Tuesday, August 23, 2011

Metrostudy - Phoenix Area Housing

There have been some famous memos in recent history. During the Watergate hearings in 1973, Richard Nixon’s White House counsel, John Dean, let slip the existence of an “enemies list” that was compiled by Chuck Colson. This list was sent in memorandum form to Dean, and its purpose was to strategize the use of the federal machinery to harass Nixon’s political opponents by manipulating federal grant dollars, fixing government contracts, directing IRS audits, and fomenting scandal. The list included Democratic contributors, media professionals, and even Paul Newman. While there was no evidence that any action was taken against those targeted, it was another of many embarrassments for the controversial president.

Bill Gates sent some noteworthy memos which communicated to his staff the course that Microsoft would chart during its history. One of his more famous documents was sent on May 26, 1995 titled “The Internet Tidal Wave.” In this 9-page memo, he announces the company’s commitment to focus on the internet, describing it as “the most important single development to come along since the IBM PC was introduced.” Here he foresaw the awesome potential of the internet, which was in its infancy at the time, and he even discussed the possibility of devices other than a PC to be used for browsing. Only three months later, MSN was launched.

Of less historical significance is my own memo below, if you’ll indulge me for a moment.

Date: July 27, 2011
From: Ben Sage, Metrostudy

To: Phoenix-area home sellers
Copy: Residential appraisers
Mortgage lenders

According to the economic law of supply and demand, when demand exceeds supply prices will be pushed up … see figure below where the increase in demand [D] results in an increase in price [P]. Over the past 12 months, 91,100 single family homes have been sold through the Arizona Regional Multiple Listing Service. Historically, this is a good deal higher than normal, indicating strong demand.

As of the first week of July there were only 19,613 single family homes listed for sale. Historically, this is slightly below the normal level of supply. Measured in time rather than units, the listings would last 2.6 months based on the current sales rate (demand). This is historically well below the normal level of 5 to 6 months.

Despite these indicators, home prices are inexplicably weak. It is understandable that the distress in the market would prevent strong price appreciation, but the fact that home prices remain stubbornly low (at roughly year 2000 levels) can only be explained by one or more of the following:
-  Sellers are unaware of the imbalance of demand exceeding supply
-  Sellers don’t care about the imbalance (unlikely)
-  External factors are artificially suppressing home prices

Some possible external factors include:
-  Stringent mortgage underwriting is disqualifying potential buyers, so desperate sellers will favor a cash offer even at a lower price to avoid a delayed or cancelled closing
-  Appraisals are coming in lower than negotiated prices between buyers and sellers, pushing the closing price down so the deal can go through
-  Sellers are favoring cash offers, even at a lower price, to avoid the possibility of the appraisal coming in below the agreed-upon price

There may be other external factors, but anecdotal evidence would suggest that all of the above are true. Regardless, sellers need to know that the laws of economics would normally be creating upward pressure on home prices in the Phoenix area today. In other words, some patience on the part of sellers may be in order. Appraisers need to know that the factors that created home price depreciation (supply greatly exceeding demand) are no longer present, and that to assume the actual value of a home is consistently less than the agreed-upon price (or even less than the comps), defies the laws of economics and creates a self-fulfilling downward price spiral.

If prices continue to be artificially suppressed, and demand continues to outpace supply, prices will eventually break through these barriers and pop upwards. While home price appreciation is a desirable outcome, a steady price climb would be a more attractive route to recovery. Sudden movements could create an overreaction and more uncertainty in the market. It is time for all housing market participants to understand the local conditions and let supply/demand forces establish the fair market value for homes.


Thank you for letting me get that off my chest. Allow me to make some additional comments that warrant our attention. Leading foreclosure indicators have been displaying some improvement, with a steady decline in new foreclosure notices, increased foreclosure cancelations, and a falling number of pending foreclosures. It is uncertain if this improvement is due to market factors or to mortgage documentation issues that arose last fall. It is probably a combination of the two. Even so, the improvement in the foreclosure picture undoubtedly relates to the squeeze on resale supply noted in the memo above.

Economic conditions are generally improving, as Phoenix is adding jobs, but at a rather slow rate. New-home starts in the second quarter were up from the first quarter, but the pace is almost certain to fall short of last year’s 7,141 starts. The dearth of new construction has driven new-home inventory levels quite low, and I think this sets the stage for in increase in home starts next year … assuming the economy stays on course and continues to gain traction. There may already be some spillover from the constrained resale market into new construction, as our weekly sample survey of builders indicates an increase in sales from May to June of this year. Hopefully this is the beginning of a trend.

Metrostudy, a national housing market research firm, conducts an onsite, lot-by-lot audit of all new home subdivisions in the Phoenix, Tucson, and Prescott metro areas, as well as Mohave and Cochise Counties. Our survey includes all new-home subdivisions, attached and detached, whether custom or production. Metrostudy drives over 15,000 miles every quarter to visually inspect every homesite, resulting in accurate information on starts, closings (move-ins), new-home inventory, vacant developed lot inventory, future lots, and lot deliveries. We supplement our core information with deed records (foreclosure activity, new home sales, resales), property ownership records, and weekly builder surveys.

Ben Sage, Director of Metrostudy’s Arizona Region, has been researching and analyzing housing markets for seventeen years. He has prepared hundreds of market studies in various cities around the country for numerous product types. His knowledge and experience combined with Metrostudy’s accurate and reliable information have enabled Ben to advise many Arizona real estate firms in their risk assessment, decision making, and strategic planning. Ben has also been a resource for such publications as the Arizona Republic, East Valley Tribune, Phoenix Business Journal, Inside Tucson Business, Arizona Daily Star, Arizona Builder Magazine, Bloomberg News, and the Wall Street Journal. He can be reached at (480) 756-9300, option 3 or bsage@metrostudy.com, or visit www.metrostudy.com.

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