3 Directions 2010 could take

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Viewpoint, 01/06/2010

3 Directions 2010 could take

2008 was a horrible year for real estate, and that horribleness carried over into 2009.  However, something changed somewhere along the way, because 2009 was one of the highest-volume years ever!

The mainstream media hasn’t picked up on this fact yet.  I can tell in two different ways – 1) I haven’t seen a news story about it, and 2) every “new” buyer we meet wants to start out by taking advantage of this “buyer’s market” and making a low offer to some desperate seller.  (a few months and many offers later, most buyers will invariably end up making an aggressive offer at, near, or above the seller’s asking price..)

Reviewing last year’s data and making predictions about next year is a common practice this time of year; I’m sure this won’t be the only analysis-type piece you’ll read.  I’m just hoping this is the best, easiest-to-understand, most-comprehensive analysis-type piece you’ll read!  So let’s get started…

Water Cooler Sound-Bite – this is a long email with lots of detailed thoughts.  Those of you in a hurry can skip to the bottom to read a summary in the Water Cooler Sound-Bite section.

Comment Here – this article is also published online here.  If you want to make a comment about anything you read here today, please visit the online version and use the comment form at the bottom of the page.

First of all, let’s look at how 2009 stacked up compared with the rest of the decade.  Here’s a chart comparing Single Family Residences sold in Maricopa County by Year since 1/1/2000:

* Note – lots of charts in this e-newsletter.  You can click on any chart to see it full size

It’s probably a surprise to see 2009 sales volume was the 3rd highest in Maricopa County’s history, trailing only the crazy-time years of 2004 and 2005.  After declines of 30% in 2006 and 29% in 2007, followed by a paltry 45,000 units in 2008, 2009’s 71,127 units and 61% increase are staggering numbers indeed.

I want to drill down into the details of the 2009 numbers, both in terms of their composition and their trends.  Today I’ll look at the trends; what made up the 71,127 units will have to wait for another Viewpoint..

The chart below shows the number of 2009 sales by city.

The chart displays every city with more than 1,200 units in 2009.  The volume falls off quickly for cities below 1,200 units; the next two cities were Tempe (1,011) and Sun City (801).  I found a few interesting pieces of information from this chart:

• Phoenix is the primary driver of our market – duh – with almost a third of the total sales volume.
• Mesa was the largest suburb, and by a fairly large margin.
• Glendale & Gilbert had very similar volume as #s 3 and 4.
• Surprise, Scottsdale, and Chandler also had very similar volume, #s 5, 6, and 7.
• The next 7 largest-volume suburbs were all on the west side of the Valley:  Peoria, Buckeye, Avondale, Goodyear, Laveen, Tolleson, and El Mirage.

This chart shows the above information broken out by month.

It’s easy to see the seasonality of summer months having more volume than winter months across all cities, but notice the end of the year shows significantly more volume than the beginning of the year.

Next I’m going to look at some specific metrics to get a feel for the direction of the market. 

Cumulative Days on Market (CDOM) tells us how long a seller markets his home before changing the status in MLS to show he is no longer looking for an offer.  This chart shows the average CDOM by city by month.

The overall 20% reduction in CDOM from January to December correlates with the volume chart above; the market got better during the year.  What’s strange is the large variance from city to city:

• Gilbert was almost unchanged from beginning to end, although October and November showed great improvement.
• Scottsdale hardly had any drop at all; most likely a sign the luxury market is trailing the entry-level and move-up markets’ recoveries.
• Glendale and Peoria showed significant drops.  Possibly from buyers trying to bridge the gap between suburb-value and near-the-city?

Now let’s take a look at prices.  If the market is getting stronger, prices should be rising, right?

This is one of the most confusing charts I’ve ever seen – probably a sign that the market is still confused and not really recovered..

• Overall, prices fell through the first quarter before rising throughout the rest of the year and eventually ending higher than they started.  This jives with our “in the field” experiences, where the first quarter was slow but the rest of the year picked up steam.
• The cities with the largest luxury and move-up markets (Scottsdale, Gilbert, Chandler) fared the worst, ending the year with sales prices lower than they started.

