Foreclosures show tiny improvement, but uncertainty still rules Phoenix real estate market

April 19, 2011

In the Phoenix real estate market, the traditional resale season begins in March, and as expected, the number of transactions last month rose to more than 11,000, up from about 8500 in February. And happily, foreclosure activity as a percentage of total transactions was down to 38 percent after climbing above 40 percent for two months. But Jay Butler, associate professor of real estate at the W. P. Carey School, says it's uncertain whether that increase in transactions and drop in foreclosure activity is the beginning of a new trend, or if the market will return to February levels. In truth, the Phoenix market is still a series of bumpy hills. Butler explains. (9:22)

Jay Butler: Well as you would expect, the numbers in March were quite high, and, in fact, some people are actually comparing the numbers back to the last time we were this high which was in 2004. Problem is, it's two entirely different markets. Now, the strange part is it's driven by the same motivation. People looking for a deal -- to invest and either to flip or rent out. Same thing is being driven here except we're driven by almost 40 percent foreclosures. Back then we were about 2 percent foreclosures, so the market motivation is the same, but it's structured differently. We don't have a lot of owner-occupants right at the moment. We have no move up market. It is still being driven by investors looking for the deal.

Knowledge: So what about that foreclosure segment? Are the number of foreclosures in the market still as high as they were?

Butler: They're down slightly, but it blips along. One would hope that they would start to decline throughout the year. There is a great deal of frustration sitting out there, absence of any move up in prices. Job market is not as strong, especially the income segment where people are still getting hit. [For example] state employees will hit with an increased pension contribution. In others, there may be increased healthcare. They're not getting pay raises however, so their net pay is going down. That adds to the frustration. They see what may be happening in their neighborhood with vacant homes and the building of less expensive homes in their neighborhood.

So there is frustration out there, and until that frustration is sort of done away with, there's always the possibility that people will walk away from their homes and seek something else. That's going to be a big issue. When people look at $4.00 a gallon gasoline, milk going up, it is one thing after another. The one thing they could always count on was their home. Well they can't even count on that now.

Knowledge: I know during the "exuberant" period, there was a lot of building that went on, on the very fringes of the city.

Butler: Uh huh.

Knowledge: With gas as high as it is and that frustration level as high as it is, do you think that those neighborhoods are going to be deteriorating even more?

Butler: They could well do that. They've not been strong in this particular market. It's the area where even before we started moving towards $4.00 a gallon, these neighborhoods and areas were getting hit pretty hard. Again, there are cheaper prices out there. There are certain market segments they may work toward, for example, on the far west side. Take distribution centers -- there was announcement a couple days ago of a big distribution center opening out there. And solar -- things may help them where they create jobs so you don't have great distances to travel, but these are relatively small in the situation. We're not building a lot of new homes. I mean, through February we only permitted about 800 homes in all of Maricopa County. Back in the "exuberant" period, we were doing 2,000 or 3,000 a month.

Knowledge: Right. Right.

Butler: So we've got a long ways to go.

Knowledge: What are prices doing? Are prices are continuing to fall?

Butler: Well they're still declining but, again, what we're looking at is the prices of what is being sold, and what is being sold is cheap. People are looking for the deal -- the $50,000-60,000 condo. We have condos in some areas as low as $35,000. In home prices … in some of the areas the foreclosures are beginning to move up. There's an interest in sort of the family foreclosure homes, not just the pure investment one.

There's a lot of belief that home occupancy is a dream that will not be attained in the future. Of course, we've heard this at least four times in the 40 years I've done this and that people will look more to renting a home instead of buying a home. Again, a lot of issues coming onto the plate that just adds to the uncertainty of the coming market.

Knowledge: You said that you've heard that four times in the 40 years you've been …

Butler: Late '60s.

Knowledge: … that the home, the dream of home ownership may not be for everyone?

Butler: Right: Late '60s because of a weak economy, interest rates were getting to move up. It just wasn't a driven market. Then when inflation hit in the ‘70s, same thing. It was pricing moving ahead of income. Mid-'80s, interest rates were quite high; 14-15 percent. Again, the argument was, well the next generation may look for homes, and they're not going to be able to afford them. Maybe this is the time it holds because we're looking at the income tax deduction. We're looking at changes in the structure of residential mortgages. A lot of things that might make it more difficult to acquire a home.

Knowledge: Since we last talked, there was news of a development firm that was beginning to buy up foreclosed properties.

Butler: Beazer, Beazer Homes.

Knowledge: Yes, Beazer. To rehab them. What do you make of that? Is that a trend, or is it?

Butler: Well they were only looking at about 100 homes in the Phoenix area. They haven't actually started doing it. The biggest competitor a new home builder has is the homes that they built a few years ago that were foreclosed on. A lot of these builders are arguing, yes our new homes are more expensive, but they're new. They're really arguing energy efficiency or environmental sound. They are E-smart, they’ve got what they call the HERS index -- Housing Energy Rating System -- similar to what we see on appliances. Yeah you're going to pay more, but we're better than the home a few years ago. One of their arguments is that these [foreclosed homes] will go up in value, adding to their bottom line, but it takes X-number of homes out [of the market]. Now it's not clear yet, so they appear not to have started doing it. Where are they going to buy them? Are they buying their own homes? Are they buying competitor homes? It's an interesting approach, but again the numbers they're talking are a relatively small set of numbers.

Knowledge: Is that a trend across the nation, or is it something unique to us?

Butler: It was a thing they're doing across the nation. It's just, again, one approach. I mean we look at Fulton Homes and their ads about the new home is better. We have warranties, they don't. It's a hammering process that is going on.

Knowledge: So it's an interesting kind of a dynamic period for the industry as well as for the homeowner and the potential homeowner. Things are shifting around a little bit.

Butler: They're shifting around quite a bit. The nature of the home is sort of the center point of the family is a serious issue, and a center point of the economy even. Home builders are looking at entry level type housing, in the 150 range. We've seen ads by some big builders arguing they have some homes available as cheap as 80,000. They're looking for active adult communities because the retirement of the baby boomers. They're looking at in-fill homes within compliance of existing cities and environmental issues, so the greening of the home sort of underlies the trend, but it's a focus in many of their ads and other things.

Knowledge: Well when we meet again next month, we'll have the experience of another month into the resale season and maybe we'll begin to see if there's a pattern developing or not.

Butler: We're probably aren't going to see much of a pattern until later this year. This market, for the last couple of years, has been a little bit of like a cha-cha: a step forward, a couple back, etcetera. A lot of the lenders and regulators are saying they're going to take a big hit because we're not certain about how clean they've done some of these foreclosures.

 

This market is just a bunch of bumpy hills. It is not clearly established what it wants to do, and people are concerned about if they're going to buy homes, where they're going to buy. Of course, we have a very large group of people very happy where they are. Yes, they may be under water, but they're in a good school district. They have all they need. They're not going to move.

 

Knowledge: Well we have to wait and see. Thanks again Jay.

Butler: Yep.