Research

Podcast: New Year expected to bring fresh round of foreclosures

Real estate experts are watching for signs that the Phoenix market is returning to normal. Activity slowed a bit in November — a hopeful sign because it is consistent with seasonal norms. But the market is still feverish. November's activity may be down from October, but it's still up considerably compared to a year ago, and 61 percent of the transactions were related to foreclosures. We asked real estate professor Jay Q. Butler, who prepares ASU's monthly Realty Studies Report, to talk about the dynamics he observed in November.

2009-12-11

Real estate experts are watching for signs that the Phoenix market is returning to normal. Activity slowed a bit in November — a hopeful sign because it is consistent with seasonal norms. But the market is still feverish. November's activity may be down from October, but it's still up considerably compared to a year ago, and 61 percent of the transactions were related to foreclosures. We asked real estate professor Jay Q. Butler, who prepares ASU's monthly Realty Studies Report, to talk about the dynamics he observed in November.

Transcript:

Knowledge: Real estate experts are watching for signs that the Phoenix market is returning to normal. Activity slowed a bit in November, which is a hopeful sign because it's consistent with seasonal norms, but the market is still feverish.

November's activity may be down from October, but it's still up considerably compared to a year ago. 61 percent of those transactions were related to foreclosures. We asked real estate professor, Jay Q. Butler, who prepares ASU's monthly real estate studies, report to talk about the dynamics he observed in November.

Jay Butler: Basically, when you take a look at sort of the monthly data, you're looking to see if the market is returning to a normal structure. Right now, the market is driven by foreclosures. Lenders foreclosing on homes runs around 30 percent, which is normally more in the 3-5 percent range. Properties being sold by lenders back from the market is running about 40 percent, and that's usually a couple of percentage.

The market is dominated by foreclosure activity, so you're looking to see if that is going to start changing. So far, it really hasn't. Now as we move for the next couple of months into 2010, much like last year, a lot of lenders put a moratorium on foreclosing homes at the end of the year.

If things don't pick up, people don't make their payments and other things, then we'll see more foreclosures. We will probably see some foreclosure activity slow for the next few months, and then pick back up probably March and April; much like we saw last year from a combination of people just giving up and walking away; or those who simply cannot make their payments anymore.

Knowledge: So what percentage of the market is foreclosures at this point in time?

Butler: Basically running about 36 percent on our foreclosed homes being shown as part of the resale activity. This is not a normal level. It's much lower. It's around 3-5 percent historically. Generally when you think of the housing market, you think about people buying a home to live in, the owner-occupant market. That's really a small segment of the market right now.

So the market has to move back to sort of a normalcy. In order to do that, we're probably going to see the numbers drop. As foreclosures wind down, people have to build back up their credit records; their willingness to buy a home having seen what's happened maybe to themselves or to friends and acquaintances. That home ownership may not be desired.

Knowledge: Well, that's a little less than last month though, isn't it?

Butler: It's seasonal. Usually the last few months of the year, resale activity is not real strong. Generally, we will not see a pickup in resale activity until March.

Knowledge: So what about median price?

Butler: Well, median price has picked up a little bit. It's $143,000. Now that's again down about 12 percent from a year ago, around 160,000. It's up a little bit from October to 140. A lot of times when people make a point that the recovery is coming evident because median price has stopped its freefall. Some of this is due largely — we're seeing more expensive homes being foreclosed on.

We had several above $2 million being foreclosed on. We had one that was a $6 million home that was foreclosed on, so there's a little go in there. Of course, if you've lost 50 percent of the value of your home, one or two percent increase per month means it's going to be a long ways before you see the value of your home get back to what you paid for it.

Knowledge: Dr. Butler, let's take a look at the cities and neighborhoods around the valley. Where are the hot spots right now?

