Experts Agree that the Trend is Positive

In our last “Market Watch” we shared our opinion that there's a significantly positive shift going on in the local real estate market. However, we did it with some trepidation because there were few, if any, other voices echoing our sentiments and being out there in front can be uncomfortable – even when you think you’re right.

The good news is that several of the more respected providers of real estate statistics and analysis are beginning to express similar thoughts. Granted, they are generally a bit more reserved than we are in our evaluation of the situation but, then again, their comments are directed at the valley-wide marketplace and  our energies are focused primarily  on the Northeast Valley and specifically on McDowell Mountain Ranch.  

As Catherine Reagor, reporter for the Arizona Republic, indicated in a recent column several key housing indices are now showing that the market could be poised to start a slow rebound.

In addition, Mike Orr, the wizard who produces the Cromford Report and one of the most reliable sources of real estate data in the valley, says that “most of the key indicators that were negative at the end of last year's second quarter are now showing positive signs”. He specifically cited the supply of homes for sale which has been falling since late November.

He‘s also encouraged by the dramatic increase in the number of pending listings. This is a precursor to closed sales and the primary indicator of growing buyer interest. His enthusiasmertainly seems justified. There are almost 13,000 pending right now and there were only 8,695 at the beginning of January.

Sadly, the only market gauge that he says hasn’t turned positive yet is the sales prices. However, even there he did say that there are indications that housing prices could start to climb during the next six to nine months.

Tom Ruff of Information Market, another Phoenix real-estate data firm, shares Mike's opinion. He says that "The numbers that made us pessimistic last July are the same numbers that are now making me optimistic,"

By the way, what you may find particularly interesting was Mike Orr’s response when I asked him if he had any idea why we seemed to be out performing the rest of the valley. His answer was that  “Each day that goes by suggests we are going to have a significant recovery this year and I believe the $400K to $600K price range is well placed [to profit from those improvements].

McDowell Mountain Ranch Sees A Change For The Better!

Let me begin by stating the obvious, nothing in life is ever guaranteed. In fact, given the economically volatile and politically uncertain times we’re are living in, something could happen to radically alter the financial landscape in less time than it takes to consume a gallon of very expensive oil.  However, despite those concerns, I’ve got to say that it feels like the market has shifted in a positive direction, at least in our local market area. 

The first 75 days of this year have produced the best sustained performance in our local market area since the first quarter of 2007 — and that was the last gasp of the late lamented bull market in housing. In fact, thus far this quarter, we’ve booked almost twice the business we did during the same time period in any of the last three years. There’s been a threefold increase in the number of people viewing the properties we’re marketing. We’ve had to contend with multiple offers in roughly one out of every four transactions we’ve negotiated and we’re beginning to see activity pick up among the higher priced properties. All of those factors suggest that something more profound than a simple burst of spring exuberance is underway. 

In fact, there really seems to have been a shift in consumer psychology. I’m not sure whether it’s rooted in growing confidence that the worst of the recession may be over, recognition that mortgage rates may never be at this level again or some virtually incalculable combination of factors that we’ve yet to fathom. Regardless, the buyers we’re seeing this year appear more determined to find a new home than to get a great bargain.

About the only thing we can say with certainty about all market corrections is that they’re neither orderly nor readily explained. They tend to start slowly and often give the appearance of incremental improvement in their early stages. However, the trigger that puts them into overdrive frequently catches everyone by surprise. Let’s face it, if change was easy to predict, we’d all be rich. Unfortunately, you need only look back to the dot.com bubble of 1995-2000 and the real estate bubble of 2007-2010 to realize how easy it is for even the smartest people to miss the beginnings and endings of cycles. 

I grant that my analysis is primarily the product of instinct. The numbers I have to support it, while good, are admittedly very thin. However, my instincts have been developed over the last 25+ years and have helped me thrive during a period when more than a third of my compatriots have left the business and another third are just gamely hanging on — hoping for a providential change in fortunes.

