This is my column for this week from the Arizona Republic (permanent link).
The bottom of the Phoenix real estate market may be in sight — but, alas, the end is not near
When will the Phoenix real estate market finally hit bottom?
Believe it or not, I can answer that question with a high degree of precision: When the number of homes being added to the available inventory each month is generally lower than the number of homes sold each month.
But that’s a sleight of hand, isn’t it? I can’t say which month on the calendar will be the market’s nadir, I can only tell you what kind of market activity to watch for.
So here’s one way of looking at things. A newer suburban tract home in the West Valley is selling for $100 a square foot, on average. Practically speaking, this makes new home building unprofitable. Very few new homes will be built, so that source of new inventory is cut off for now.
Meanwhile, various loan workout programs are depleting the foreclosure pipeline. Where before a house might be offered as a short sale and then as a lender-owned home, now there will be an interregnum for the workout. What had been a gusher of lender-owed homes may slow down to a trickle, at least for the next few years.
Meanwhile, the low prices of currently available lender-owned homes are providing incentives for monied investors to come to Phoenix to snap up bargains. The nationwide economic slowdown might put the brakes on our normal in-migration patterns, but if people do move here, they’re going to be soaking up inventory as well.
So we should see some slowing in newly-listed homes, and we have upticks in demand. Are these enough to stop the general decline in home values in the Phoenix market? Ask me in three months.
But even if they are, we’re very far from being out of trouble. The loan workouts, particularly, may well keep home prices from plummeting. But because they will stretch out what in most cases will be an unavoidable foreclosure process, they will probably keep home prices low for years to come.
Buy and hold? No problem. Profit on resale? Don’t bet on it, not for a while.
Technorati Tags: arizona, arizona real estate, investment, phoenix, phoenix real estate, real estate, real estate marketing
J Boyer Morristown NJ says:
Looking for a bottom here in New Jersey as well. The financial crisis has made predicting very difficult though since we have some towns in the area were as many as 20% of the working adults are employed in the finance industry.
November 23, 2008 — 4:28 pm
Robert Kerr says:
When will the Phoenix real estate market finally hit bottom? … When the number of homes being added to the available inventory each month is generally lower than the number of homes sold each month.
We each have our own definitions. My bottom is when appreciation returns.
November 23, 2008 — 7:22 pm
Greg Swann says:
> My bottom is when appreciation returns.
Okay. My point is that we could be sitting at or near the bottom of the price curve for a long time — a span of time during which appreciation can wax and wane more than once.
November 23, 2008 — 7:51 pm
Michael Cook says:
Greg,
Based on what I am seeing in the markets overall, I think bottom calls are premature. People have been calling bottoms here for almost a year now and I think you guys are missing the big picture. Until people feel more comfortable about jobs, banks feel more comfortable about their own capital structure and inventory declines signficantly, I think its premature to call an end to declines.
I had been thinking that the bottom was six months to a year away, but I might even be moving that call back some time. Real Estate is certainly local, so feel free to call me a liar about Arizona, but I just havent seen any fundamental change in a positive manner.
November 24, 2008 — 9:54 am
Joe Strummer says:
I had been thinking that the bottom was six months to a year away, but I might even be moving that call back some time. Real Estate is certainly local, so feel free to call me a liar about Arizona, but I just haven’t seen any fundamental change in a positive manner.
I don’t think he was calling a bottom, he was simply describing what it would take for there to be a bottom, which means something like more buyers than sellers.
As for the bottom, it’s going to be long and flat – so long and so flat that several “recoveries” will occur within the bottom that people don’t really appreciate. That’s because until people have confidence that they’ve hit the bottom, they won’t buy in significant enough numbers to drive prices back up.
And people won’t buy in significant enough numbers because they know these “workouts” are phony-baloney. The workouts just delay the inevitable for lots of people who cannot afford the homes once the real rate kicks in.
The sad thing is about the workouts is that they don’t even help the homeowner. They just delay the foreclosure and keep his credit in the tank, possibly simply delaying a bankruptcy.
But, I guess, no party wants to go into an election on the wave of hundreds of thousands of bankruptcies, and no party wants to start an administration with hundreds of thousands of bankruptcies.
The end result is many years of un-remarkable growth and moderate to high levels of inflation. How sad.
November 25, 2008 — 10:25 am
Greg Swann says:
> I don’t think he was calling a bottom, he was simply describing what it would take for there to be a bottom
Check. Also describing why this particular arm of the price curve might go horizontal sooner than in, say, Detroit. We’re still a growth market, and we’re adding very little new inventory. Demand should eventually put us on a steady flat line, at least, sooner than it will in other markets.
Here’s more good news: As a part of their moratorium on foreclosures, apparently Fannie and Freddie are going to be taking a closer look at the homes they already own. Thoughtless people sneer at value-added by marketing, but if lender-owned homes were put into turn-key condition, they would be more likely to appeal to owner-occupants and not just investors. A larger buyer pool implies higher prices.
Sadly, I am forced to agree with your long-term analysis. There will be no significant growth in values in any of the former boom markets until the foreclosure inventory is fully absorbed. Delaying the process might be politically popular, but it will not lessen the pain.
November 25, 2008 — 10:43 am