Market Analysis

Yesterday I was working on my sprinkler system, trying to repair an underground leak and a timer which was shorting out.  After a couple of hours of digging, testing, replacing emitters, and generally figuring out what I was going to need, I jumped in the car & headed the block and a half to Ace Hardware…

… only to find Ace was closed.  No signs about their status, and no apologies.  There was one sign referring people to the next closest Ace Hardware, and another sign from PepsiCo saying they hadn’t met the terms of their lease.  Hmmm.

10 minutes later I was at Lowe’s, with the required parts in hand.  Today my sprinklers are working like new!

I’ve been getting my hair cut at a local salon for the last couple of years - it’s a little bit more fru-fru than I would typically use, but they do great work and their men’s haircuts are only a couple dollars more than a barber shop.

This morning, at the request of my better half (that’s when I know it’s time), I called to set an appointment for a haircut.  Unfortunately, nobody answered the phone - the computer voice said it was disconnected.  That seemed strange, so I drove over there to find the store completely shut down - doors were locked and the interior was completely stripped.

Is the bad housing market and (possible) recession - as if there’s any doubt we’re in a recession - starting to hit home for Middle America?

Your wondering out loud Realtor,

Chris Butterworth

It seems like everybody’s written something lately about Lehman Brothers, Merrill, Bear Stearns, or AIG.  (not to mention Washington Mutual and Wachovia, both coming soon.)  Each one of these companies is huge and complex, and their undoings’ effect on our market are not entirely understood yet.  And that’s just independently - taken together it’s even more complicated.

I don’t pretend to be smart enough to answer all the questions.  In fact, I’m not even sure why some of these companies are getting government bailouts while others are being allowed to fail.

In steps Barry Ritholtz with an explanation understandable to the layperson:

Lehman Brothers was like the little kid pulling the tail of a dog.  You know the kid is going to get hurt eventually, and so know one is surprised when the dog turns around and bites the kid.  But the kid only hurts himself, so no one really cares that much.

Bear Stearns is the little pyro - the kid who was always playing with matches.  He could harm not only himself, but burns his own house down, and indeed could have burned down the entire neighborhood.  The Fed stepped in not to protect him, but the rest of the block.

AIG is the kid who accidentially stumbled into a bio-tech warfare lab…  finds all these unlabeled vials, and heads out to the playground with a handful of them jammed into his pockets.

Personally, I’m glad to understand that.  But it doesn’t make me feel any better about what’s on the horizon in AIG’s portfolio…

Your can’t wait to get through this mess Realtor,

Chris Butterworth

Once again I find myself pulling information from John Mauldin’s “Outside the Box” e-letter. (and once again I recommend you sign up for this free service!) This week John printed an essay written by David A. Rosenberg entitled “The Elusive Bottom.” Rosenberg is the North American Economist for Merrill Lynch.

Rosenberg’s essay is lengthy and detailed, and I found it very interesting. He compares our current environment to different periods in history, and makes a case for when our recovery will begin and what things will trigger a recovery. Of course, I focused in most closely on his points related to real estate – a couple of which I wanted to share.

A. He writes: “Home prices in this country on average rose 20% per year for six years. That has never happened before. When you take a look at home prices in real terms, they’re still more than 30% higher today than they were when this mania morphed into a bubble back in 2001. … Make no mistake there is going to be more deflation in home prices ahead…”

B: “I doubt that anything is really going to bottom, including the financials, until we’re convinced that house prices have hit bottom. … When I take a look at (total units for sale), it’s more like a 17-month supply. I have to see that number cut in half. I have to see it down below eight months supply before I’ll be convinced that home prices don’t bottom.”

These points are interesting to me because they deal with the housing market at the national level. And while I don’t want to sound harsh, I don’t really care about the national level – I’m more concerned about the local level. So let’s take a look at his points from a local perspective:

A. Home prices in Phoenix did not rise 20% per year for 6 years. They rose their historical average in 2001 and 2002, a little faster in 2003 (10-15%), and then they basically doubled between 2003 and 2006. I’m looking at homes listed for sale today, and homes that sold in 2002 for $175,000 are on the market for $275,000. If the home had appreciated 5% per year, it’s current value would be $235,000. It’s very possible, then, that Rosenberg is right on this point.

