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Justin Baker's Blog

By Justin Baker | Agent in Phoenix, AZ

Phoenix Area Market UPDATE

As a real estate professional, I get asked about the market by almost everyone who knows I am a REALTOR.  Some sample questions:  Are homes selling in Arizona?  What is the market like?  Can I get a home that is listed for $250,000 for $225,000?  These are all great questions and I would like to summarize the market.  March 2011 represented the 5th highest sales volume in the last 5 years and April was slightly lower than March, however April 2011 represented the 10th highest sales volume in the last 10 years.  Inventory levels are down by 22.5% from one year ago and a downward trend in inventory levels began in December 2010 representing a current 18.7% decline since December 2010.  Our current inventory level is the LOWEST since March 2009 wich is only  a 3.7 month supply of inventory (MSI).  This MSI is well below the 4 months of inventory which signifies a sellers market exerting upward pressure on pricing.  Foreclosures continue their 17 month downward trend with a 33.2% decline from teh high of 2009. The demand remains steady due to the average and median sales price stagnant or flat over the last year creating great deals for buyers.  Likewise, buyers that foreclosed or short sold 3 years ago are NOW BUYING, creating a new demand.  So, if you are a buyer, get your offer in quickly.  We are seeing multiple offers over list price on properties, specifically under $400k. -Summarized from the ARMLS by JUSTIN BAKER

Comments

By Carmen Brodeur- Top 1% Realtor,  Thu Jun 2 2011, 22:15
These numbers will probably shock people because of all of the inaccurate information that is out there. I tell clients everyday that the Phoenix market really is coming back up and we have seen some real improvement. I'm glad that you posted actual stats.
By Carmen Brodeur- Top 1% Realtor,  Thu Jun 2 2011, 22:17
These numbers will probably shock some people because of all of the inaccurate stats and rumors that are floating around out there. I am constantly telling people that the market really is improving and that there are a lot of buyers grabbing up the good deals quick. I'm glad that you posted these stats.
By Justin Baker,  Fri Jun 3 2011, 09:18
Hi Carmen, Thank you for the comment. I speak with many professionals representing buyers and investors. I also like to present what is currently happening in our market. You nor I can predict the future, but was can relay what is current!
By NonRealtor,  Fri Jun 3 2011, 09:56
Hi,
Do you have any stats that show the number of delinquent mortgages in Phoenix? I heard that 4.1 million people were seriously delinquent on their mortgage payments. I'm guessing a bunch of them are in Phoenix. Wait another year to buy, prices are declining. Good Luck
By Justin Baker,  Mon Jun 6 2011, 10:02
NonRealtor: FIRST, have the dignity to post your name and picture if you with to have an opinion. Second, Notice of Trustee Sales are DOWN significanlty from a high of 325 per day in 2009 to 160 per day currently. THIRD, people like YOU are the reason I WRITE MY BLOG. STOP 'hearing' things and read about our LOCAL CONDITONS. Read my most recent BLOG: Buyer Beware! You, without a doubt have heard this term before. The phrase is normally used to make sure the buyer understands he/she has to investigate all terms and conditions of a sale. HOWEVER, I am going to use this phrase in a different context. I am saying BUYER BEWARE because of the ‘MARKET’ conditions. Our local Phoenix Metro market is NOTHING like the National real estate market. Our local market has seen a consistent reduction in inventory making purchasing a good home frustrating for most buyers. If you are a buyer in our current market, you must be aware of our supply levels. You must understand our demand/supply ratio for Bank Owned/Foreclosure homes and as well as our total supply. I am not wanting to scare anyone, rather I want you to know and understand our current market conditions. If you talk to buyers or anyone else working with buyers, you will hear an underlying principle that they had to submit multiple offers and were in a ‘highest and best’ competitive offer situation for most of the homes they preferred. Most of this can be attributed to the lower supply of foreclosed homes and the high demand for foreclosed homes. At this point in time, there is only a 1.1 month supply of bank owned/foreclosed homes on the market. Likewise, our overall inventory of units for sale in the ARMLS is at 3.2 months supply. Just a quick note: February of 2009 we had an 11.2 month supply of homes. Just 6 months ago, we had a 6 month supply of homes. One year ago, we had 40,960 units for sale in the ARMLS. Today we have 31,227 homes for sale. Unfortunately, this # is not accurate because it includes short sale homes that are ‘Active with Contingency’ (AWC). In basic terms, this is a short sale listing with a contract submitted to the bank. If you take out the short sales classified as ‘AWC’, there are only 23,407 units for sale with 13,483 pending and 9,963 units closed last month. THIS IS NOT THE FIRST MONTH I HAVE DISCUSSED OUR REDUCTION IN INVENTORY! Need an expert representing you that KNOWS THE MARKET CONDITIONS? Call me today at (480)330-7426.
By Justin Baker,  Wed Jun 8 2011, 14:32
I am so dumb! Even this guy thinks like me...http://seekingalpha.com/article/273255-signs-of-a-phoenix-housing-recovery-good-for-homebuilders
Signs of a Phoenix Housing Recovery Good for Homebuilders
In my opinion there are strong indications that the long awaited housing recovery is about to begin in the city that became the poster child for home building excess – Phoenix, Arizona. Things are changing so fast, this new outlook is really only clear to those using the most recent pricing and inventory data from services such as the Cromford Report, which updates information daily, and the latest mortgage statistics from the MBA.