Actually, I imagine that most people have little capacity left for either emotional or financial risk at this point (and I’d certainly understand that given the last four years) and waiting for more substantive proof from other more authoritative sources is certainly a safer course of action than acting on my observations. However, as comforting as that approach might be, authoritative and respected sources like the Case-Shiller index are, for the most part, generally more adept at explaining what has occurred than they are at predicting or recognizing a market shift as it happens. 

That being said, the only folks that I might encourage to act with some urgency are those who’d like to “move up”. There are still marvelous buys available in the higher price ranges, the interest rates continue to be exciting and now that it’s getting easier to sell more modestly priced homes, you’ve got an almost perfect storm of opportunity.

Call me to check out the market!

Looking Ahead to 2011

As the year draws to a close, economists seem to be increasingly more upbeat about the economic outlook for 2011 and there are certainly enough positive indicators around to suggest that change might be in the wind. Holiday retail sales were up about 15%, industrial production and factory orders are on the upswing, and new claims for unemployment benefits are trending downward.

However, it’s not entirely certain that anticipated improvements will be dramatic enough to affect the real estate market. None of the prognostications suggest they’ll readily morph into significant reductions in unemployment and, with concerns about inflation driving the bond markets higher, interest rates have begun to increase significantly.

In fact, it’s entirely possible that we’ve already slipped past the so called the “sweet spot” for home purchases.  That’s the point where the cost of acquisition is at its lowest when all factors, including the cost of financing, are taken into consideration. The reason for that assessment is that the 4.25% rates for 30 year mortgages that were available just a few months ago are now hovering around 5% and are unlikely to return, at least in the short term.  In fact, even if housing prices continue to slip a bit further or if we should experience the worst case scenario - a double dip recession, the cost of purchasing may never be cheaper than it is right now.

Incidentally, the assumption that prices in the Greater Phoenix market area still have a way to go before they reach bottom is primarily predicated on the foreclosure backlog. It’s generally believed to be “too wide and too deep” to expect that we’ll see any “market wide” equity growth in 2011. However, what I do expect is that we’ll see is some modest recovery occurring in more localized markets. The stronger parts of the valley like the Central Corridor, Scottsdale and more specifically McDowell Mountain Ranch should begin to differentiate themselves from the broader marketplace.

The reason for that contention is that, despite the fact that foreclosures are still a problem for these areas, they don’t dominate the market. Moreover, the employment outlook for residents of these areas is considerably better (unemployment among the college educated is only about 5% as opposed to the 9+% rate for the valley as a whole) and these areas will also benefit more quickly from the renewal of “baby boomer” relocations which are less dependent on employment  opportunities than the rest of the market.

The map insert should provide some perspective regarding which parts of the valley are being most deeply impacted by the foreclosure phenomenon. Each red dot represents a foreclosed property and the density of the dots pretty much tells the story. The boxed area represents a rough approximation of the 85255 zip code and demonstrates that the area, while not entirely immune to the problem, is considerably less vulnerable and likely to recover more quickly.

The economy seems to be on its soundest footing since the financial crisis started three years ago. Let’s hope that we see tangible change and a restoration of consumer confidence in 2011.

Housing Values in 2011

According to the National Association of Homebuilders, generally the most optimistic prognosticators around, homeowners can expect to see little, if any, increase in home values in 2011. In fact, Lawrence Yun, the group’s chief economist, predicts that it will take another two years just to clear the foreclosures and short sales on the market.

Still, he says that five years from now, when home values have recovered and mortgage interest rates likely are higher, people will look back to 2010 and say ‘I should have bought a home back then’. Clearly, not many Americans are thinking like that today.

Annual existing-home sales are expected to reach 4.8 million this year and Yun predicts existing-home sales will rise to 5.1 million in 2011, assuming that job creation continues to improve.