Let’s see how Sold Price compared with List Price.  (in other words, were buyers able to negotiate deep discounts to what sellers were asking?)

I don’t think you can there’s softness in the market when some of the months showed sales prices HIGHER than list prices!  Many cities hovered in the 97%-99% range throughout the year, and again the luxury areas showed the most weakness (although Chandler & Gilbert, more move-up than luxury, showed improvement during the year.)

Another metric we can use to smooth out some of the noise regarding the size of homes which are selling is the average Price per Square Foot.  Here’s what we get:

Here we have different data telling us the same story, or at least corroborating some of my earlier assertions.

• Scottsdale has the highest $/sqft, followed by Chandler and Gilbert.  All 3 of these suburbs saw declines during the year.
• Some of the lower price ranges saw increases during the year, as investors and first-time buyers gobbled up the excess inventory.  Phoenix and Surprise fit this bill, with Buckeye ending the year just about even.
• This agrees with what we saw first-hand in the field this year.  The initial surge was within the “city” by investors, followed closely by first-time buyers.  Both of these groups moved towards the lower-priced suburbs as inventory thinned out.  Then, eventually, buyers moved up the price range ladder.

Where does today’s pricing put us in historical perspective?

Not much good news here.

• Scottsdale – although Scottsdale looked worse than the other suburbs in many of the above charts, it has fared the best, by far, compared with historical numbers.  Does this mean the luxury market hasn’t collapsed all the way yet?  Or does it mean the luxury market has survived the worst of everything?
• East Valley – most of the east valley is showing improvements from the beginning of the decade.
• West Valley – only Peoria is better off today than it was in 2000; the rest of the west valley is looking at numbers from the 1990’s.

That’s a pretty good look at the sales numbers.  Another key component of 2009 were the Distressed Sales – bank owned (foreclosures), auctions, pre-foreclosures, short-sales.  I’ve long maintained that our market will begin to recover in earnest once the foreclosure tidal wave subsides.  Let’s see how the distressed properties shaped up throughout the year..

Here is a chart my regular readers will be very familiar with.  I’ve been pulling the New Distressed Property Listings each month this year.  The red line represents a moving 3-month average and makes trend-spotting easier.

** Single Family Detached homes in Maricopa County, listed as bank-owned, short-sale, pre-foreclosure, or auction.

It sounds bad to be excited about 4,484 New Distressed Listings, but it’s the first month all year under 4,500!  Maybe the banks were showing some holiday charity?  Regardless, we closed out 2009 with 3 months in a row under 5,000 and 5 months in a row under 5,500.  Compared with earlier in the year, that’s a couple thousand less sales required each month just to tread water.

The chart below shows all the new listings that hit the market in 2009 (SFR in Maricopa County), by city, broken out by different types of “distressed”.

More interesting food for thought..

• Compare Scottsdale with Phoenix right above it.  Only 36% of Scottsdale’s listings were distressed, with a scant 16% being bank-owned.  Phoenix, on the other hand, had 68% of its listings come from distressed property owners, with 44% being bank-owned.
• Another split between the higher-end markets and the rest of the city; look at the number of Short-Sale listings compared to Bank-Owned.  Scottsdale, Chandler, and Gilbert have more Shorts than REOs; the rest of the county had more REOs than Shorts.
• 65,886 VACANT new listings??!!  Compared to only 71,127 total sales from earlier.  Thankfully the sales activity picked up; I can only imagine how bad things could have become if we dropped 66 thousand vacant homes on 2008’s market..

That’s a lot of data – what does it all mean?

Lots of Buyers.  More than 71,000 homes sold in 2009, the 3rd most in Maricopa County’s history.  We can infer there were more buyers than normal as well (unless a handful of investors bought all the homes…)

Distressed Properties are driving the market.  Distressed and Vacant properties accounted for almost two-thirds of all homes listed for sale in 2009.

