A report on real estate market conditions in Phoenix shows that foreclosures represented 43 percent of total transactions in February. That's a significant increase from the 30 percent of the closing months of 2010, when many banks put a pause on foreclosures as procedures were reviewed. Jay Butler, associate professor of real estate and author of the W. P. Carey School's Realty Studies Report, says that economic uncertainty will continue to bedevil the market, which remains dominated by investors rather than owner occupants. Butler met with Knowledge@W. P. Carey to talk about the data behind the report, and what may be ahead for Phoenix. (9:19)
Introduction: A report on real estate market conditions in Phoenix shows that foreclosures represented 43 percent of total transactions in February. That's a significant increase from the 30 percent of the closing months of 2010, when many banks put a pause on foreclosures as procedures were reviewed. Jay Butler, associate professor of real estate and author of the W. P. Carey School's Realty Studies Report, says that economic uncertainty will continue to bedevil the market, which remains dominated by investors rather than owner occupants. Butler met with Knowledge@W. P. Carey to talk about the data behind the report, and what may be ahead for Phoenix.
Knowledge: I thought we would begin today by talking a little bit about the report itself. Could you please explain for us what exactly the Realty Studies report is, where do you get your data and who finds this most useful?
Dr. Jay Q. Butler: The data represents recorded sales transactions within Maricopa County, however this particular study looks only at the resale component, not the brand new homes that have only sold once. We acquire our data through a third party, Marketron, and we analyze it based housing type, year, districts. We have 37 housing districts by city, so we analyze the data in different ways.
The data is historical data: events that occurred over a period of time. In other words, the recording may be in the month of February, but the decision to buy this piece of property is made several months before, so it's a historical look at data. What you're looking at is how does this compare to the historical pattern? What we're seeing right now is 40 percent of our activity is foreclosure, where the historical number would be close to 3 percent. Certain areas are having more than 40 percent foreclosures, others less. So you're looking for patterns in this sort of thing.
The data and the analysis are by different groups of people: some to make market studies of particular areas; others to see what the general economy is doing. The housing market is a good indicator, so it's used in different things, though it's not an absolute answer. It's not 100 percent perfect. I used to tell an old joke about a very old actor named Gary Moore. He was an avid sailor, and he's out in the New York Bay. A guy comes up and asks, “How do you get to Bermuda?” So Gary Moore comes up with minutes, latitude, every detail, and the response to the guy was, "Can't you just point?" That's really what this data is. It's pointing at things that are happening.
Knowledge: You said that there's a historical component here. You're making comparisons in order to discern patterns. So how much history do you have? How long has this been going on?
Butler: Since 1981. We go back a long way.
Again, you always have to be careful of apples and oranges situations: influences in the marketplace, scale of the property, etcetera. You're looking at how things are evolving. You've got to remember that a recording of a home is a decision made by a human being and the yearly issue is what it is that the humans are doing. Right now the market is really being driven by the same forces that drove the market in 2004, 2005. It is those people looking for an investment opportunity -- either to flip or sell the home -- but in the much lower price level. It is not being driven by the owner/occupant looking for someplace to raise their family.
We don't have a move up market right at the moment, so there's an important human element -- you can't just look at the numbers. You've got to impose a human face on this sort of thing.
Knowledge: Let's look at the February report then. You said a minute ago that the share of the market represented by foreclosures is back up into the 40's, actually 43 percent, and I also read that if you add in the traditional transactions that were previously foreclosed properties, the percentage actually goes up to more like 66 percent so --
Butler: This is what the market has been like since early 2008: predominantly either foreclosures, or the sale of foreclosure property. Not your traditional owner/occupant being the dominant theme. Towards the end of 2010, the numbers began to drop, but they began to drop because we had moratoriums, not because the market is getting better. Again, you're the human element. Because of legal issues, title issues and a bunch of other things, lenders backed off both foreclosing on homes and on selling foreclosed properties. That was worked through in the last few months of 2010.
Now we're back to "abnormal market normalcy," so we're seeing foreclosures pick up. I think we're going to see a drop [in foreclosure activity] -- fundamentally I think we're running out of product. In some areas like El Mirage and Maryvale, where we've seen heavy foreclosure activity over the last couple of years, sales are dropping. We're simply running out of product, but we're seeing it pick up in some of the areas like Glendale, Peoria, Tempe and others as people move to new locations where there is investment opportunity and where they are willing to pay somewhat more for the homes.
Knowledge: So one way of looking at it would be that we're picking up the trend that began before the moratoriums …
Butler: Yeah, we had a slight break. I think there was hope, but we didn't come back. We also had the reality that during the holidays a lot of families are making decisions about what they need to do. Do they want to continue in a home where they maybe used up all the resources? One of the things we are seeing is somewhat more expensive homes being foreclosed on because these people, much like in other situations, simply used up all their resources, and they really don't feel like maintaining this home anymore and they want to move on.
Knowledge: Would those be the one million plus properties?
Butler: No we're looking at maybe $200-300,000 homes. The people have just been strained. They had resources they've used up, maxed out their credit cards, family friends, and they thought things would start to get better. Maybe they thought their job would get better, but yet we're still talking about layoffs. We're still talking furloughs in certain areas. While some jobs are picking up, others are not. There's a lot of frustration with what's been the continuing pattern for the last couple of years.
Knowledge: I did notice that there were 19 properties valued at over a $1 million that were foreclosed in February. Isn't that more than we've had in the past?
Butler: We've been running about 20 per month, and we're seeing the somewhat higher end, step-up homes being foreclosed in cities such as Tempe, Glendale, parts of Mesa -- instead of the 200,000 or maybe 250-275,000 type home.
Knowledge: Well what do you see in the next couple of months? Do you have any ideas on what's coming down the pike?
Butler: That's the $64 million question. You have all sorts of issues. A few weeks ago, we were being told that $4.00-4.25 a gallon would be norm. Now, they said well maybe not -- supply came in bigger than they thought. So maybe things are settling down, so maybe we'll not -- we don't know. As for the job market, we know a lot of the growth was in seasonal jobs. That's didn't hold. There have been bits of news about Intel and some others that show promise down the line.
But the uncertainty of the economy, and hence the impact on the confidence of the consumer to either stay in the home they're in or go out and buy another one, is still shaken.