Signs of Life in Phoenix Housing

What’s going on with Phoenix real estate. If you believe the realtor hype prices are going through the roof, supply is practically non-existent and buyers are trying to shove competitors aside to get what homes are available. As you might suspect the truth is a bit more nuanced.

To get some perspective on the market I pulled up the latest (Feb. 2012) report from Arizona State University’s business school. It paints a picture of a market on the mend, albeit in less than an organic mode, but one with wide price trends among the various sales components. Here are their headline observations:

Headlines:
• Overall single family home prices are now higher than 12 months ago:
o The median sales price is up 8.3% from $115,000 to $124,500
o Average price per square foot is up 4.1% from $81.07 to $84.36
• Pricing has moved higher since reaching a low point in September 2011
• Supply is down 42% compared with 12 months ago
• Monthly foreclosure starts rose in February 2012 but were still down 9% from February 2011
• Monthly foreclosures completions were down 52% from February 2011
• There has been a 72% reduction in the number of homes reverting to lenders at trustee sale
• Overall sales were 9% higher than in February 2011
• Single family home sales increased for
o New homes (up 26%)
o Normal re-sales (up 63%)
o Investor flips (up 71%)
o Short sales and pre-foreclosures (up 34%)
o HUD sales (up 9%)
o Third party purchases at trustee sale (up 15%)
• Single family home sales reduced for:
o Bank owned homes (down 40%)
o GSE (Fannie Mae, Freddie Mac, etc.) owned homes (down 58%)

As a point of clarification, all the comparisons in these bullet points are February 2012 to February 2011.

The number that I suspect jumped out at you is the 8.9% increase in the median sales price. Don’t start hyperventilating. Go to the article and you will find a couple of graphs that clarify the situation. You’re going to see that the sales price of new homes and normal resales in fact declined 2.2% and 22.2% respectively. Things aren’t quite coming up roses yet. The overall increase in sales price was driven by sales of foreclosed homes and investor flips, though to be fair the decline in normal resales is overstated due to the absence of sales at the higher end.

To put this another way, investors are crawling all over each other to get what for the time being is a dwindling supply of appropriate rental property and in the course of doing so are driving up prices. A few of them, probably the smart ones who got in early, are taking their money and running.

Nevertheless, the supply of homes for sale under $250,000 stood in February at a 25 day supply. You don’t have to be a student of real estate markets to understand that represents a considerable supply/demand imbalance. Assuming investor demand remains solid, an inordinate number of current investors don’t decide to cash in and organic demand builds, even slowly, it seems reasonable to expect prices to firm if not escalate.

Here is the summary from the ASU report:

After a slump during the third quarter of 2011, the Phoenix residential market has improved significantly for sellers and a swift recovery is now well under way. Supply of single family and condo homes is now very low, interest rates are low, the economy is showing signs of life and prices are still very affordable
compared with salaries and rental rates. However the supply of homes is now so tight that buying one is ften quite a struggle, primarily due to the intense competition for the few homes available for sale. Public sentiment toward housing remains relatively poor but is now starting to improve as signs emerge that the worst of the housing crisis is over. Loans are still hard to come by and a financed buyer is usually at a distinct disadvantage when competing against a cash buyer who is prepared to waive their appraisal contingency.

With prices that have declined from their peak in June 2006 more than almost anywhere in the US, we still have a large number of homeowners with loans that exceed the market value of their home. Following the launch of HARP 2.0 and the recent settlement between the states and five large lenders,these homeowners may have more of an opportunity to refinance into low interest loans. This will not resolve their underwater condition, but perhaps it will reduce their monthly payments and allow them to feel less financial stress. At the moment the success of these programs remains to be proven.

Given that wholesale reductions in loan principals appear unlikely, the main mechanism available to solve underwater loan problems is for prices to rise. Overall prices have already improved by some 15% since September 2011 and are currently on a strong upward trend. However that trend is fueled mainly by the rise in the prices of lender owned properties, auctioned homes and flips. Normal re-sales and short sales have yet to really participate in the improving price movement. It will take many months of strong improvement for the negative equity problem to abate, and there is little chance of pricing achieving the heights of 2006 in the medium term. However we now have a severe supply/demand imbalance that favors sellers and sets us up for the possibility of a significant rise in pricing at the lower and middle sectors of the market in the immediate future.

For what they’re worth, some observations:

• The significant amount of rental property acquired by investors over the past few years will probably constitute a shadow inventory for some years to come. As interest rates rise creating investments that are equal  or superior to their investment real estate, expect this class to look towards cashing out. Keep in mind that maintenance costs are going to increase as the properties age, so the overall return is probably going to decline.
• The still disappointing level of new homeowner buyers is discouraging given the attractiveness of prices, escalating rents and extraordinary interest rates. I suspect this has something to do with fresh memories of the crash as well as less than stellar incomes. A lot of potential owners have jobs but they aren’t pulling in the incomes they enjoyed before things went south. Discretion for them is the watchword.
• A truly organic market in which first time homeowners become move-up buyers and thus support the higher priced end of the market is probably years away. Consequently the upper end of the housing market will most likely suffer for some years to come.

It strikes me that the macro view hasn’t captured the dynamics of the Phoenix market and I suspect that’s true of other real estate markets as well. The data tends to be too sketchy and dated to adequately reflect granular changes. To that end, one should probably be leery of reports that attempt to paint too dire a picture of the market generally as well as skeptical about the need of or utility of large government programs intended to “cure” housing.