B. Today there are 52,515 Active Listings in the MLS. (43,019 Single Family Residences). The MLS shows 6,228 as having sold in the last 30 days (5,577 SFRs). This puts our inventory level at 8.4 months (7.7 for Single Family Residences.)

Does this mean that we’re at the bottom? Or because we’re better off than the national averages, does this mean Rosenberg would want to see our numbers at 4 months inventory, rather than 8? And what about the differences I pointed about last month regarding various price ranges?

It’s interesting to think about, even though we don’t really have any answers.

Your wishing his magic 8-ball really predicted the future Realtor,

Chris Butterworth

Distance equals Time plus Gas.

The suburbs have always been a little bit less expensive than the center of town – they kept building the outskirts of town further away, and people kept buying because the houses were more affordable.

This has been going on for the last 50 years. A new neighborhood is built “way out there”, but people realize they can get a 4 bedroom home for the same price as a 3 bedroom, and they rationalize that the commute isn’t all that bad either. Over time, the neighborhoods “way out there” build up all the necessary infrastructure, and become part of the town, while new neighborhoods are being built “way out there.” Believe it or not, McCormick Ranch (Scottsdale) in the 70’s, and Arrowhead Ranch (Glendale) in the 80’s were considered “way out there” when they were built!

How much will the “new” gas prices affect this cycle?

Perception. Gas prices are high and going higher. Anyone who buys “way out there” is going to spend a fortune on gas. They’re going to kick themselves for moving that far away, and they’ll probably want to sell and move closer.

gas seemed very affordable this weekend.

Reality. If you add 10 miles each way to your commute, you’ll drive 5,000 extra miles for the year. (assuming you commute 5 days a week, 50 weeks a year.) If your car gets 24 mpg, you’ll need to buy 208 extra gallons of gas each year. At $4.25 per gallon, that’s $884 per year, or $73.67 per month.

How does $73.67 per month translate into your monthly expenses? Well, you’d need to reduce your mortgage by $11,655 (at 6.5%) to offset the difference. One way to reduce your mortgage is to pay $12k less for the house in the suburbs you’re thinking about buying. Another option is to carpool &/or telecommute to help offset the difference.

Will higher gas prices affect the suburbs? Maybe. But I don’t think they’ll be the nail in the suburbs’ coffins anytime soon.

Your still doing business in the suburbs Realtor,

Chris Butterworth

I pulled some numbers for the northwest valley, and it’s clear to see how the market is different depending on which price range you’re looking at. It’s also interesting to compare the cities with each other; I’m surprised by the results (pun intended!)

Northwest Valley by City

Northwest Valley by Price Range

Definitions & Variables – Here are the criteria I used for these statistics:

Northwest Valley: Glendale, Peoria, and Surprise

Single Family detached homes only

Sold: homes which closed escrow between 7/11/08 and 8/10/08.

Inventory: how many months’ worth of homes are available at the current sales pace.

I find exercises like this interesting because the numbers don’t tell the same story as what’s being reported by the media, or by what an individual seller might be saying. Overall, the Northwest Valley appears to be a fairly balanced market – maybe just a tad in favor of buyers, but not too out of whack. In addition, the price ranges under $400k also appear moderately balanced. Yet the media is reporting doom and gloom across the board, and if you happen to talk with a seller whose home has been on the market for a year, you’ll hear a different story!

The fact that the numbers tell me a different story from what my local news tells me makes me think that we’re at least headed in the right direction. Nobody knows when we’ll be back to “normal”, but it might not be as bad as some folks would have you believe..

Your looking forward to “normal” Realtor,

Chris Butterworth

Is it legal? Is it morally acceptable? Is it ethical? Would I be comfortable if the newspaper printed a story about it? And after all is said and done, is it the right thing for me & my family?

I had a conversation with somebody this week which sent shivers down my spine. He told me about his plan, and asked my opinion.

Here’s his plan.

He bought his house in early 2006 for about $400,000, putting down 10% and financing $360,000. (assuming a fixed rate mortgage at 6.25% gives him a principal & interest payment of $2,217.) His home is worth about $250,000 today, judging by a few of the same floorplans currently for sale. He believes that if he’s patient and negotiates well, he might be able to buy one of those homes for $225,000. (that remains to be seen, but let’s believe him for the time being.) If he made a 10% down payment on that house, he would finance $202,500 with a monthly payment of $1,247.

