Research

Phoenix real estate: A market of many stories

The summer resale season in the Phoenix real estate market has been brisk, with about 10,500 single-family homes changing hands in June. And, for the fourth consecutive month, foreclosure-related sales as a percentage of the total market have fallen. But W. P. Carey Professor Emeritus Jay Butler cautions that it’s still too soon to assume that this positive trend will continue. And even though the median price is holding, it may fluctuate down as recovery proceeds. Butler said that a rise in prices may trigger a wave of re-sales as owners and investors attempt to turn a profit on the foreclosed properties they have acquired. That bump in supply could push prices lower. These dynamics and more make Phoenix real estate not one story, but many.

2011-07-12

The summer resale season in the Phoenix real estate market has been brisk, with about 10,500 single-family homes changing hands in June. And, for the fourth consecutive month, foreclosure-related sales as a percentage of the total market have fallen. But W. P. Carey Professor Emeritus Jay Butler cautions that it’s still too soon to assume that this positive trend will continue.

And even though the median price is holding, it may fluctuate down as recovery proceeds. Butler said that a rise in prices may trigger a wave of re-sales as owners and investors attempt to turn a profit on the foreclosed properties they have acquired. That bump in supply could push prices lower. These dynamics and more make Phoenix real estate not one story, but many.

Q&A:

Knowledge: I noticed that foreclosures continue to dip a bit, and I understand it’s the fourth month in a row that we’ve seen a little decline. What do you think?

Butler: It’s a big unknown because we’ve seen this decline before. We saw it last year, and we saw it the year before. The issue is, does it begin to pick up, which would be in the next couple of months given the historical thing. So it’s really the next few months are going to be the key. Pre-filings are down. They’ve been slowly coming down, although during the last couple of months they began to stabilize. The other thing is you simply sort of expect that we’re running out of homes to foreclose on.

Knowledge: You would think.

Butler: Yeah you would — we foreclosed over 120,000 homes in the valley.

Knowledge: Which is what percentage of the housing?

Butler: About 12 percent.

Knowledge: 12 percent of housing stock.

Butler: Yeah, single family only. We’re not throwing in the townhouse/condos.

Knowledge: Right. I also noticed that the Obama administration came out with some news the other day about assistance for unemployed homeowners, an extension of the amount of time that they have before a foreclosure actually goes through. I was wondering how significant this will be and what impact do measures like this have on the market when they have the effect of lengthening the time that home is in limbo?

Butler: Much of this is unfortunate because most people felt by now the job market would be much better, and so we wouldn’t have had to worry about these issues. The other is much like the previous programs, not a lot of people got involved because they’re not certain they exist.

They’re not certain who to go see. They’re not certain whether they qualify, because the qualifications really are run through the respective lending or service company. One suspects, much like the past programs, some will benefit from it, but great numbers are not expected.

Knowledge: Another thing that we’ve observed right here in this local Phoenix market is that some of the big apartment or condominium projects that have been foundering in foreclosure are beginning to come back on the market. What does that signify? And is this a bright sign or what?

Butler: Well the big market right now is the selling of apartment projects, especially those that have been upgraded because they were originally apartments, then condos and now back to being apartments again, and you can buy them real cheap. You can buy a Class A apartment, instead of paying $80,000 or $90,000 a unit, you can pay $20,000 or $30,000 a unit or $40,000 a unit; so you can rent it at a very competitive rate.

There’s a lot of belief in the rental market right now from single family on up to the massive condo towers. The premise here is people who lost their homes have to live somewhere. Now it doesn’t mean they have to live in Phoenix. Maybe more people are leaving, because the key is jobs, and we still don’t have jobs.

In other areas, the automotive industry is expanding. Even farming is now become a successful industry once again. So there’s sort of the sense that in some markets, even within the valley, rental is doing okay, other sectors aren’t. There’s a feeling by some larger investors, especially in the single family market, that it’s getting over competitive. We’re getting over supplied; the demand really isn’t there.

What we’re seeing, we’re seeing for lease signs for the first time in a lot of areas. In talking to people who own a lot of rental properties over the years, they’re saying how competitive it is. The cheaper foreclosures — the ones that have been foreclosed on and bought in the last few months — can again offer cheaper rents than previous properties.

Much like if you buy a cheap Class A apartment, you can be more competitive on the rents than the older ones. What a lot of people are describing right now is a game of checkers. We’re moving people around the board, but we’re not adding any more people to the board.

Knowledge: As people leave the area and foreclosures come on the market, there’s still going to be this glut of available housing, right? And what happens to our construction sector then?

Butler: The construction sector has not come back yet. We may even see smaller numbers this year than we’ve seen for the last couple of years. Homebuilders are being very competitive in looking at specific market niches; age restricted, in-fill projects, entry level in expensive homes and green across those three.

This is a thing that they’re really pushing. The biggest competitor new home builders have is the old foreclosed home that they built a couple of years ago. They’re trying to convince people that newer home is greener, so it’s more environmentally sensitive and way cheaper to operate.

Knowledge: Well what about median price this month? Butler: Median price is holding in there, and this is where you get this issue of a hidden inventory, the shadow inventory that will be dumped. I think there’s an inventory, but I don’t think it’s ominous.

We’ve found that over 60 percent of the foreclosed homes have been resold back to the market; takes four to five months to do that, so you have some inventory. You have a bunch of homes that are just junk. We’re even seeing homes that were foreclosed on in early 2007 are now being sold back in the marketplace because they’ve become cheap enough. The lenders or investors will accept the deal.

Knowledge: Wow.

Butler: I think there are some homes out there, especially in the higher-end priced homes that have not been foreclosed on because the lender isn’t certain what to do with them either.

I also feel that a lot of people who bought foreclosed homes, once home prices begin to move up — because they sat on them for three-four years — they’re going to move to lock in their profit unlike the last time; which could mean, we could bring a lot of homes back to the market to be sold; which could have an impact on the median price. Just as it begins to emerge, pressure may be brought to bear as people try to make their expected economic return.

Knowledge: And that would drive price down a little bit.

Butler: It would move prices back down depending on how many come in; what neighborhood they come into. I refer to this as cramming an elephant through a keyhole. There are a lot of people who thought that by now the market would be better. They could start to sell their homes and make their expected economic return.

Knowledge: It’s a really complex market. Have you seen anything this complicated in past years?

Butler: It’s not complex or complicated. It is a market of many stories. Those who are older will remember the Naked City. At the end of the Naked City, they said “there are 8 million stories in the Naked City. This has been one of them.” That’s what we really have here. We have some markets — some like the East Valley — doing somewhat better.

The West Valley, is not real strong. Pinal County: not good at all. Some price homes are doing better than others. Investors are doing better than others. So everybody wants the answer, and there isn’t one. There’s a set of answers, and that’s what makes this thing really difficult to get your hands around.

Knowledge: Okay, well thanks very much Jay.

Butler: Okay see you next month.

Real Estate