Careful calculations show the once scary "Shadow Inventory" in Phoenix is no longer as large as many thought and what remains can effectively be cleared in about a year. And just as important, short term defaults haven't increased indicating the pipeline of distressed homes isn't refilling at the front end from strategic defaults, which could easily have increased after the large price drop last year.

Phoenix Home Prices Are Stable

While other areas of the country are reporting price weakness this year, Phoenix is different. As the chart from the Cromford Report indicates, after the six month price decline from June to December of last year, the median price for greater Phoenix has been flat for five months. On important reason is the shrinking inventory of homes for sale.


(Click to enlarge)
Phoenix's Shrinking Inventory

The Phoenix inventory of homes for sale has contracted 25% over the last five months until only 32,000 homes are now listed. At a monthly sales rate of just under 10,000 homes, "months of sales" last week stood at only 3.5 months - a number considered by most as low enough to indicate "recovery mode." This small and "getting smaller" inventory – composed of 55% distressed homes and 45% normal - should help produce price stability over the next 12 months as the distressed inventory is worked off.

Most people operate on the fixed idea that housing cannot recover until unemployment comes down and more buyers appear. This isn't universally true, however. It is an old observation that after a long price decline in any market (stocks, real estate, bonds), prices often begin to recover, not from an increase in demand but from a dearth of supply. This means that instead of more buyers pushing prices higher, prices are essentially "pulled" higher by an inventory "vacuum" or a lack of homes for sale. Indications are pointing to this happening here.


(Click to enlarge)
Phoenix's Shadow Inventory is Fading in the Sun

How about the great "shadow inventory" looming over Phoenix; that huge, uncounted pipeline of delinquent homes still working toward resolution or foreclosure? Let's define shadow inventory as all homes over 90 days delinquent plus mortgages in foreclosure plus all bank owned REOs not yet listed. As the graph below shows, the first part of that definition – the delinquent loan inventory - is rapidly evaporating in the desert sun. The percent of delinquent loans for the state of Arizona (of which Phoenix accounts for 66%) has declined from 7% to 4% in only fifteen months. At this rate, the straight line rate of decay points to the first component of the shadow inventory being depleted within one year - by June 2012!

