PHOENIX MARKET UPDATE, Why is inventory low? (Maricopa: for sale, real estate market)

[Captain Bill]

This is an update on the current state of the Phoenix Metro real estate market. The source of my data is The Cromford Report and the ARMLS.

The Cromford Report is a web site full of historical data, charts and graphs that can be used to spot trends and make short term forecasts from the trends. It's available to anyone, on a subscription basis.

ARMLS is the Arizona Regional MLS, available to Realtors.

Mike Orr maintains the Cromford Report, and is also Director of the Center for Real Estate Practice at ASU, WP Carey School of Business. He develops a monthly real estate report for the school that is available to the public. Here is the link: Division of Real Estate - Finance - W. P. Carey School of Business

Here are a few myths that are being perpetuated on the internet.

MYTH 1: The wave of foreclosures will soon hit, and that will demolish the market
FACT: In April, the non-current home loans in Arizona was 5.9%. 5.0% is considered to be the "normal" percentage.

MYTH 2: Lenders are holding back inventory in order to falsely inflate housing prices.
FACT: Lenders in Phoenix have only 1,778 homes owned but not listed on the MLS.

MYTH 3: The Phoenix housing market is "dominated by institutional investors".
FACT: Institutional Investors are a small part of the Phoenix real estate market.

MYTH 4: The shadow inventory is so great that it will crash the market.
FACT: See Myth numbers 1,2 and 3. Any shadow inventory is negligible.


FORECLOSURES:

In the past few years, delinquent loans were an important issue, but that is no longer true. In April 2013 the non-current home loans in Arizona was only 5.9%. If we exclude those delinquent loans that are already in foreclosure, then the percentage of non-current home loans (not already in foreclosure) is down to 4.5%. There will always be foreclosures, in every market, and the normal is 5%. Therefore, Arizona has a less than normal number of homes with delinquent loans.

The Pending Foreclosures in Maricopa County as of June 6 was 8,147 which is the lowest number since 2007. It's also lower than 2002 when the economy was hit after 9/11.

Because of the tighter underwriting procedures during the last four years, Mike Orr expects the foreclosure rate to continue dropping below normal for several years. You can expect to see Realtors and attorneys who specialize in foreclosure activities to begin changing their business models. You'll see less and less advertising from those groups for foreclosure business.


LENDER INVENTORY

Anyone discussing the bank inventory, and claiming that banks are holding back inventory in order to increase prices artificially, should first learn exactly how many homes the lenders own.

• In Phoenix Metro, as of June 1, 2013, the total number of lender owned properties (REO's) was 3,534.
• Of that number, 1,756 are listed on the MLS for sale.
• 1,778 of those are not listed for sale on the market.
• Part of that 1,778 are in the two month process of being made ready for the market.
• That leaves about 644 homes the lenders have held for over two months for unknown reasons.

In a market that sells 75,000 annually, those numbers are a drop in the bucket. So, if on one day, the lenders released the total 1,778 homes they own, but are not listed, what would the Phoenix real estate market do? It would applaud and gobble those homes up as fast as they hit the market (provided they were priced at the market).

The Cromford Report tracks all of the lender owned sales through the county recorders office and maintains a daily spread sheet of the results.


INSTITUTIONAL INVESTORS

There are active institutional investors in Phoenix, but they are a very small part of the market. They do not "dominate" the market. Obviously, they have deep pockets, pay cash, and can be difficult to compete against. However they do not even compete for the majority of homes for sale.

They are only interested in the lower priced homes that can be rehabbed and rented for cash flow. This is a small niche market, and they don't dominate that market. There are many small investors in the market, and they buy more than twice the number of homes as the institutional investors.

Mike Orr said,
"Normal homeowners buy three times as many homes as all investors put together. The market, therefore, is dominated by normal home buyers."

Over the past few years, institutional investors now own around 11,000 homes in Maricopa County, which is not a large number. It is less than 1% of the housing stock, which would be about 1.5 months sales. If they all came on the market in one day, we would still have an inventory shortage.

Now consider that these investors with rental homes will not be selling the homes until they have achieved a sufficient capital gains. They will probably sell them a few at a time, so as to not flood the market in a given area which could cause a decline in price in that area. In addition, the tenants in those homes will have to find new housing. Many of the tenants are renting only until they can save enough money to buy a home. That will create new demand.


WHERE WILL A SUPPLY OF HOMES COME FROM?

• Not from institutional investors because they don't own enough to make a difference. And there is no chance that they would "dump" them all at once.
• Regular homeowners when they reach positive equity. That is happening on a small scale, but is unlikely to be a huge source.
• Homeowners relocating from Phoenix. That is happening, however, there are also more people moving in, than moving out, so the demand for housing is increasing.
• New built homes is a source of new supply, however, it appears that developers are keeping their production low in order to keep prices high.
• There are several reasons for them keeping production low. As the demand for building materials increase, the prices increase, thereby lowering their net profit. Skilled labor is still in short supply. Land for expansion is very expensive to buy now. The most compelling reason for builders to limit production is that if they increase the number of houses they build, the price overall would decline as the supply overtakes demand. So, it seems logical for builders to stay with low supply and increasing prices as long as they can.

[Burning Madolf]

Haven't seen a Capt. Bill update in awhile. Thanks

[Zippyman]

I don't know why anyone would sell, when even conservative estimates forecast a 10% increase in value over the next 12 months.. unless you're listing for 10% over current values, which is kinda the situation I'm seeing around me.. overpriced, or not for sale..

[Captain Bill]

I have four rental properties and I wouldn't consider selling them now. I probably won't sell them until I see something like the trend that was setting up in 2005-2006 where prices were increasing, but demand (sales) had started declining, signaling that prices would follow the downward demand trend several months later.

[autism360]

Builders were building 35000 homes a year consistently in the Phoenix area prior to 2006 now they are building only 17000 a year.
They hold the key to replenishing the housing inventory. Most homeowners who sell end up buying another home here so that does not help increase inventory.
If home prices continue to increase that may draw builders from other parts of the country to our area which may help get the builders moving but there is no sign that will happen at this point.


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[Tall Traveler]

I still think the housing in Phoenix is a bit low priced and it will take more of a rise in prices to motivate builders to build the number of houses needed. Another 30-35% increase will probably be needed to get builders up to the level necessary to match the need. At that point, I'll be ready to sell the houses I bought and now renting.

[MN-Born-n-Raised]

Originally Posted by Captain Bill

....
.....
*New built homes is a source of new supply, however, it appears that developers are keeping their production low in order to keep prices high.


*There are several reasons for them keeping production low. As the demand for building materials increase, the prices increase, thereby lowering their net profit. Skilled labor is still in short supply. Land for expansion is very expensive to buy now. The most compelling reason for builders to limit production is that if they increase the number of houses they build, the price overall would decline as the supply overtakes demand. So, it seems logical for builders to stay with low supply and increasing prices as long as they can.

Bill.
Did Mike Orr write these two bullets?

[Captain Bill]

Originally Posted by MN-Born-n-Raised

Bill.
Did Mike Orr write these two bullets?

All of the facts in my post were compiled from information from a month of daily reports within the Cromford Report. The daily and monthly reports are written by Mike Orr, but unless I have something in quotes, it is not the exact wording used in the reports.

[jimj]

Capt., concise and full of information as usual! Thank you very much for the update.

[TiredOfyycCold]

Thanks for another informative post Captain!
An ill-informed poster had mentioned "shadow inventory" in another thread recently - didn't have the energy to even respond - hopefully that individual will take the time to read and understand your post.