Butler: Well, it depends on what you're looking for. People are looking for the investment. Buying a foreclosed property, the hot area was Maryvale, but that's sort of gotten picked over. Now they are moving into Glendale and some of the areas around that. On the other hand, people who are looking for owner-occupied homes, or a pick-up of the market, Gilbert and Chandler seem to be the hot areas right at the moment.

Knowledge: What's going on there?

Butler: Well, it's basically again the price. A lot of these homes in these areas were $400-500,000. You can now get them for $200-300,000. Again, it's the price is the name of the game.

Knowledge: Now what's happening with the markdown on foreclosed properties?

Butler: Right. The markdown is — we've been tracking this — that a home was foreclosed on at a certain price. Then it is resold into the market at a certain price. A year ago, the traditional markdown was about 25 percent. In some areas, like Maryvale, we're running over 50 percent.

That markdown is lowered quite a bit. Like we said, Ahwatukee is about 2 percent markdown because it's a popular area for people to live in. It's a good investment area to some degree and a popular area for people to own and live in homes. Now we're seeing similar, very slow down markdowns basically an 8–9 percent markdown in areas like Gilbert and Chandler.

Knowledge: I understand that the tony areas of town, the high end of the market, are being affected by the foreclosure problem now more than before. What are you seeing?

Butler: Well this is where the areas are now beginning to feel the foreclosure activity. Basically, we usually think of people who lose their homes through foreclosure are the ones who can't make decisions. On the other hand, when you see foreclosures at the high end, these are people who are leaders in the valley, lawyers, CPAs and other things, but they have the same issues. They stretched their income to buy this home.

They may not be getting the bonuses that they did. One of them may have lost a job. We know law firms are even laying off throughout the valley; or they simply are not getting the billable hours they used to get. So they're having as much of a reduction or impact on income as some other people may have.

The situation is for them, they probably have the resource to buy another home. Many people, in the previous foreclosures, lost their homes simply didn't have the resource to acquire another one. Moved into the rental market or moved in with parents or friends or other people.

Knowledge: What do you think, Dr. Butler, has there been any improvement for townhouses and condominiums?

Butler: They're still very soft. The townhouse/condominium market, its total inventory, makes up about 8 percent of our housing stock in the valley. It's never really been a popular lifestyle because housing — single-family detached have been relatively inexpensive. They only became popular when home prices began to accelerate rapidly, and you see this sort of in California.

In order for you to start buying homes, you usually enter it by buying a townhouse/condominium, and then you move up the ladder. Well that was sort of the premise here, but we're seeing that a lot of them foreclosed, and, of course, a good percentage of townhouse/condos are in the rental market. People can't sell them, so they're trying to rent them out. It's somewhat management standpoint an easier one because you don't have external maintenance.

Maybe a little bit better security than you would have on a detached home. We also have a lot of empty new projects sitting out there that has some influences on value because they've not been able to fill them. So it's going to be difficult. FHA is coming out with some new rules relative to lending in the townhouse/condominium market, which may make it even more difficult to sell condominiums.

Knowledge: Well, thank you very much for talking with us today Dr. Butler. In closing, can you size up the trend for the next few months?

Butler: Basically, the market is moving as it has been for the last two years. Now a lot of people like it, because they can take foreclosed homes from the lender, sell them to investors. People are buying them and flipping them and making money. This is, again, an opportunity that people — some people are taking advantage of. Now, in some areas, it's just getting overwhelmed. There are too many homes for rent.

Too many are being flipped or up for resale, and that's going to influence the values again. A lot of the goals and objectives of the newer investor may not be met so nothing is happening. We think foreclosures are going to pick up early next year as people just simply get frustrated. Walk away from their homes or simply feel that economically they're not going to get a job; or their job is not going to get any better.

So they might as well just move away from this home, and walk away, and have it foreclosed on and see what else they can do. Again, some may leave the valley and return to family. Others may move in together and other things; young people moving back home, etc. The early part of 2010, I think we're going to see some, still declines in the housing market. The general expectation is this market should show more sustainable signs of improvement towards the end of 2010.

Real Estate Economics Faculty