Friday, September 7, 2007

My proposal for fixing the current Phoenix Real Estate glut

Today there are 46,844 Single Family Residences being marketed for sale in the MLS.

Last month there were 3,595 Single Family Residences that closed escrow.

This means there is currently a 13-month inventory valley-wide. Or looked at from another angle, each month we can expect 1 house to sell for every 13 that are on the market.

Those are some sobering numbers. But numbers alone don't always tell the whole story. Let me use these number to paint a different picture...

In an average Phoenix neighborhood right now there are 13 comparable homes for sale, and let's assume a hypothetical median asking price of $300,000. From my experience, 2 of the homes are probably priced very aggressively, somewhere below $280,000. And 2 of the homes are priced ridiculously high, somewhere above $320,000. The other 9 homes are priced between $280k and $320k. It's obviously a buyer's market, with 13 opportunities to play one seller against the others in an attempt to drive the purchase price as low as possible.

If one seller lowers his asking price, he will gain a short-term advantage, but only until the other sellers follow suit. Once all 13 sellers have lowered their price, nobody gained an advantage but the entire neighborhood lost value. So lowering the price is not a good long-term solution.

If we could take the 6 homes in the neighborhood that are priced the highest and remove them from the market, the entire complexion of the neighborhood would change. Heck, none of these homes is going to sell anyway – by staying on the market they are only giving the buyers more leverage to drive prices down further, which drives down the comps in the future, which ends up hurting these very sellers!

Remove the homes priced in the top part of the range for their neighborhood, and the buyers will have fewer homes to choose from; they will probably only LOVE one of the six, which will force them to pay closer to asking price. (good old fashioned supply and demand!) This will help to stabilize prices, which will bring additional buyers into the market who are waiting on the sidelines for the bottom of the market. More buyers means more houses selling, which frees up those sellers to buy their next house – the domino effect. And once the dominos start falling, we would find ourselves in a balanced market very quickly.

Sellers (and Listing Agents) – if you aren't going to be super-aggressive in your pricing strategy in today's market, you are actually hurting yourself by "testing the waters." It's better to remain on the sideline than to be part of the oversupply which is driving prices downward.

And if you are already in the market but do not want to compete at the lower half of your neighborhood's price range, consider taking a break until the market finds a balance. You're most likely wasting your own time, as well as everyone else's, while contributing to the neighborhood's depreciation rate.

- Chris Butterworth

[tags] Phoenix market review, real estate glut, absorption [/tags]