What if he buys the new home, which is basically the same as his current home. Then, once he’s moved in, he’ll stop making payments on his current home, and just give it back to the bank. His credit will show a foreclosure, but he’s not planning on moving anytime soon. His car is new, so he won’t need to finance a car for a few years either. The rest of his credit accounts will remain in good standing.

Looking to the future, it wouldn’t matter what the house is worth, or what time period you’re considering, since both homes will always be worth about the same. $300k? $500k? $700k? Either way, he will have about $150,000 additional equity in the home, AND he will be paying about $1,000 less per month on his mortgage payment.

Here’s my opinion.

Wow - those are staggering numbers. I don’t think it’s illegal, although I would consider consulting with an attorney before doing this, as I’m not sure if the bank has the right to sue you - if you can’t prove the inability to make the mortgage payments, could the bank win a judgment against you for the $150k? (maybe a breach of contract lawsuit?) As for morally / ethically / front page of the newspaper - I don’t like it, but it’s not my choice to make. I’m not a moralist, and I don’t claim to be perfect, but this does sound a bit shady. On the other hand, you’re talking about saving a tremendous amount of money over the course of 15 years - money I’m sure you can use for kids’ college &/or retirement.

I try pretty hard to live up to my commitments, and we both made commitments to our mortgage lenders. Personally, I’m not ready to follow in your footsteps, if that’s what you’re asking. On the other hand, I’m sure we all have a price. Would I follow your plan if I could come out $1 million ahead? $5 million? Hmmmm - I can’t say “no” definitively… So we’re really just talking about each person’s threshold; that’s what scares me.

Your doesn’t like the sound of this plan Realtor,

Chris Butterworth

Technorati Tags: keys for home

I read an economic / geopolitical report this morning which was long, detailed, and very well presented. And buried deep down in the body of the report were a couple of paragraphs about the U.S. economy that made me feel good about what’s in store as we head into the 3^rd quarter.

First of all, I need to give credit where credit is due.

John Mauldin is a world renowned economist, who publishes a FREE weekly email. I’ve said many times before that this is one of the most important emails I read all week. You can subscribe to it here.

George Friedman is with Stratfor, and has some of the best geopolitical intelligence on the planet. Mauldin’s Outside the Box newsletter features Stratfor’s forecasts regularly, and I learn more from this one email than I could learn from watching CNN every day.

Anyway, buried in the body of Stratfor’s Third Quarter 2008 Forecast was this little gem (and I’ll quote directly from the newsletter):

Regional trend: Despite much talk to the contrary, the United States will enjoy strong economic performance. In part, this is because of the massive inflow of money into the United States from Asian and Arabian states.

While talk of recession in the United States remains par for the course, the U.S. Federal Reserve is both becoming optimistic and leaning toward interest rate increases to contain inflation. The Fed will always err on the side of triggering faster growth (and inflation with it) rather than slower growth that could lead to deflation and induce a Japanese-style depression. Add in roughly $100 billion in stimulus checks, and the United States is well past the worst that the slowdown of the latter half of 2007 presented. (emphasis mine.) This does not mean that the “strong economic performance” we anticipated has materialized — but the truth so far is much more positive than the doom-and-gloom talk that dominated American media the first half of the year.

Obviously, not all things are cheery. The American property market is far from recovery — the rising inventory of unsold homes in particular is a critical factor to watch — and strong commodity prices are making the U.S. consumer take pause. Additionally, a combination of American subprime contagion and regional structural and cyclical weaknesses could trigger a European banking crisis in the third quarter. But Stratfor’s primary economic concern for U.S. growth remains tied to the election cycle. Neither presidential candidate has any interest in pointing out positive aspects of the current government’s economic management. And, in past elections, “It’s the Economy, Stupid” has not only garnered votes, but also has had the side effect of amplifying public perceptions of the economy’s problems.

Of course I’d prefer to read that the housing market is well on its way to recovery, but at this point I’ll take my good news where I can get it! We all know the market is cyclical and will heal with time – a better economy will help consumers’ pocket books and consumer confidence, which in turn will help heal our housing market a little faster.

