Thursday, May 31, 2007

Phoenix Real Estate Market-How healthy is it?

Recent reports show that nationally, home prices have dropped for the third straight quarter. Interestingly, here in Arizona we were reporting less sales, but sales prices were actually increasing. What does it all mean? Well let us not forget that anyone can pull a set of statistics and interpret them to suit their own purposes. In this case, nothing nefarious is occurring but we do need to analyze the stats carefully. What is happening in the Phoenix metropolitan area is that although the number of homes sold has gone down, the ones that have sold are at the higher end of the price range. This reflects a couple of interesting points in the Arizona real estate market. Firstly, the fact that more expensive homes are still selling just reveals a broader fact of life that the more wealthy among us are not as affected as the less financially fortunate, by the overall economy or the ups and downs of a finicky real estate market. Secondly, the folks in entry level homes who desire to trade up for something bigger or better (and this is an excellent time to do this) are experiencing a great deal of difficulty in selling their current homes due to unrealistic pricing and an over-abundance of inventory. The pricing problem is one I encounter all the time. Otherwise intelligent folks cannot seem to grasp that the "investor" fueled madness of two years ago is over. I point out recent comparable sales and the response is universal. Those people just "dumped" the property at below market prices. The old "grassy knoll" conspiracy trick!

The overall economy is generally healthy. In the Pacific Northwest prices have either held, or dipped slightly, due to excellent job growth. Here in Arizona, the economy has some catching up to do, to help siphon off excess inventory. That may take time. Also, banks are tightening up lending parameters; making loans, particularly "low-down" or "no-qual" loans, much harder to get. Lenders are now seeing an increase in foreclosures, Arizona ranks 7th in the nation, as their previously lax requirements are coming back to haunt them.

Lenders are also starting to process "short-pays". This is a situation whereby a bank will forgive a portion of the debt secured by a home, in order to allow it to be sold. Traditionally, in a foreclosure a bank would receive, after expenses, around 70-75% of sale proceeds, whereas a short pay could net as high as 90% of proceeds. See your Realtor, or accountant, for more details of both procedures.

It is not all gloom and doom. There will not be any catastrophic decline in house prices, as we saw in the 90's, due to the underlying strength of the economy. Some of the huge "investor" fueled increases will inevitably be given back. However, the market will stay robust, but it will need a year or more to rid itself of the so-called investors, the foreclosures and for inventory levels to return to normal.

Look on the bright side, at least the weather is excellent!