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Phoenix-area real-estate market may face new reality
As the Phoenix-area housing market's shift from boom to bust approaches its fifth anniversary, a number of real-estate analysts have replaced optimistic terms such as "recovery" with sobering talk of a new market reality.
The landscape of tomorrow's housing market, as depicted in recent research papers and forecast meetings, is only a rough sketch, but three notable features have taken shape.
Foremost among them is a much higher ratio of renters to homeowners than the Phoenix area has seen in recent decades.
Another long-term problem, they said, is the large number of struggling borrowers trapped in high-end homes for which there are virtually no eligible buyers.
Perhaps the most troubling long-term prediction is that certain pockets of less-desirable residential development simply will not recover.
Trouble by the numbers
Home sales and prices began to stall in mid-2006, but the collapse of the metro Phoenix market gained momentum in the latter half of 2007, when a disturbing trend emerged among recent homebuyers.
There was a sudden jump in mortgage-loan defaults, which came as no surprise to those aware that constant home-value appreciation had been essential to the viability of certain loans being approved for first-time buyers.
Popular mortgages issued during the housing boom were adjustable-rate loans structured to start off with lower monthly payments that would increase over time.
Loans were approved based on borrowers' ability to make the lower, initial payments. It was assumed that by the time those payments increased, the home would have appreciated enough to allow the borrower to either sell or refinance.
But when home values stopped going up, that exit strategy evaporated.
Sales began to slow, then stall.
When the number of pre-foreclosure notices issued to single-family homeowners in Maricopa County nearly doubled to 16,911 notices during the last six months of 2007 from 9,319 notices during the first six months of the year, the problem loan products were yanked from the market, but the damage was done. Home foreclosures skyrocketed to record levels.
Home values plummeted, leaving about half of all mortgage-holders owing more than their homes' market value. Many now find themselves thousands of dollars underwater.
Big questions remain about how much of the fallout is yet to come and what Phoenix-area neighborhoods are going to look like when the economy stabilizes.
Analysts say they do know this much: The housing market will not simply go back to the way it was before the boom.
Renter's mecca
One fundamental change, according to housing-market analyst Mike Orr, is that more metro Phoenix homes will be occupied by renters than ever before. Foreclosure properties are being bought overwhelmingly by investors; other potential buyers simply haven't materialized.
Orr said the ratio is changing rapidly, especially at the lower end of the market.
"There is a big swing from ownership to rental," Orr said.
The overwhelming majority of homes priced at or below $100,000 are being purchased by investors, he said, and nearly every investor has adopted a strategy that includes renting out the homes for a period of years.
"If it wasn't for the investors, this market would be dead," said the Mesa-based Orr, who publishes the Cromford Report, a housing-market update read by many real-estate investors. "There's very weak demand from ordinary people."
What's not yet known, according to Orr, is how large a segment of the population will remain renters in the years to come. Still, he said the shift from a buyer-dominated housing market to one dominated by renters will continue, at least for the foreseeable future.
Long way down
Homes at the high end of the market, those above the Federal Housing Administration's $346,250 loan-guarantee limit for a single-family residence, are proving difficult to sell.
That is expected to be a long-term problem, as well.
As a result, Orr said, many high-end housing submarkets are in the midst of a long, slow slide.
Financially stressed borrowers in luxury homes face a much more difficult challenge than their counterparts with homes priced under the FHA limit, according to Arizona State University professor Jay Butler.
Investors generally aren't interested in high-end homes, Butler said, in large part because they understand how shallow the buyer pool is for homes above the FHA limit.
While banks do still offer higher-value "conventional" loans, which do not come with a federal guarantee of repayment to the lender if the borrower defaults, such loans are expensive, difficult to obtain and require a much higher down payment, usually about 20 percent as opposed to 3.5 percent for FHA-backed loans.
Without a willing buyer, struggling high-end homeowners cannot short-sell the home. Short-selling, in which the home is sold for less than the loan's outstanding balance, has become a popular way for homeowners to escape suffocating mortgage debt without suffering too much credit damage.
Meanwhile, Butler said, it appears that many high-end homeowners are running out of time, siphoning off critical savings and retirement funds to stay current on their mortgages.
"We might see more people give up in the coming year," he said. "I don't see it getting any better (this) year."
Long-term downturn
Local analysts are predicting another long-term problem at the neighborhood level. Metro Phoenix residents most likely will have to live with pockets of persistent blight in areas where ill-fated residential subdivisions will not recover, some analysts said.
One of the areas facing the greatest risk of a long-term slump is west-central Phoenix, where in some areas home values have plummeted almost down to nothing.
Orr said no area has been dealt as hard a blow as Maryvale.
"It's almost unbelievable what actually has happened," he said.
Orr said it's difficult to envision how a recovery would occur in ZIP codes such as 85009, where the median home price has dropped more than 80 percent from the market's peak.
"That means (homes) could double in price, twice, and still not be worth half as much as they used to be," Orr said.
According to The Arizona Republic's most recent Valley Home Values report, the median home-sale price in ZIP code 85009 fell to $30,000 in 2010 from $160,000 in 2007, a decline of about 81 percent.
Other areas at risk of non-recovery include some of the more remote subdivisions in northern Pinal County and the southwest Valley, analysts said.
The new market reality is still being shaped: After a few months of uptick, Arizona State University has reported five straight months of home-price declines.
It could be years before the Phoenix-area housing market of the future comes into full view.
