Three months ago I wrote Signs of a Phoenix Housing Recovery Good for Homebuilders, which presented evidence that a Phoenix, Aris., housing recovery would start next year. Data flow over the last three months continues to confirm this forecast. This has made us look more closely at a possible Phoenix “end game.” The “end game” is the specific sequence of events that should occur as the Phoenix market transitions from distress into recovery. The transition should not be a gradual change but events should occur very rapidly and in a particular sequence. We think this is important for investors to know.
Why Phoenix was Chosen
Phoenix was chosen for this study for two reasons:
- We believe Phoenix is a proxy for many distressed markets throughout the country and so what’s happening in Phoenix is probably a good indicator for other regions.
- The depth of data needed to completely analyze and wrap one’s mind around the problem is available. In this I have to thank Cromford Associates LLC, licensed by ARMLS to provide subscribers and all 30,000 agents with detailed resale and foreclosure data, the “Information Market”, which counts and categorizes on a daily basis the status of every piece of distressed property in Maricopa County, and Corelogic, which also provided vital distressed market data.
- The inventory of distressed homes in Phoenix should deplete to normal levels by sometime next year – probably by mid-summer.
- At that time sales of distressed homes should fall off rapidly leading to an almost immediate 20% rise in the median home price.
- This sudden price “pop” should not happen everywhere or at the same time. It should occur intermittently, region by region, throughout Maricopa County as distressed inventory is depleted at different times for each region. This price “pop” should begin first with less expensive homes and then move upward.
- This price rise should drop the number of homes with negative equity, further slowing strategic defaults and unfreezing thousands of marginal equity homeowners. This process – price rise and unfreezing - should become “self-sustaining” and help fuel the recovery and broaden the market.
- Loans delinquent 90 days or more, which have not yet received a Notice of Trustee Sale (NOTS)
- Delinquent loans that have received a NOTS
- Accumulated Bank or Agency Owned property called REOs
Watch "Distressed Inventory" not "Distressed Sales" However, if this is true, it begs an obvious question. Why, after such a rapid decline in distressed inventories, have distressed sales as a percentage of total sales stayed so high? We see this fact plotted in the next graph.
Our model treats housing like a fluid flow problem with distressed homes moving from one reservoir to the next and bank foreclosure departments acting like pumps, moving the houses along. This model says that distressed sales will remain high (and might even increase) right up to the very end. Then the transition from distress to recovery will occur suddenly, much like how a pump sputters and spits right as it runs out of water.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.