WatchMany of the observant posters on Patrick.net have noticed market reversals in many submarkets:
1. Price increases in their search areas
2. Extreme lack of inventory
3. Bidding wars on homes that seem like good deals
4. Homes selling over list price.
In Phoenix this has actually been extreme. Some areas and homes that had dropped by 60 to 75% during the darkest times of the crash, have rebounded by 50% or so from their bottom pricing. [and to the mathematically challenged, this does not mean they are nearing peak prices again, 50% up doesn't cancel out 50% down, you need 100% up to cancel out 50% down... ]
While the zealots on here will simply argue that "what you think you are seeing, you are not seeing" that is actually not helpful to anyone of sane mind and analytical purpose. Rather, it makes more sense to attempt to study what may be the reasons, and to that end, I have a few suggestions.
1. Aggressive loan modifications. With the latest change to HAFA, many homeowners can now modify their loans despite how far underwater they are. MANY people are doing this, all the lenders I talk to, tell me how busy they are and how backlogged with these types of refinances. At today's rates of under 4%, even many an underwater home will likely have a mortgage less than comparable rent. Take a home with a mortgage of $300K, in Phoenix, the payment with tax and insurance would be around $1800, which is about in line with rent. I'll wager that someone who has held out the last six years while underwater, and paying more than prevailing rents, is very unlikely to default when their monthly living costs will stay the same afterwards. Sure a job loss could force their hand, but remember, they've stuck it out a very long time under a worse payment.
2. Underwater owners. True, this is generally a negative for the market, in the sense of causing short sales and foreclosures, process well documented over these years. However, for an owner that doesn't let go of the home, this becomes a positive in one way: an owner who simply will not sell the home. That removes one potential home from the supply side, until the market rebounds enough that they can get out of it without a loss.
3. Banks renting homes back, short sale purchase with a lessee in place. Neither of these homes is coming on the market, despite their distressed sale. At least not for a time. Who knows, in markets where the price/rent favors renting, maybe banks will continue leasing them for years, it would actually make sense.
Why does this matter? I like many patrick.net readers, thought the crash would have a large U shaped bottom; I thought I would have years to buy and fix up homes, rent them out and wait. However, when I saw the market changing, I stepped up my plans and purchased as many good deal investment homes as fast as I could; Most of those purchases can not be duplicated today, prices have already climbed too much in those areas.
What does the middle term/ long term future hold? who knows? but with rental rates of return at 10%, even with maintenance and vacancy accounted for, why would i care? I actually hope the permadoomers on here are right, I hope a year or two from now, the market takes another tack downward, so I can buy even more homes... But given everything I see, I don't believe that is likely
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San Jose, CA
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SophiesChoice says
LOL! Not only you value location, a lot of folks do. That's why houses in desirable locations held up their value the most during this downturn and likely in future downturns. Ironically, people in these neighborhoods tend to be NIMBY's, which further reduce housing development while the demand for housing in these neighborhoods keeps on growing. Like it or not, I guess that's life & reality. :)
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Everything is being thrown at housing to make prices rise. Simply wait this temporary situation out and prices will resume their fall. Mortgage rates rose this week and huge tax increases are coming in january. Time is the buyers friend.
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Laguna Beach, CA
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Strategic Renter says
This post pretty much sums up the situation, much better than the OP (with all respect of course).
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The fed is propping up prices with low interest and help with closing costs which make buying a house cheaper, in order to get this basicly free money you have to buy a house,
California real estate tax incentivizes not selling your house if you have owned long term, live in huge house and sell and scale down costs actually can go up, so why hassle with selling and moving when you are doing fine as is. If they need money then they sell if they have enough they stay.
The banks know more supply means less money so don't expect a huge tsunami of houses out of them, but you can count on a steady flow unless they sell them all to investors in bulk to rent.
I think with rising prices there is still a good group of sellers who will get pushed onto the market. so I think there will still be a oscillation up and down in prices right now we are in the up.
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DEAD. CAT. BOUNCE.