This "visual forecast" is confirmed by a more detailed, mathematical calculation as follows:

Approximately 48,000 homes in Arizona are 90-days or more delinquent but not yet in foreclosure. Greater Phoenix represents about 66% of Arizona, so we estimate about 32,000 90+ day delinquent homes in Greater Phoenix. I estimate about 10% of these loans will be modified successfully leaving 28,800 to be resolved by short sale or foreclosure. At the moment, each month in Greater Phoenix there are about 1,700 successful short sales and about 5,200 trustee sales of which about 1,600 are sold to third parties and 3,600 revert to the beneficiaries. So I estimate that the 28,800 loans will become 7,100 short sales, 6,700 trustee sales to third parties and 15,000 REOs. There are currently about 28,000 already in foreclosure, so these will generate another 6,900 short sales, 6,500 trustee sales to third parties and 14,600 REOs.

There are some 10,400 REOs already owned by not yet listed on MLS. So the total number of REOs including those not yet listed, those that will emerge from existing foreclosures and those that will result from delinquencies yet to receive a notice of trust sale is:

REOs not listed 10,400

REOs from pending foreclosures 14,600

REOs from 90+ day delinquencies 15,000

Total 40,000

The annual sales rate for REOs through ARMLS is 42,633, so the total of 40,000 represents just over 11 month's supply which again presents us with a target date of June 2012.

Phoenix Home Prices

As the inventory of distressed homes is worked off, at some point there should be a price surge as investors begin to notice what is happening and start competing to scoop up the remaining bargains before higher prices carry the opportunity away. I think this price surge will begin in about six months. After the surge, prices should continue upward in a constant positive trend.

While the foundation for a coming price recovery rests on simply having a very, very low supply of homes for sale, prices will have an additional upward bias for a completely new and refreshing reason.

Everyone knows that the sale of a large number of foreclosed homes hurts the value of all homes in an area. For example, according to the Cromford Report, Phoenix had 9,844 home sales last month. Of these sales, 20% were short sales, 45% were REOs and 35% were normal sales (see chart). While the average size home in these categories was about the same, the average price per square foot wasn't. Normal homes sold for $112 a square foot while short sales averaged $74 a square foot and REO sales were $59 a square foot. From this it's easy to see how distressed sales lower the average price - in this case $83 per square foot - affecting the value of all homes in an area.


(Click to enlarge)
Few know, however, that an opposite and positive effect can occur too. As the distressed inventory declines the average or median price rises even if the sales price in all three categories stays the same!! It's the changing mix of REOs, SS and Normal sales that makes this happen. In fact one of the reasons Phoenix's median price has been relatively flat this year is because distressed homes have fallen from 73% to 65% of the total (see chart). Theoretically, if short and REO sales went to zero, the median price could rise from $83/sf to $112/sf - and remember, that's with no change in the selling price of any home.

Don't think this is "sleight of hand" mathematics; the price rise is just as real as the price drop was when distressed homes dominated. Once distressed homes are gone, homes throughout Phoenix should be valued quite a bit higher just from this effect alone. Add in a price surge due to "low supply" and together they're a powerful one -two punch. This will go a long way to help reduce the negative equity problem that exists on paper. It's also good news to homebuilders who will no longer have to compete with all that underpriced product.

New Home Construction

Since what is happening in Phoenix is probably also happening in other states that have trustee foreclosure sales like Arizona - states such as California – this more positive outlook in Phoenix may foreshadow a general turnaround in the broader housing market and home construction. This conclusion seems to be indicated by similar target dates in the delinquency decay patterns of the other five states shown in the third graph.

It is my belief that once the distressed inventory is depleted, the number of willing home sellers at current prices will remain low and stay low even after prices rise for a while. To fill the supply large numbers of new homes will suddenly be needed and we think people (builders) will be surprised at how quickly this will occur. We could easily see a demand nationally for over 750,000 new homes in 2012 and a million plus in 2013. Since there is a considerable lead time in setting up to build homes, I think many homebuilders will be caught flat footed.