Your feeling better about the economy Realtor,

Chris Butterworth

Technorati Tags: economic forecast

I pulled together a chart to summarize how many Active Listings out there are owned by, or need approval by, a bank. The numbers may be a surprise, but the distribution isn’t; the outlying suburbs (which were investor-driven in 2005) have a significantly higher percentage.

Lender Owned SFR listings

Lender Involved SFR listings (short sales included here)

Wow – what a difference! In Scottsdale, you’ll find a foreclosure in 1 out of 27 Active Listings. In Maricopa (city), you’ll find a bank’s involvement in 45% of the Active Listings!

Your wishing he had done this post a few months ago so he could compare trends Realtor,

Chris Butterworth

Technorati Tags: bank owned, short sale, market statistics

Last year, as the market slowed to a crawl, and everybody began to realize just how bad things were, the finger pointing started.. Banks were making loans to people who couldn’t afford to repay them. Borrowers were lying on their loan application. Mortgage Brokers were helping borrowers lie, or were having borrowers apply for loans with artificially low start rates. Realtors were encouraging buyers to buy more expensive homes. Appraisers were justifying rapidly rising prices. The Media was fueling the price frenzy.

Everybody can share in the blame to some degree. Here’s my list of blame, in order from least to most at fault.

The Media. Of course they fed the frenzy – these are the same people who devote 15 minutes of a half-hour broadcast to … rain. I can’t wait for the Monsoon ‘08 series next month.

Appraisers. The appraisers who committed outright fraud should be punished. But the vast majority were really trying to capture the market value – what the buyer and the seller agreed to.

Realtors. Those who encouraged buyers to use “pick a payment” type loans in order to buy a more expensive home than they could afford were either ignorant or negligent.

Mortgage Brokers. Same argument as the Realtors, except they can’t claim ignorant. The loan officers who knowingly put borrowers into loans that would adjust upward and become unaffordable shouldn’t have a clear conscience today.

Borrowers. Ever heard of buyer beware? You’re taking out a multi-hundred thousand dollar loan; don’t tell me you didn’t understand the terms. At the end of the day, you’re responsible for your own actions.

Banks (and Mortgage Lending Companies). When you lend money, you’re number one rule is to not lose money. When you lend money professionally, you’re at a big advantage, because you have systems in place to make sure every borrower has the desire & ability to repay you, and the collateral in case they don’t.

For years banks made loans based on low collateral, or bad credit, or without verifying income. But they always relied heavily on the other two in these cases. No collateral – the borrower better have good income and great credit. No Income – look for a borrower with great credit and some equity in the property. Bad credit – need good income and good equity. Oh, and they’ll add a higher interest rate to the loan in all three of these cases.

Suddenly, in 2004 and 2005, banks stopped caring about these qualities. No down payment, no income, no credit – NO PROBLEM! Then they went even further by creating and advertising the low teaser rate loans: “Buy a home today with a $500,000 loan, and your payment can be as low as $200 per month.” Are you kidding me?

Remember the old Golden Rule – “He who has the gold makes the rules.” The banks had the money; they were the ones making these loans. They might claim they were lied to, and even defrauded. But if you don’t bother checking anything before you make a loan, that’s what you get. Just like the borrowers, you’re ultimately responsible for your own actions.

As a side note, I might have a different opinion if the banks took strong action early in the process. They had every opportunity to be proactive and make radical solutions which would benefit everybody. (I even offered an idea for renegotiating mortgages.) But they didn’t. They’ve handled the entire process by sticking their head in the ground, or by running around like the Keystone Cops. My short sale example from yesterday highlights this point.

Your wouldn’t trust the banks with his money if it wasn’t FDIC insured Realtor,

Chris Butterworth

Technorati Tags: real estate bubble, mortgage lending

The Phoenix area real estate market is heating up (unofficially).  I haven’t analyzed statistics to back up my claims, but I do have some anecdotal evidence - our group has put 6 listings into escrow in the last 3-4 weeks!  We also have several buyers with offers outstanding, waiting for sellers &/or banks to respond.

However, I’m not ready to claim that our market has recovered.  Most of our activity is focused on properties which are on the “more affordable” end of the spectrum.  Activity for buyers and sellers in the half-million dollar plus ranges is still slower than we’d like to see.

