Research

What will energize the subdued real estate market?

A year ago the recovering Phoenix real estate market suddenly shifted to weak, and the market has remained down ever since. We asked Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business, what one word he would use to describe the market this fall. The word he chose was “subdued.”

2014-10-28

A year ago the recovering Phoenix real estate market suddenly shifted to weak, and the market has remained down ever since. In the podcast, we asked Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business, what one word he would use to describe the market this fall. The word he chose was “subdued.” 4:49 Listen: [podcast] Read: Research: A year ago the recovering Phoenix real estate market suddenly shifted to weak, and the market has remained down ever since. We asked Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business, what one word he would use to describe the market this fall. Mike Orr: Subdued is probably the word that I’ve been using for a long time now. Everything is below normal and not changing very much. Research: In this subdued market, both buyers and sellers are listless. Demand has remained weak, with single family sales dropping 5 percent and townhouse/condo sales rising just 0.6 percent compared to a year ago. On the supply side the numbers are similar. Although we had 28 percent more listings in September than we did a year ago, the August numbers had fallen 3 percent lower than the month before. Orr: The new home market is probably the area that’s feeling it worst. Because expectations were that that would start to show some significant growth this year. Not only has it not grown, it’s actually gone backwards a bit from last year. Research: Demand is low for a number of reasons, Orr said. Orr: You know, we've got the people who’re locked up because of the foreclosure history or short sale history. That will probably start to improve next year, so we’ll see if that makes a difference. Then we’ve got people who can’t buy, because the banks are being pretty strict with their lending guidelines. They’re probably more strict than the government’s asked them to be. Research: Following the financial crises in 2008, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which brought significant changes to financial regulation. Since then, lenders have been very cautious — many, in fact, have been even more restrictive than Dodd-Frank required. The result has been a numbing effect on demand. But that could all change, following the announcement this week by Federal Housing Finance Agency chief Mel Watt that newly issued guidelines will allow government backing of loans with down payments of as little as 3 percent. Whether the industry will take the chance, however, is still to be seen. Orr: Banks are concerned about it. First of all, they don’t want to take loans that are not going to be paid on time anyway because that’s not good for them. The second thing that they’ve become much more sensitive to is loans that after they’ve gone bad — Fannie and Freddie say ‘we bought this loan off you, but now we’re going to shove it back because we don’t think you did everything right when you took the loan out.’ Research: Some institutions have been slapped with penalties for making even small errors in the mountainous paperwork that goes along with mortgage lending. Some of them concluded they didn’t want to be in the business. Orr: They’re complaining that some of the reasons they’re taking those loans back are trivial, administration errors that have no significance whatsoever. They’re saying that if you’re going to be that petty about these pushbacks, then we don’t want to be in the business, thank you. I think that alarmed Fannie and Freddie and they said ‘okay, we don’t mean to be that harsh so we’ll lower down some rules if you do these things,’ which are egregious frauds really, ‘then we will push loans back to you.’ But if you just make a small admin error, that’s forgivable. If they can sort of encapsulate that idea in some strict rules, then that should help. Research: As we approach the beginning of November, seasonal dynamics set in, slowing the market even further until about February. The strongest sales months for the year have historically been in late winter and spring: February, March and April. 2015 might just be the beginning of a stronger market once again, as people who were unable to buy because they have foreclosures or short sales on their records begin to emerge from the penalty box. A surge of demand from that quarter could help a lot. But … Orr: I wouldn’t get over optimistic, yet. But I think there's some hope that 2015 will be a better year than 2014 because 2014 has been pretty disappointing. We actually have something like 5 percent more realtors than we had the year before. Probably anticipating that there would be plenty of business to go around, there’s actually a little bit less than last year so we’ve got more people trying to service fewer buyers and sellers. It’s not a particularly healthy situation.  

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