Good News for Homebuilder Stocks

I think there is finally a strong fundamental reason why home building stocks [D.R. Horton (DHI), KB Home (KBH), and Toll Brothers (TOL)] and the homebuilding ETF (XHB) have probably made bottom and will not experience another large price dip. I think homebuilders are facing a new dawn and much brighter future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
By Justin Baker,  Wed Jun 8 2011, 15:31
HARVARD must be wrong too...""With inventories of new homes at historic lows, a turnaround in demand could quickly result in tighter markets," -Harvard: Real Estate Recovery Hinges on Return of Demand
By Helen Oliveri,  Wed Jun 8 2011, 15:33
Great market update Justin.
By NonRealtor,  Fri Oct 21 2011, 15:50
Hi Justin,
Thank you for the response to my question.

So there are 48,000 homes in Arizona are 90-days or more delinquent

So we agree, Wait another year to buy, prices are declining, right?
By Justin Baker,  Fri Oct 21 2011, 16:37
Hello NonRealtor,
You are in IDIOT if you wait another year to buy in many Phoenxi Areas! NO WE DO NOT AGREE. Why?? Please review: The following are ALL TRUE or FALSE per the CROMFORD REPORT’s Mike Orr's latest October review of the Phoenix housing market:
1)A glut of foreclosed homes overhangs the market
2)A new wave of foreclosures is coming
3)Shadow inventory is big, scary and out to get you!!!
4)Prices are still declining
5)Short sales take forever and rarely succeed
6)Renting saves money compared with buying a home
ALL are FALSE. Please also review: The Phoenix Housing ‘End Game’

Michael James McDonald writes: Three months ago I wrote Signs of a Phoenix Housing Recovery Good for Homebuilders, which presented evidence that a Phoenix, Aris., housing recovery would start next year. Data flow over the last three months continues to confirm this forecast. This has made us look more closely at a possible Phoenix “end game.” The “end game” is the specific sequence of events that should occur as the Phoenix market transitions from distress into recovery. The transition should not be a gradual change but events should occur very rapidly and in a particular sequence. We think this is important for investors to know.


Why Phoenix was Chosen

Phoenix was chosen for this study for two reasons:
1.We believe Phoenix is a proxy for many distressed markets throughout the country and so what’s happening in Phoenix is probably a good indicator for other regions.
2.The depth of data needed to completely analyze and wrap one’s mind around the problem is available. In this I have to thank Cromford Associates LLC, licensed by ARMLS to provide subscribers and all 30,000 agents with detailed resale and foreclosure data, the “Information Market”, which counts and categorizes on a daily basis the status of every piece of distressed property in Maricopa County, and Corelogic, which also provided vital distressed market data.

The Probable Sequence of Events of the Phoenix “End Game”

Using this data we think the following forecast and “end game” is highly probable for Phoenix:
■The inventory of distressed homes in Phoenix should deplete to normal levels by sometime next year – probably by mid-summer.
â– At that time sales of distressed homes should fall off rapidly leading to an almost immediate 20% rise in the median home price.
■This sudden price “pop” should not happen everywhere or at the same time. It should occur intermittently, region by region, throughout Maricopa County as distressed inventory is depleted at different times for each region. This price “pop” should begin first with less expensive homes and then move upward.
■This price rise should drop the number of homes with negative equity, further slowing strategic defaults and unfreezing thousands of marginal equity homeowners. This process – price rise and unfreezing – should become “self-sustaining” and help fuel the recovery and broaden the market.

It all starts with distressed inventory depletion.

Phoenix Distressed Inventories are Declining in All Categories

Both real and shadow inventories of distressed homes in Phoenix, continue to rapidly decline.These inventories are:
1.Loans delinquent 90 days or more, which have not yet received a Notice of Trustee Sale (NOTS)
2.Delinquent loans that have received a NOTS
3.Accumulated Bank or Agency Owned property called REOs

The graph below plots inventory categories #2 and #3 from November of 2010 to September 2nd of this year for Maricopa County:



The purple area represents the number of homes with notices of Trustee Sales (#2). The three colors at the bottom represent different categories of REOs (#3). Inventories #2 and #3 have declined from 52,000 to 32,000 homes or 40% in only ten months! This rapid decline has occurred from a combination of short selling, loan adjustments, third-party purchases at trustee sales and finally, REO sales. If it continues at this same rate Maricopa should be down to only 12,000 distressed homes by next summer.



