2009 was a record year for real estate transactions in the Phoenix metro market. In fact there were 2,000 more transactions last year than in the previous record-setting year, which was 2005. As it happens, the two years are book ends around a historic run up of real estate prices and the subsequent crash. Dr. Jay Q. Butler, associate professor of real estate at the W. P. Carey School of Business, has been tracking real estate in Phoenix for decades. Recently he talked with Knowledge@W. P. Carey about the record year behind us, and the transitional year ahead. (4:47)

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Knowledge: We're here with Dr. Jay Q. Butler to talk about the year-end resale activity report. I'm noticing that 2009 turned out to be a record year with 112,725 transactions. The previous record was in 2005 when we were approximately 110,900 transactions. Now, 2005 was just before the peak of the bubble, and I was wondering if maybe you could spend a minute comparing the two record years, 2005 and 2009.

Jay Butler: Well, 2005 was sort of driven by euphoria. Prices were going up. People were buying homes to live in or invest in almost without any reason to it, and people found out the home values were going up so they could refinance it; the finance lifestyle and a bunch of other things. There was almost a euphoria or giddiness about the period of time. Now, I don't think anybody really believed it was going to go on forever, but most people believed in at least going a little longer than it did.

Of course, this was not unique to Phoenix. We saw this in Vegas and other parts of the country, even in other parts of the world. In a sense, 2005 was a period of very up beat optimism about the housing market as the numbers just soared, confirming everybody's opinion on how great things were.

Knowledge: So what do the numbers look like now? I think probably the foreclosure activity is still a dominant force in the market. We've been talking about this every month, but is this still true?

Jay Butler: Yes. Over almost 40 percent of the recorded resale activity were homes being foreclosed on. Of course, we didn't see that back in 2005. Also, probably another 30 percent or 40 percent of other transactions were homes that were foreclosed on being sold back into the market. The sense of euphoria is gone. People are struggling to maintain their homes, make their payments, wondering why they're doing this. Now again, there are people who are doing very well in this market; those who are buying homes inexpensively either to flip or rent out; people who are marketing this particular area. Agents and mortgage companies, etcetera, are doing quite well in this particular area. But the euphoria is not there. There is not a sense that this market is really doing these big numbers for great and glorious reasons. It's more sort of putting up the numbers based on, to some degree, the misery of other people.

Knowledge: Now I'd like to talk in a minute about what's ahead for this market, but before we do that, could you talk a little bit about what's going on in the cities around the valley and the neighborhoods?

Jay Butler: Well it varies quite a bit. In some communities such as Gilbert and Chandler, you didn't see quite the big drop in home values. Also, we're seeing that when the homes that were foreclosed on sold are back into the market, the markdown is not that great. In fact, in a couple of times, they're actually positive. They're selling for more than what they foreclosed on.

Other parts of the valley, especially the western communities, you're still seeing fairly low prices going into this particular area. Again, fairly significant back markdowns from the foreclosed, largely because these communities lack the infrastructure that develop in a lot of the east valley communities. We're also beginning to see an increasingly large number of high-end homes. We had in December almost 20 homes over a million dollars that were foreclosed on, and, again, in the high 8-900 hundreds, again a fairly large number. We're seeing sort of a bigger failure rate at the high end. It's probably the exact same reason, people stretching their incomes; maybe losing their jobs or losing pay that they thought they were going to be able to have, bonuses, etcetera. The market is spread out throughout the entire valley, but there are some pockets that are doing better than others.

Knowledge: Okay, so what's ahead? Do you have-is there any chance you could give us a hopeful word, an encouraging word?

Jay Butler: Well 2010 is looked to be a year of transition as we move from this heavy activity in the foreclosure market, and we begin to have less and less foreclosures throughout the year. Now, we might see an increase at the beginning of the year. We frequently do. People lose their jobs over the holidays, or they simply decide they can't maintain their home anymore. The new terms being strategic default, but we should see, if the economy holds together and job markets begin to improve, a decrease in foreclosure which means the actual number of transactions will begin to fall.

In a sense, the goodness of the market is it begins to fall away from heavy dependence on foreclosures; moving back to more normal transactions, owner-occupant buying a home; but this will resolve in fewer numbers of transactions occurring during the year. The good news is actually when the market activity begins to decline and move off its dependency on the foreclosure market.

Knowledge: I was wondering, as a closing word, what you might have to say about the townhouse market and also, possibly, commercial. Commercial seems like it's really down.

Jay Butler: Well, the townhouse/condo market has been a difficult market, because it really never has been a desired lifestyle in Phoenix, because housing has been so inexpensive which is true now. A lot of the new projects are in a lot of financial trouble. Some of them have not even been able to be finished, and so they are in bankruptcy and foreclosure, so this market is a relatively smaller market. It makes up about 8 percent of our housing stock, but it is in deep trouble.

The commercial market is felt to be the big drain this year, basically foreclosures. The problem a lot of property owners are having is that while they may not have vacancies, most tenants, in order to survive, have had to have reduction in rent, so you're not getting as much money off of your center. You may have to-a jargon of the trade-feed the kitty. Pay the mortgage lender in order to keep your tenants in, so there's going to be a difficulty in the commercial market.

Apartments, right now, seem to be popular because people can buy them much cheaper, and we're seeing failures but people are willing to pick them up. Retail office and industrial are the sectors that are beginning to show a lot of difficulty and will throughout this year.

Knowledge: There's a long road ahead of us before things are going to feel good again.

Jay Butler: In a real estate sense and good is a relative term. I mean, if you are able to buy an inexpensive property and turn it around, you feel pretty good even though the person who sold it or lost it doesn't feel good. Same thing when buying a home. You're buying a home very inexpensive either through foreclosure or very cheap on price, you feel pretty good about the deal you've made. On the other hand, the people who have lost their homes don't feel so good.

Knowledge: Thanks a lot for spending time with us today Jay.

Jay Butler: Glad to do it.