment by Sunnsea and you might be right.

"Prices must drop to 1997-98 levels in all markets, period. The banks must be held accountable for this mess and they must suffer along with everyone else.

Also, the 1997 tax exemptions on home sale capital gains ought to be repealed. This was an underlying factor and rarely discussed incentive for the price bubble. If and when prices do stablize, we do not want to trigger off another bubble with this ill-advised exemption.
Reply"

Pre-Bubble means about 1998 and possible add 10 years of normal inflation
and maybe that's where the trail leads? I also might add owning a home is
much more expensive than 10 years ago thanks to much higher property taxes
and much higher insurance rates, water and utilities, stricter codes, and
maintenance costs. The worst should be over but I expect another 4-5
years of mostly sideways movement.

2008 Dec 28 05:44 PM

[ATWshop:]

I agree with Scotty above... The increasing of the value of a home is actually of little value to the Owner. The increase in value only adds more to your Property tax bill... if you sell, you will still need to live somewhere and the price of a new home will be higher so you will have to spend all of your gain for the next home...or... if you rent the monthly costs will be higher, again eliminating your "perceived" gain.
With that in mind... ***where is the advantage for a Homes value to Increase?*** Of course, if someone dies, the heirs get more money if the home goes up in value..but does anyone buy a home planning for their heirs to make more money when they die? I certainly hope not.
The farther down the price of homes drops... the better off everyone will be as their is hardly any advantage for the Homeowner to have the value increase.
Lets put the extra money in something else to keep the economy humming.

2008 Dec 28 06:02 PM

[John Wake:]

What's magic about 1997-98? It sounds even more ad hoc than 2003. From the graph it's clear the bubble really started to take off in Phoenix in 2004. So 2003 or 2002 are clearly pre-bubble prices.

I'm not saying prices won't go back to 1997 levels. At the current rate of decline, home prices could be there in six months or so. But then again, if we extrapolate the current rate of price decline, homes will be free in 2 years... so extrapolation is not such a great economic forecasting technique.

2008 Dec 28 08:34 PM

[sickofthehype:]

Gotta love comments like 'housing must go back to 1997 prices!!'. Hmm. How about... housing must go back to 1957 prices!!! Yeah that's it!

Here's the deal. The swing has swung too far. I bought a house in Phoenix in 2001, sold it in 2005 for a profit. Now that same model home, same neighborhood, is selling for exactly what I paid in 2001. And I bought mine with a substantial discount over the others that bought in there.

Like any city in the US, the farther out you go from the city, the harder the fall. But let's be realistic here. If we're already at 2000-2001 prices, which we are in many areas around Phoenix, and clearly 2001 was pre-bubble, then wouldn't you say we've gone far enough?

2008 Dec 29 10:02 AM

[bobbobwhite:]

Perhaps home prices have not overcorrected. Perhaps they have merely returned to their intrinsic worth.

Maybe they won't go any higher for a long time, and that defines intrinsic worth.

2008 Dec 29 11:57 AM

[bobbobwhite:]

Unless you sell and move to Panama or the like. Then a big increase in house values do you some real good. Real nice places in Panama go for $100k. A good exit plan is always worth considering, especially in the America of today. Indonesia even pays you money to move there.


On Dec 28 06:02 PM ATWshop wrote:

> I agree with Scotty above... The increasing of the value of a home
> is actually of little value to the Owner. The increase in value only
> adds more to your Property tax bill... if you sell, you will still
> need to live somewhere and the price of a new home will be higher
> so you will have to spend all of your gain for the next home...or...
> if you rent the monthly costs will be higher, again eliminating your
> "perceived" gain.
> With that in mind... ***where is the advantage for a Homes value
> to Increase?*** Of course, if someone dies, the heirs get more money
> if the home goes up in value..but does anyone buy a home planning
> for their heirs to make more money when they die? I certainly hope
> not.
> The farther down the price of homes drops... the better off everyone
> will be as their is hardly any advantage for the Homeowner to have
> the value increase.
> Lets put the extra money in something else to keep the economy humming.

2008 Dec 29 12:27 PM

[poor&unempl...:]

This is called desperation. Seeking Alpha is lowering it's standards by allowing such garbage

John Wake, M.S., is an Associate Broker with HomeSmart Real Estate in Scottsdale, Arizona. John takes a highly analytical approach to managing his clients' purchases and sales of luxury real estate in Scottsdale and Paradise Valley, Arizona.

2008 Dec 29 03:22 PM

[texas cowboy:]

A report conducted by the World Economic Forum (WEF) has placed Canada at the top of the pile, just above the likes of Sweden, Luxembourg and Australia.

The statistics have been compiled based on information provided by 12,000 corporate executives throughout the world. A system of rating the banking systems of individual countries was conducted by participants answering a number of questions and rating the banks on a scale of one to seven, one being in need of government support seven being entirely healthy.

Canada’s baking system, lead by Royal bank, CIBC, Scotiabank, TD Bank, Bank of Montreal and National Bank, received the highest rank in the world, scoring 6.8 on the rating scale.

The top 10 safest countries for banking are currently as follows:

Canada (6.8)
Sweden (6.7)
Luxembourg (6.7)
Australia (6.7)
Denmark (6.7)
Netherlands (6.7)
Belgium (6.6)
New Zealand (6.6)
Ireland (6.6)
Malta (6.6)

2008 Dec 30 07:39 AM

[GreenGoblin:]

The real problem: The building “industry” has created an enormous, sprawling, future ghetto in the desert Southwest. The buildings (both residential and commercial) that were built over the past several decades were originally designed for an entirely different climate. The costs of operating and maintaining the buildings, and the costs of maintaining the system that supports such an unsustainable scheme will eventually (perhaps soon) overwhelm us. The program was ethically bankrupt from its beginning.

2008 Dec 30 02:29 PM

[David Fischer:]

This summer since spring has been the time to buy, right now for 70 k gets you an 1800 to 2100 sq foot home built during this century, their cash flow positive. There is alot of demand for renters, and though I think the rents will likely drop a little in the possibly 10 to 20 % range to adjust for so many investors piling back in the market.
Prices have been indeed slammed by foreclosures, and now prices will rise off of this artificial bottom, just like a parabolic sell off in the stock market, prices are artificially squashed due to too many bank owned properties. If you look at the cost of building one of these homes right now, they are possibly 80 k undervalued to current building prices. No new homes will be built until prices of these homes climb from here. Smart real estate investors are buying up these homes like crazy, now is the time, buy buy buy. 70 k homes renting for 800 per month, are you kidding me? Even if rents dropped to 550 per month, they would still be worth buying.

Sep 27 12:55 PM