This drop in inventory is often met with the comment: “Yes, but this decline is simply because banks, for a variety of reasons, have slowed their issuance of Notices of Trustee Sales. These numbers obscure the huge, growing inventory of delinquent loans yet to receive a NOTS (#1 inventory).”

This comment, however, is incorrect; there is no inventory build-up in category #1. Using data from Corelogic we estimate that category #1 (90 day plus loans without a NOTS) declined from 42,000 to 34,000 between May of last year and May of this year. This is very important. Data is showing all three categories of distressed and shadow inventories declining and declining rather rapidly and, at a straight line rate of decay, project depletion by mid next year.

Watch “Distressed Inventory” not “Distressed Sales” However, if this is true, it begs an obvious question. Why, after such a rapid decline in distressed inventories, have distressed sales as a percentage of total sales stayed so high? We see this fact plotted in the next graph.



This graph shows that for the last six months normal sales (center line) stayed between 30% to 35% of total sales, while total distressed sales (REO and Short) remained between 65% and 70%. This confirms that distressed sales have remained extremely high even as distressed inventories dropped 40%!

However, we think this is what is fooling most people. They see distressed sales remaining extremely high and, since they expect a recovery to be a long, gradual affair, believe the recovery must be a long way off. But we think they’re expecting the wrong thing and looking at the wrong item. They’re looking at distressed sales and not the declining inventory these sales are coming from. Our model says distressed sales should do exactly what they’re doing – stay high up to the very end, then plunge.

Our Model

Our model treats housing like a fluid flow problem with distressed homes moving from one reservoir to the next and bank foreclosure departments acting like pumps, moving the houses along. This model says that distressed sales will remain high (and might even increase) right up to the very end. Then the transition from distress to recovery will occur suddenly, much like how a pump sputters and spits right as it runs out of water.

At this point – the point where inventory depletes and distressed sales rapidly fall – the median price should “jump” and the “end game” sequence listed above should begin.

Why the Median Price will “Jump”

One point that I want to make very clear is why the median and average home prices will “jump” when distressed sales rapidly decline at the very end. It’s rather interesting. Let’s look at the current situation.

In mid-August in Phoenix, REOs accounted for 44% of sales and sold for an average of $59 per square foot (sf). Short sales were 23% of sales and went for $74 per sf., and normal sales were 33% and sold for $105 a sf. A rough mathematical average of these three categories is $78 per sf., which is pretty close to the actual average for Maricopa County in August of $79 per sf.

Now, let’s assume that distressed inventories suddenly deplete and distress sales just as suddenly decline to 25% of the total. Even with no change in the selling price of any home (just changing the mix of normal and distressed sales) the average price per square foot should suddenly rise to $93, which is a 20% increase. If distressed sales became only 5% of sales, the average price would jump 32%. This change in the paper value of all homes would have very positive repercussions, especially for homebuilders.

Other Opinions

Other Phoenix experts see a similar picture but have their own particular ideas about it. In a phone interview I had with Mike Orr of Cromford Associates, he said, “There is a widespread belief that a huge shadow inventory looms over the housing market caused by the robo-signing scandal and foreclosures delayed by the banks and/or the judicial system. However careful research shows that in non-judicial foreclosure states like Arizona, the bulk of the foreclosures tsunami is already behind us and the supply of lender-owned homes is likely to fall away much faster than most people realize.”

In a phone call I had with Tom Ruff of “Information Market” he said he thinks the Phoenix market is about 75% of the way through its housing problem, which he considers began in mid-2007. He cautions, however, that some of the inventory may be around longer than expected, held there by individuals gaming the system i.e. using legal challenges and other techniques to impede the liquidation process to gain free rent or some financial advantage.

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