Last week I had the pleasure of hearing Michael Orr, founder and creator of the Cromford Report, an extremely comprehensive up to the minute charting system that shows exactly what’s going on in the real estate market. The focus of his presentation today was mostly North Scottsdale, but he touched upon some very clear facts about the real state of Real Estate in Phoenix.
Let me touch upon the basic market cycle before I continue, and I’ll add a simple reminder as well. Mainstream media, while accurate at times, is typically WAY behind where we really are. If you want to know what’s REALLY happening in the market, then you need to tune in to a blog like this one.
The image below is the basic cycle of emotions that people go through in an economic market. We’re all familiar with every part of this chart. Mainstream media places us somewhere between Capitulation and Depression. We in the real estate industry, see things differently. I personally find myself already at Optimism after some of my recent observations.
Here are some key points that Michael made today at the Pinnacle Peak RMS meeting. Many of them involve busting through some of the myths that people believe right now.
Fact #1: Phoenix is a unique market compared to the rest of the nation. We lead along with a few other markets, but we’re not like the rest, so national news does not apply in a general sense. We have to rely upon market data to determine what’s happening.
Fact #2: Urban sprawl creates a unique pattern in this city. The market here moves much like the ripple of a pond, only in reverse, where the outlying areas experience the most movement at the highest speed in both upward and downward trends. Lower valued properties in the sub 250K range experienced the highest decreases in value, and during the coming recovery will experience the greatest and earliest increases in value.
Towns like Paradise Valley continued to increase in value while the outlying cheapest areas fell like rocks.
Fact #3: There is a massive disconnect between what’s actually going on in real estate and what people think is happening in real estate.
Fact #4: Foreclosures exist always, and they grow in line with the population. The number of trustee sales has dramatically fallen compared to 2009 which was the highest year.
Myth #1: There is another wave of foreclosures coming.
Truth: In states where there is actual judicial foreclosure, this may be true because of the backlog of cases that go through the court systems. In Arizona we have Deeds of Trust which require no judicial foreclosure process should a home owner default, therefore the process is much faster. We do not have a huge wave of foreclosures coming.
Myth #2: Shadow Inventory is the 800 lb gorilla in the closet.
Truth: Nobody can agree upon what “shadow inventory” is. In fact, when asked, nobody in the entire meeting believed that prices were declining. Granted, there are areas where prices are weaker, but the long term trend is a bounce-back.
Myth #3: 60% of homes in Phoenix are under-water.
Truth: When asked about the value of a home, two Realtors responded with answers that differed by $175,000 for the same home. The value of the home is determined by what someone will pay for it. It’s impossible to measure the under-water statistic because in order to do so, one needs to know the value of the home, and also what the remaining balance on the mortgage is. Unfortunately, most people have no idea how much their payoff is…including Michael Orr, as he stated, “we all know how much we borrowed, but most of us have no idea what we owe now.” In fact, hardly anyone in the meeting admitted to knowing the balance on their own mortgage. So how could one come to the assessment that any percentage of the valley is under water? In Arcadia, only 11% of the homes are under-water. Other areas of town, such as Southwest Phoenix, experience 80% rates of negative equity. The bottom line is that it’s different in almost every area of town, which is part of the unique nature of our market.
Two forms of Trustee Deeds
There are two measures of trustee sales. There are the trustee sales that are purchased by private buyers at auction, and there are trustee sales that go back to the bank which lead to REO or Bank Owned properties. There are two things to note about these. The first thing is that the number of trustee sale notices overall has decreased. The second thing to notice is that the number of private sales as a percentage over bank recovery is increasing, which means more and more private buyers have entered the market. In fact, in Phoenix, roughly 30% of all homes are paid for because of how much cash has been infused into our market. As a result, the REO market is declining very quickly, starting again at the bottom end of the market and moving up to the higher priced properties.
Foreclosures next year are not going to be a significant enough part of our market for it to be newsworthy.
Currently our supply is down dramatically. As of this moment, there are 18,651 single family homes for sale in the Arizona MLS (Search here). Of those, roughly 6,862 are short sales waiting for approvals. That leaves 11,778 homes to choose from. Only 1,113 of those homes will require short sale approval, while 1,164 are either HUD owned or Bank Owned for a total of 2,277 distressed properties on the market.
(Note: A few days have passed since I originally drafted this article. Stay updated by subscribing or bookmark my site so you can stay on top of what’s happening.)