I’ve written several times before that our market is going to recover differently for different neighborhoods and different price ranges.  I think what we’re seeing today is more proof of this.  Any positive news is a step in the right direction, but we’re still a ways away from being recovered..

Your looking for silver linings Realtor,

Chris Butterworth

For the first time since June, 2007 the sales numbers for single family detached homes in Maricopa County were above 4,000.  To be exact, for the previous 30 day period (4/25/08 - 5/25/08) there were 4,056 homes sold through the Arizona Regional Multiple Listing Service (ARMLS). 

Keep in mind that this may not include every home that sold, only those that sold with the services of a Realtor® and through the ARMLS.  These are the numbers that I analyze every week, therefore in an effort to spot trends the data is sufficient.  I’m not necessarily looking for the exact numbers, just the comparisons from previous periods.

The abosrption rate is now approximately 9.42 months.  Once again we haven’t been that low since June, 2007.

The pending numbers are still continuing to increase very week, now at 5,466 units currently in escrow.  And the inventory level has been inching its way downward for the past 6 consecutive weeks, now at 38,210.

On the flip side of all this seemingly good news is price.  Price has been steadily declining since about December of last year.  At the beginning of December the average price per square foot of the sold single family detached homes in Maricopa County was about $165/square foot.  Today we are at $138/square foot.  That’s about a 16% decrease in six months.  While we have the good news on the sales and pending numbers side, we are also dealing with a decrease in the average price per square foot.  Short sales and foreclosures, primarily the latter, are what is driving the prices currently.  Banks are pricing properties very agressively in an effort to minimize the time they sit on their books.  It used to be that you could manage to exclude a foreclosure sale from a CMA or appraisal.  The reason for this is that in most cases they were in terrible condition, and there just wasn’t that many of them.  There were plenty of other properties to justify an increased value over the foreclosed property.  However, in today’s market that’s not necessarily the case.  Many of the foreclosure properties are in fairly decent condition; nothing that a couple thousand dollars won’t fix anyway.  And with more and more foreclosure properties selling in today’s market, we just can’t ignore them anymore.  Bottom line, they are affecting the value of your home!!

Keep in mind that it’s impossible to take these very broad Maricopa County numbers and accurately depict the current market in your specific neighborhood or subdivision.  Some areas are feeling the brunt of what I’m talking about much worse than others.  If you’re curious about the current status of a specific area in Maricopa County drop me a note, I’d be happy to take a look at let you know what I’m seeing.

-Steve Nicks

Technorati Tags: maricopa county real estate, market analysis

I’ve been seeing a lot written and spoken about the market conditions lately – days on market is coming down, sales numbers are going up, etc. And while I believe there are a lot of silver linings on our current market’s cloud, I think it’s important to remember how different “the market” might be from any one individual house, or even when comparing two house’s relative markets.

I pulled the combined numbers today for Surprise, Peoria, and Glendale (single family detached homes only.) I wanted to show how different the numbers were for different parts of the price range. Take a look at these tables:

Wow – what a huge difference! If you’re selling a home in the northwest valley in the $150k - $250k range, things don’t look so bleak. But if your home is priced in the $500k - $750k range, you don’t have much of a chance of selling right now; there’s simply too much competition!

Now let’s look at the same information, but we’ll look at the pace of sales from 2005 (the busiest year ever.)

We all remember 2005 as being completely out of control, with most homes selling the first day on the market. Well, using 2005’s crazy sales volume, today’s numbers aren’t too much different on the lower end of the price range: 5.0 months compared with 7.0 months. However, back in 2005 we sold 524 homes in the $500k - $750k range. At that pace of sales we would clear today’s inventory in 8.5 months – a HUGE difference compared with 62.2 months.

I’ve said before that statistics can be easily manipulated, but this example shows that we can’t take a given number at face value. Our recovery will vary greatly based on city, zip code, subdivision, price range, lot size, and all the other variables that make each home unique. We’ll continue to see trends moving in the right direction, but they will always mean different things to different homeowners.

Your analytical Realtor,

Chris Butterworth

Technorati Tags: Surprise, Glendale, Peoria, inventory