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.