Thursday, April 5, 2007

Phoenix Real Estate - Market Forecast

It's time to update my personal forecast of for the Greater Phoenix Area.  Not in the sense of "exactly how many units are going to sell this year", but more along the lines of "when is the market going returned to a more balanced state?" 

First we need to think about what a balanced state is.  We've spent the last 3-4 years with a market that has been out of whack (or at least out of balance), so we have to go back a bit further to remember what it was like to be balanced.  I like to use 2002 and 2003 as good comparison years, because the market at that time was fair.  People put their homes up for sale, and they sold!  The average time on the market was 2-3 months.  Buyers had a choice of homes available to look at, but not enough to play many sellers against each other; if they liked the house they made a fair offer.  As for inventory, or number of homes actively on the market, most experts say that approximately 30,000 single family residences on the market would force a balanced state.

Let's look at Sales figures (demand).  In March, 2003, there were 5,262 single family residences that sold, in an average time of 65 days.  (figures from MLS).  In March, 2007, there were 4,761 sales, with an average of 109 days.  At first glance this looks like there were more buyers in 2003, but the numbers hide the fact that there are many, many potential buyers today, who can't actually buy a home until theirs sells.  I don't know the exact number of people in this situation, but my guess is that there are at least 500 people who are ready to buy but can't sell, and that's a conservative estimate.  So from a demand perspective, today's market is very similar to 2003, and potentially even better.

Now let's look at inventory (supply).  In the spring of 2003, there were approximately 27,000 single family residences actively for sale.  Today there are approximately 41,000.  Once again, as I've said many times before, this is where our problems lie - too much supply.  What has to happen, and when will it happen, to reduce the supply to the balanced range of 30,000?

I think the people who are selling can loosely be divided into two groups:  those who want to sell (Wants), and those who have to sell (Haves).  The Wants are made up of people who want to upsize, or downsize, or move closer to work or family.  They have a very real desire to move, but they are not being forced to move - if they have to wait for a year, they can.  The Haves do not have this luxury.  They've already bought another home, and two mortgage payments are killing them.  Or they've moved out of town.  Or their situation has changed and they can't make their mortgage payment.  Or they've gotten divorced.  Or something else.  They are in a situation where they Have to sell their home, now.  And if they can't, and the bank takes it back, the bank will Have to sell it.  So one way or another, these homes are going to sell.

The Wants and the Haves can both market their homes aggressively, and they can both make their homes look very pretty and desireable.  But price is the final determinant - the Wants will be very hesitant about reducing their price too far, while the Haves won't have a choice; they will go lower and lower and lower, until their home shows enough value that someone buys it.  This is where the inventory is going to get cleared.

Haves will do whatever is necessary - lowering their price is the final move.  If they can't sell & walk away from the house, then the bank will sell at a reduced price.  As prices drop, Wants will pull their homes off the market.  Some of the Haves who give their homes back to the bank will now have credit problems, and become renters.  They will rent some of the other Haves' homes, effectively taking those off the market.   Some Haves will be able to buy again, even if their selling price is low.  They'll buy a smaller home, or in another neighborhood, or whatever, which will take another home off the market and allow that home's seller to buy another.

Eventually the overabundant numbers of Haves (investor owned, potential foreclosure, and vacant-already-moved) will sell, and mostly at prices 10%-15% below today's.  This clearing of inventory will be fairly quick and turbulent; I expect it to occur during the remainder of this year.  Keep in mind that prices can't fall too far.. some people will simply not have enough equity to sell (and remove their home from the market), others will refuse to lower their price out of choice (and remove their home from the market), and lower prices will coax more investors to buy discounted homes (and remove homes from the market).  All this removal of inventory will help bring the number of homes for sale closer to 30,000, which will balance the market and stabalize prices.

Bottom line - I'm looking for the rest of this year to be moderately turbulent, but prices aren't going to drop evenly across the board.  Those who Have To Sell will be the driving force in prices, so we'll see many neighborhoods with a wide divergence in prices - the Want To Sell homes will be priced higher than the Have To Sells.  I realize this is usually the case, but I think this year the disparity between the two will be larger than normal.  However, this purging of Have To Sell homes should happen during the next 6-12 months, and we should head into 2008 with a much more balanced market.

How do my forecasts usually fare?  I've been right, and I've been wrong.  I was dead-on accurate in my call of the market's peak in 2005.  But I didn't expect this current slow-down to last as long as it has.  I'll report back on this post in future forecasting posts and we can see how I'm doing..

-Chris