Luxury / Entry-Level Variance.  2009 showed us a large variance between the entry level markets and the luxury neighborhoods.  Scottsdale showed the most softness in Days on Market and Sold Price as a percentage of List Price, but Scottsdale also fared the best on Price per Square Foot (compared with historic averages) and had the least amount of distressed activity.

Relative Market Strength.  The average number of Days On Market fell throughout most of the year, and the Sold Price as a percentage of List Price remained very strong.  This indicates that good properties priced fairly are commanding buyers’ attention.

3 Alternatives for 2010

I didn’t see anything in these numbers and charts to make me think any differently from what I’ve been writing lately.  The market has been moving fast, and we’ve been working very long hours just to keep up.  That said, the market doesn’t really seem to be improving – all the activity is needed just to keep the inventory levels from rising.  Ask any of our buyers or sellers what the market’s been like over the last 6 months, and they’ll tell you once the seller gets over the initial shock of the low market prices, it’s really a seller’s market out there!

What’s going to happen in 2010?  I don’t know.  (how’s that for an honest answer?)  Here are 3 potential outcomes I can see:

Bullish.

New Distressed Listings continues its monthly downward trend while demand stays relatively strong.  It won’t take too much of this before buyers don’t have any decent, vacant bank-owned homes to see, and they start buying from traditional sellers.

There is still considerable concern over the dollar at the macro level, which is enough to keep interest rates at their record lows.

At the same time, there is a pent-up demand from traditional homeowners who have been wanting to move but haven’t been able to sell their home.  These move-up families have been talking about moving since late 2006, and are finally ready to say “what the heck – we’ll get nickels for our house, but the home we want is selling for nickels too, and we can’t pass up a 5% mortgage.”

Bearish.

The $8,000 Tax Credit has pushed forward some of the spring-time demand; first-time buyers who would be out shopping today have instead already bought a home to take advantage of the tax credit.  This leaves a hole in demand, where there aren’t enough buyers to keep up with the new distressed listings.

The commercial real estate market continues to slide (very likely, to the point this is almost a certainty), and eventually carries over to apartment buildings and forcing rental rates downward.  Single family rental homes would need to lower rates as well to compete with apartments.  Eventually there could be fewer investors buying homes if the homes don’t cash flow.

If first-time buyers and investors leave the market at the same time, we’ll see inventory balloon again and the recovery will grind to a halt.

Muddle Through. (to borrow a term from economist John Mauldin, and in my opinion the most likely scenario)

Last fall I wrote a piece called The 2010 Recovery has been Postponed.  I still think this is the most likely case.  We’ll see some ebbs & flows, seasonality, unexpected government intervention – and somehow we’ll work our way through it.

The unemployment rate is expected to get a little worse in 2010 before stabilizing, but we’re already at the other side of the plunge in 2009.  Fewer people this year will lose their jobs, and in 9-18 months we’ll see the foreclosure tides recede.

Water Cooler Sound-Bite (Can you boil all this down to a sound-bit I can quote to my friends?)

“2009 saw a lot of sales volume, but it was offset by the amount of new distressed listings hitting the market.  Unfortunately the market won’t recover in earnest until the bank-owned REOs stop coming in waves, which is likely to be in 2011.”

I hope you enjoyed today’s e-newsletter.  Please feel free to leave a comment/opinion online by using the form at the bottom of the online version, found here.  You’re also welcome to comment on other people’s comments.

Your doesn’t like bears anymore, even the cute ones in the zoo Realtor,

Chris Butterworth

Chris & Heather, The Phoenix Agents

http://thephoenixagents.com

623-570-9940

Chris Butterworth and Heather Barr are The Phoenix Agents at Thompson’s Realty.  The Phoenix Agents are Realtors in the Greater Phoenix area, who have built a loyal following over the years by offering superior service levels coupled with a low-pressure approach.  You can visit http://ThePhoenixAgents.com online to learn more about Chris, Heather, and the Phoenix-area real estate market.  If you have real estate questions or needs, please contact us anytime; we’d love to hear from you.

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