It's Indian Summer in the Phoenix real estate market: Like a replay of the traditional high sales months, resale activity increased in October -- from 9,070 sales in September to 9,955. But although the level of activity appears strong, it's not necessarily a sign of recovery, as foreclosures continue to be the dominant force.
In my opinion the market is showing signs of recovering, but there is a galaxy of issues surrounding it, said Jay Butler, professor of real estate and author of the W. P. Carey School's Realty Studies report. We're going to have issues around the first of the year, because of the weak job market and because the difficulty people are having getting loan modifications will increase foreclosures. And, when people think about recovery they mean a time when prices return to what they paid for their homes. For people who bought at the top of the market, Butler said, that time may be a long way off.
In October, foreclosures on 3,815 homes accounted for 38 percent of the total market, according to Butler. This is an increase from September's 32 percent, but a drop from the 46 percent of a year ago. That's not the whole story, however. Approximately 45 percent of traditional transactions -- 6,140 sales -- involved properties that had been in foreclosure. That means foreclosure-related activity was 66 percent of the market in October -- about level with September.
The hot spots for new foreclosures are Buckeye and Surprise west of the city, and in the high-end communities in North Scottsdale and Paradise Valley.
We saw multi-million dollar foreclosures pick up -- there were 18 over $1 million in October including four above $2 million, Butler said. Part of the reason is that these properties do not qualify for federal loan modification programs, which target houses at $417,000 and less. Other than the size of their debt, however, Butler says these homeowners are not much different from others who find themselves in trouble with their mortgages: they've lost the jobs or bonuses they were counting on to cover payments on a house that might have been a stretch to buy in the first place. There's ego involved, too, Butler said. These are people who should have known better.
Foreclosures actually accounted for less of the traditional sales in October than the month before -- 45 percent compared to 50 percent in September. Butler said that these properties, which had been purchased in foreclosure and then were re-sold, sold well in October. And although half of previously foreclosed properties are still selling at a markdown of about 19 percent, in some areas, notably Gilbert, for the first time they were fetching prices higher than the foreclosure price.
Recovering or not?
Recovery is a matter of definition. The ordinary homeowner expects recovery to bring his home value back to the level of purchase, but whether or not that will happen is an open question, Butler said. Another definition relates to market structure. Butler said that typically, foreclosures account for 3 to 5 percent of the market, a fraction of the current level.
A key factor in sustaining a housing recovery is the satisfaction of pent-up demand, which is initially driven by entry-level households that are not burdened with the problem of selling a residence, Butler said. Several factors are currently affecting pent-up demand, he said, which will probably knock this recovery off the traditional cycle.
Typically a housing recovery is part of a growing economy and declining interest rates, Butler said. In an expansion, people feel secure enough in their jobs to consider upgrading, thereby creating a market for first-time homebuyers who benefit from lower interest rates.
The current economic recovery is limited, with the possibility of higher rates and a continuing weak job market, Butler writes. Further, the housing tax credit -- which has been extended to April 2010 -- could be dissipating the pent-up demand and weakening its influence in the coming few years. And, foreclosures will eliminate many households from obtaining home financing to buy another home.
Investors are making the market right now, Butler commented. Lured by low prices, they are buying homes to flip or to rent out. A lot of people are troubled by the fact that the market is still being driven by investors rather than buyers who intend to live in the homes. One perception is that the growth in rental houses will negatively impact the already weak apartment market.
All told, Butler thinks the market is still bottoming out rather than recovering.
The median price in the Phoenix market held steady at $140,000 in October, 20 percent less than the $175,000 of a year ago. The median price for foreclosed properties, however, rose from $136,800 in September to $153, 450 in October compared to $159,775 a year ago.
Facts about the single-family resale market in October:
- North Scottsdale -- The median price for a foreclosed property was $397,560 ($410,000 in September) while the median price for homes sold in the traditional market was $460,000 ($445,000 in September)
- South Scottsdale -- The median price for foreclosures was $164,000 ($178,000 in September) and for traditional sales, $198,450 ($190,000 in September)
- Maryvale -- The median price for foreclosures stood at $74,085 ($62,395 in September) and for traditional transactions, $55,000 ($51,500 in September)
- Union Hills -- The median price for foreclosures was $177,657 ($162,970 in September) and $190,000 ($188,000 in September) in the traditional market
- Paradise Valley -- Homes sold logged a median square footage of 4,085 and a median price of $1,112,500.
In October, 1,390 total recorded sales were recorded in the townhouse/condominium sector, including 535 foreclosed properties. A year ago, transactions totaled 850, of which 355 were foreclosures. The median price for the traditional market stood at $95,750 ($136,750 in 2008) and for foreclosures, $105,500 ($119,375 in 2008).
The median square footage for a single-family home recorded as foreclosed in October was 1,695 square feet (1,650 for a year ago), while it was 1,750 square feet (1,765 for a year ago) for a market-transaction home. In the townhouse/condominium sector, the median square footage for a foreclosed unit was 1,060 square feet (1,075 for a year ago), while the median for traditional-market units was 1,120 square feet (1,185 for a year ago).