Yun also indicated that, although there are some indications that prices have stabilized (Editor’s note: our experience is more that the rate of decline has slowed), consumer confidence continues to be a problem. There are many people who still believe that prices will continue to fall and it’s uncertain how long it will take to restore confidence levels.

Interestingly, consumers typically have demonstrated increased confidence after elections, he said. However, with the country so philosophically divided, we might actually find that there’ll be legislative gridlock rather than orderly progress.

The worst scenario for the real-estate market, he said, would be if the economy were to begin to experience deflation as a result of that gridlock. That would lead to a “why buy now, I’ll buy one year from now, attitude” and cause the markets to spiral down dramatically.

The key motivator on the “buy now” side should be that mortgage interest rates have likely hit bottom already. In fact, Yun forecasts that the 30-year fixed-rate mortgage will average 4.9% by the end of next year. Not bad, but not as extraordinary a situation as we have now.

Owning May Now Be Cheaper than Renting

It’s actually a little frightening to consider but rising rents and falling property values are combining the change the rent vs. buy equation for thousands of potential homeowners.  In a sense, the world's turned upside down.

The statistical support for this contention actually comes from nationwide numbers published by Trulia.com which indicate that rents in the third quarter were up 2.6 percent over a year ago and that occupancy rates climbed sharply, to 93.9 percent (fueled in part by those displaced by the foreclosure crisis).

At the same time the median price of an existing home has continued to drop (homes in MMR have lost over 8% of their value this year and, as bad as that may seems we actually outperformed the market) and most observers expect them to continue to fall as high levels of foreclosures flood many markets and demand slackens.

The result is that many prospective buyers in more are finding that it is actually cheaper to buy than rent. The Trulia.com web site calculated the comparative costs of owning versus renting in the nation's top 50 markets and found that in 18 of those markets it is much less expensive to buy than rent. And, both Phoenix and Mesa ranked in the top five of the markets identified.  

As disconcerting as the numbers might be, it does point out the fact that there’s opportunity out there for those with the courage and foresight to take advantage of it.

Predicting the Future

For the most part, statistics are actually more useful in looking back at what’s happened as opposed to predicting what might occur. Unfortunately, that means that we’re virtually guaranteed to miss shifts in market conditions as they occur as well as the opportunity to profit from them.

Fortunately, the Arizona Regional Multiple Listing System has begun offering a new tool that actually does give us at least a reasonable glimpse of what’s to come. It’s called the ARMLS Pending Price Index™ and it uses the pending sales in the MLS system to forecast forecasts Average Sales Price and Median Sales Price in succeeding months.

There are, of course, several cautionary points to make. The first is that these are valley-wide numbers and that I expect that both Scottsdale and MMR will outperform the general market (certainly, their prices will be higher J).  

Next there is the hopefully obvious fact that the index is not a guarantee of what's to come and that the predictive value of the numbers declines as the index moves further out into the future. As with all forecasts, its real value lies providing a glimpse into the future to assist in "molding expectations and planning reactions to those expectations".

The latest version of the index (see chart above) suggests that the Median Sales Price in November will increase to $127,000, only to fall in December to $110,000, and then rally to $115,000 in January.

At the same time, the Average Sales Price for November is also predicted to increase to $171,400 only to fall significantly in December to $153,300, and then rally in January to $159,100.

Unfortunately, it seems that the short bursts of optimism experienced in the earlier part of the year have given way to some more regressive trends. However, as the index indicates, there is optimism for the first quarter of 2011.

Activity by Ownership Status

The sample for McDowell Mountain Ranch is really too small to make any serious observations as to trends but, by comparison to the valley as a whole, the statistics suggest it is a much more stable market.
For example, most of the activity inventory is still comprised of normal, non-distressed properties and the component that's actually lender owned is just a small sliver of what's available.  By contrast, the valleywide charts indicate that at least 30% of the avaialble inventory is lender owned and that almost 70% of the sales involve either lender owned properties involve short sale transactions.