Housing: Spring Cleaning in Phoenix

Much has been made about Phoenix home prices falling more than 50% from their peak according the February S&P Case Shiller Index released this week. So is this a sign a weakness, or just the market clearing itself in due time?

Since early February, the number of listings leaving the market continues to exceed the number of new listings entering the market, and this difference is widening with each passing week:

The new homes entering the market in March and April are price about 10% above the price of listings absorbed, indicating that sellers are pricing their homes pretty closing to where buyers are active, and is consistent with local MLS data showing a 95% list-to-sale ratio for Phoenix:

Additionally, the properties exiting the market has been in the lowest 25% price quartile over this period, meaning the least expensive homes (the blue line on the chart below) are either going into foreclosure or are getting snapped up by investors flush with cash, and are trending in the opposite direction of the most expensive 25% of homes in the city (the black line):

As a caveat to show that "real estate is local," check out some of the trends in Scottsdale, a well-known suburb northeast of Phoenix. Supply and demand levels are well-balanced this Spring, and the prices of homes leaving the market are higher than those new listings entering the market:

While there is likely to be continued decline in Phoenix are home prices as the Case-Shiller HPI eventually reports the March and April numbers, the good news is that inventory and the number of new listings is below levels from Spring 2008.

For investors, there are definitely signs that the bargain-hunting is on and homes are moving off the market. For the rest of us, it's a good news to see the inventory clearly the market even if prices are 50% below their unrealistic highs from 2006-2007.

Disclosure: No positions

Comments

[Steven Hansen:]

very good write-up. i suggest the drop in inventory is due to sellers waiting to list their homes. it is illogical to think that volumes can fall, and inventories can fall - unless the population is falling or people have completely changed their buying habits for homes.

May 01 04:21 AM

[Mr. Ed, Jr.:]

The yellow caution light is still falshing in the Phoenix home market.

RealtyTrac says there is a shadow inventory of 600,000 homes that banks have held off the market to avoid completely destroying home prices. No doubt AZ has at least their fair share of that shadow inventory.

There is still no "trading-up" in the housing market. It is investors and first-time buyers taking advantage of the tax break. And likely some uptick due to pent-up demand, but that does not make a trend.

If home prices inch higher, we will likely see more sellers-- those who took their homes off the market because they could not afford to sell at the prices offerred.

Significant default increases in the last 60 days, as well as a new wave of ARM Alt A bad loans that will increase the supply even more.

There is just no catalyst for the housing market at this time. The law of supply and demand is in firm control of the situation.

May 01 04:35 AM

[WY Broker:]

The pendings and actives ARE NOT the true inventory of available housing units. Rents are coming down to fill vacancies, and the home price to rent equalization has not come in yet. More to go.

Some areas may be bouncing along a bottom, but remember, a lot of this is manipulation by the banks, asset managers and even some RE agents to hold a large amount of vacant homes off the market. The shadow inventory is huge and more are coming on line every week. NO ONE should think values will start up in a meaningful manner any time soon.

May 01 10:15 AM

[Scott Sambucci:]

Steven, Mr. Ed & WY Broker - Thank you for your comments. Much appreicated.

You all make excellent points about the "real" inventory that's out there. Certainly the short-term conversions to rentals and the shadow inventory of post-foreclosure units are out there. Though in some regards, by pushing the rentals a few years and the post-foreclosures getting sold in asset bundles, that's the market acting accordingly to the existing conditions. If the local market begins to show some levity in the short-term, perhaps that will provide more consistent inventory inflows over the next couple of years, rather than the floodgates that we've been seeing.

May 01 11:29 AM

[pick freedom:]

I was thinking about buying a home about 20 minutes south of Salt Lake City but have changed my mind after seeing that the default rate is going up now that banks are foreclosing again.

Unemployment is also still going up, over 500,000 a month, leading to more homes going into default over the next 2 years.

In addition many mortgages will be re-adjusting the notes interest rates, needing re-financing, but will not be able to because home prices have fallen below the equity that is left in the property. Causing more homes to go into default.

It seems that supply will increase over the next 12 months. I feel prices will be much lower this time next year. So I will wait.

I have seen MLS asking prices on homes just 2 years old drop $50,000 to $100,000 dollars in 6 months to a year here in Utah.

Whats it like were you live?

May 03 05:02 AM

[ubuy2w:]

Scott I have been following the Phoenix mkt closely and my analysis of conditions lead me to exactly the same conclusion. Much has been made by some commentators of so called "shadow inventory" and industry practices of keeping foreclosed inventory off the mkt I am unaware of ANY evidence of this, banks will certainly keep a homeowner in a property if he is current with their obligations however a home defaulting mortgagee will have a for sale sign on it as swiftly as possible.

May 03 09:54 AM

[HardwoodFlo...:]

Good Post.

I was just in LA taliing to a builder from AZ. He said that he had 30 people ready to go on a development north of Scotsdale but couldn't break ground because they are all waiting to sell their existing homes.

May 04 11:57 AM

[Radardoc:]

On May 03 09:54 AM ubuy2w wrote:

> Scott I have been following the Phoenix mkt closely and my analysis
> of conditions lead me to exactly the same conclusion. Much has been
> made by some commentators of so called "shadow inventory" and industry
> practices of keeping foreclosed inventory off the mkt I am unaware
> of ANY evidence of this, banks will certainly keep a homeowner in
> a property if he is current with their obligations however a home
> defaulting mortgagee will have a for sale sign on it as swiftly as
> possible.