As the Phoenix-area housing market's shift from boom to bust approaches its fifth anniversary, a number of real-estate analysts have replaced optimistic terms such as "recovery" with sobering talk of a new market reality.
The landscape of tomorrow's housing market, as depicted in recent research papers and forecast meetings, is only a rough sketch, but three notable features have taken shape.
Foremost among them is a much higher ratio of renters to homeowners than the Phoenix area has seen in recent decades.
Another long-term problem, they said, is the large number of struggling borrowers trapped in high-end homes for which there are virtually no eligible buyers.
Perhaps the most troubling long-term prediction is that certain pockets of less-desirable residential development simply will not recover.
Trouble by the numbers
Home sales and prices began to stall in mid-2006, but the collapse of the metro Phoenix market gained momentum in the latter half of 2007, when a disturbing trend emerged among recent homebuyers.
There was a sudden jump in mortgage-loan defaults, which came as no surprise to those aware that constant home-value appreciation had been essential to the viability of certain loans being approved for first-time buyers.
Popular mortgages issued during the housing boom were adjustable-rate loans structured to start off with lower monthly payments that would increase over time.
Loans were approved based on borrowers' ability to make the lower, initial payments. It was assumed that by the time those payments increased, the home would have appreciated enough to allow the borrower to either sell or refinance.
But when home values stopped going up, that exit strategy evaporated.
Sales began to slow, then stall.
When the number of pre-foreclosure notices issued to single-family homeowners in Maricopa County nearly doubled to 16,911 notices during the last six months of 2007 from 9,319 notices during the first six months of the year, the problem loan products were yanked from the market, but the damage was done. Home foreclosures skyrocketed to record levels.
Home values plummeted, leaving about half of all mortgage-holders owing more than their homes' market value. Many now find themselves thousands of dollars underwater.
Big questions remain about how much of the fallout is yet to come and what Phoenix-area neighborhoods are going to look like when the economy stabilizes.
Analysts say they do know this much: The housing market will not simply go back to the way it was before the boom.
Renter's mecca
One fundamental change, according to housing-market analyst Mike Orr, is that more metro Phoenix homes will be occupied by renters than ever before. Foreclosure properties are being bought overwhelmingly by investors; other potential buyers simply haven't materialized.
Orr said the ratio is changing rapidly, especially at the lower end of the market.
"There is a big swing from ownership to rental," Orr said.
The overwhelming majority of homes priced at or below $100,000 are being purchased by investors, he said, and nearly every investor has adopted a strategy that includes renting out the homes for a period of years.
"If it wasn't for the investors, this market would be dead," said the Mesa-based Orr, who publishes the Cromford Report, a housing-market update read by many real-estate investors. "There's very weak demand from ordinary people."
What's not yet known, according to Orr, is how large a segment of the population will remain renters in the years to come. Still, he said the shift from a buyer-dominated housing market to one dominated by renters will continue, at least for the foreseeable future.
Long way down
Homes at the high end of the market, those above the Federal Housing Administration's $346,250 loan-guarantee limit for a single-family residence, are proving difficult to sell.
That is expected to be a long-term problem, as well.
As a result, Orr said, many high-end housing submarkets are in the midst of a long, slow slide.
Financially stressed borrowers in luxury homes face a much more difficult challenge than their counterparts with homes priced under the FHA limit, according to Arizona State University professor Jay Butler.
Investors generally aren't interested in high-end homes, Butler said, in large part because they understand how shallow the buyer pool is for homes above the FHA limit.
While banks do still offer higher-value "conventional" loans, which do not come with a federal guarantee of repayment to the lender if the borrower defaults, such loans are expensive, difficult to obtain and require a much higher down payment, usually about 20 percent as opposed to 3.5 percent for FHA-backed loans.
Without a willing buyer, struggling high-end homeowners cannot short-sell the home. Short-selling, in which the home is sold for less than the loan's outstanding balance, has become a popular way for homeowners to escape suffocating mortgage debt without suffering too much credit damage.
Meanwhile, Butler said, it appears that many high-end homeowners are running out of time, siphoning off critical savings and retirement funds to stay current on their mortgages.
"We might see more people give up in the coming year," he said. "I don't see it getting any better (this) year."
Long-term downturn
Local analysts are predicting another long-term problem at the neighborhood level. Metro Phoenix residents most likely will have to live with pockets of persistent blight in areas where ill-fated residential subdivisions will not recover, some analysts said.
One of the areas facing the greatest risk of a long-term slump is west-central Phoenix, where in some areas home values have plummeted almost down to nothing.
Orr said no area has been dealt as hard a blow as Maryvale.
"It's almost unbelievable what actually has happened," he said.
Orr said it's difficult to envision how a recovery would occur in ZIP codes such as 85009, where the median home price has dropped more than 80 percent from the market's peak.
"That means (homes) could double in price, twice, and still not be worth half as much as they used to be," Orr said.
According to The Arizona Republic's most recent Valley Home Values report, the median home-sale price in ZIP code 85009 fell to $30,000 in 2010 from $160,000 in 2007, a decline of about 81 percent.
Other areas at risk of non-recovery include some of the more remote subdivisions in northern Pinal County and the southwest Valley, analysts said.
The new market reality is still being shaped: After a few months of uptick, Arizona State University has reported five straight months of home-price declines.
It could be years before the Phoenix-area housing market of the future comes into full view.
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