Ubuy,

If you don’t believe the fact that there is a shadow inventory, please check Mr. Ed’s source, RealtyTrac.

There is a delta between foreclosures and listings appearing on the market. If there are more foreclosures than properties entering the inventory pool, what would you like to call them? I prefer shadow inventory. We could agree to call them Easter Eggs, Tiddly-Winks, widgets, but we can’t deny they exist. The houses haven’t disappeared.

This has been said before but it’s apparent we haven’t reached acceptance of (imho) is obvious. An entire segment of the real estate market is GONE. The “trade-up” crowd are missing in action. Why? Because they have no equity to trade up with. It all vaporized when the bubble started to deflate. Please note I avoided the term “burst” because that implies that it happened and it is over. It is far from over.

What we have now are first timers buying perceived good deals. If they are buying to meet a housing need and they plan to be there long term (and they keep their jobs, etc., etc.) they’ll be fine. We also have speculators ignoring the fundamental data, thinking we are near the bottom, and asking “what shadow inventory?” Bad timing.

“Why would the banks do this?” you may ask…it’s simple. Survival. If the banks list the properties and further flood the market, prices fall further. If they foreclose and hold the property, it holds the value of the foreclosure. If they sell it at comparatively ridiculously low prices, the asset column of their accounting reports fall further and faster. If the banks had to account for their assets in a manner that basically said “it’s Monday, May 4th, 2009 and if we had to sell our assets today they would be worth $XXX B” I think most banks would be insolvent. That would be true “mark to market” accounting. As it is now, it’s similar to the Enron scheme, but where Enron was motivated by the greed of more profit, the banks are motivated by the greed of just seeing another business day.
The shadow inventory exists, and it exists to save weaker banks. It does so at the expense of the taxpayer.

May 04 07:45 PM

[flashrob:]

the BIG PROBLEM...

historically, Real Estate, like most other INVESTMENTS has been CYCLICAL...but NOT THIS TIME... here's why...

1. "Buying a House" as opposed to renting has been a "sweet deal" for many decades in MOST MKTS.

this is because you put 20% down (or less) and if your house appreciates just 10% a year...well, on a 200,000 dollar house YOU WOULD BE MAKING A 50% return on your investment.

(20% x 200,000 = 40,000 which is your down-payment investment)

(10% appreciation in the annual value of your house x 200,000...means you made a "50% gain on your investment!)

You did much better than MOST DO IN THE STOCK MKT OR OTHER FINANCIAL MKTS...and with CONSIDERABLY LESS RISK!

however, this is a DOUBLE-EDGED SWORD...when Real Estate depreciates YOU LOSE your down payment RAPIDLY and in most cases permanently unless the mkt recovers.

Let's say your house went down 20% (or more) in value over the last two years (typical in many mkts) now because of REVERSE LEVERAGING you have lost your entire 40,000 equity in the house if you have to sell (that's why the bank wanted your 20% in the first place...so if there is a REASONABLE DOWNTURN...they are protected until your SECURITY DOWN-PAYMENT is exhausted.

Now, in most Real Estate Cycles...housing doesn't depreciate that much, so in the next up cycle you recover...but not likely THIS TIME!

WHY: tens of thousands of high-paying tech jobs are going overseas to places like India...so there are less and less high-paying jobs to support a recovery THIS TIME.

there is a glut of housing (many empty) because of overbuilding...because everyone saw the "rapidly rising prices" of residential or rental real estate and wanted a piece of this HIGH RETURN, LOW RISK investment...add to this the banks relaxing credit standards and issuing mortgages...because, hey, real estate just keeps going up, up, up...and with that leverage, etc.

well, it all collapsed, and now we have a glut of houses, AND GUESS WHAT...

WHY WOULD YOU BUY A HOUSE THAT IS GOING TO "DEPRECIATE IN VALUE because of the "negative leverage factor," even if you can GET A MORTGAGE AT 2%...YOUR STILL LIKELY TO LOSE YOUR DOWNPAYMENT...(better to Rent, and put your money in Gold or some other prospective investment...and rents are coming down because of the glut of housing...plus the impact of renters being evicted because of job loss, etc.

Also, the gov is NOT GOING TO ALLOW THE BANKS to pump up the Real Estate bubble AGAIN with risky loans...

So, essentially REAL ESTATE, though IT MAY BE NEAR THE BOTTOM, is NOT GOING TO RECOVER anytime soon, if ever...

In fact Real Estate will MOST PROBABLY...CONTINUE TO DECLINE...

just because the losses in home values are slowing DOES NOT MEAN THEY WILL REVERSE...

think about it...

why buy a house, even at a 2% (or less mortgage) IF YOU ARE GOING TO LOSE YOUR DOWN-PAYMENT...

do the arithmetic...most buyers will...

SO THE SPIN HOOPLA on WALL ST. about a Real Estate Recovery is UTTER NONSENSE...

show me how, why and the way...

don't show me incremental statistics showing a slowing in decline,
or slightly positive numbers in specific mkts...

some people will always have money to buy a BMW...problem is there are a LOT LESS OF THEM BUYING A BMW...

flashrob

May 12 07:03 PM