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Right, when you have government, banksters and speculator community standing on a ladder and whipping the dead cat at the pavement as hard as they can, you're going to get some lively english on that pitch.
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But
it's
still
a
dead
cat.
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I think a lot of folks just remember the 06 insanity and attribute slight margin play in random markets as a sign of YTY 20% appreciation.
Reality is that such cannot occur again. Real estate market will be a non event for a good number of years. Each market is different and all are very saturated.
I'm sure there will be articles pumping up real estate, or whatever else since news are paid for... nothing more than sales pitches and waste of time. If you don't read into it too much you'll be fine. Just make sure you are out of debt and are comfortable with your life.
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Mountain View, CA
bmwman91's website
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Thanks for the analysis Robert. RE is the big focus of everyone right now (and sort of always has been). Pricng seems really volatile in desirable areas (for living, or investing) since supply and demand are at historic opposites now. Add in a lot of government and bank intervention, and the whole system is just wildly unpredictable in the short term. The hard part is accepting that the longer term may seem predictable, but intervention may well make things go another direction. Many of us on here want a downward trajectory, but we might not get it. That's a bitter pill to swallow, considering the last decade or so of irrationality and in some cases, outright idiocy, that priced rational people out of the market.
The adage that, "markets can remain irrational longer than you can remain solvent" sort of comes to mind. While remaining a renter really isn't going to lead to insolvency if the individual is smart about saving/investing, it does sort of serve as a reminder that markets can remain irrational for a really long time, despite loads of logical reasons for why they shouldn't. A year or two I, and probably many people here, were feeling very optimistic about housing prices dropping and dropping. As of now, at least in the areas most of us live in and want to remain in, that optimism is fading in light of this year's RE performance. We are all looking for reasons why, since it sort of sucks to have your hopes trounced.
But, that is life. There are all sorts of places in the world where a middle class person or couple has no hope of ever purchasing anything more than a slummy 400SF flat in some highrise. We all think that we are different because we live in America. We are promised homeownership from the day we are born, and I think that a lot of us see it almost as a right to do so. Well, that promise may just be a lie in this day and age. RE ownership may be becoming a thing for the super wealthy (or the super irresponsible, in the hear future - FHA loans), and they will rent land out to everyone else. It wouldn't be the first place or time in history where that was the case. Just because we THINK it is different here, does not mean that it is. History has a tendency to repeat itself.
None of this means that you should "buy now or be priced out forever" though. If you aren't comfortable with the price now, then so what if you are MORE uncomfortable with it later. You either can afford it now, or you can't. Frankly, the options are renting or moving. America may well become a place where people are forced to make choices they don't like and live with them. It wasn't that long ago that the economy was forcing people to make those types of choices just to stay fed.
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Boulder Creek, CA
Nice summary bmw. This spike has gotten me to re-think my strategy, though I suppose I'm lucky in that I have multiple choices.
Current: Keep renting and see if one of my startups pays off (lol). See what happens to the market over the winter and into next year.
Other: Move to another state (OR or WA).
Other: Move back to Santa Cruz and get a low stress job, as my housing outflow would be ~$800 A YEAR =/
The last option is looking more and more likely.
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Mountain View, CA
bmwman91's website
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CrazyMan, I think you are CRAZY to not be taking that last option. Hell, why deal with the SV rate race & douchebaggery competition when you could move to SC for $800 a year?! Yeah, SC has its own "special" vibe to contend with, but for that price who cares?
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Emeryville, CA
HEY YOU says
Those are words to live by. I take them as Gospel! :)
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Boulder Creek, CA
Yeah, I know I probably am crazy :)
I grew up in and then inherited that house and while I'll never let it out of the family, I've always wanted "my own" place. As a matter of fact that's why I've been saving for the past 15 years.
I certainly could afford to buy a house in Santa Clara/Campbell (I have a couple hundred K in cash I need to do something with) but I'm just not sure I want to deal with the rat race (indeed) for the next 30 years to pay it off.
So yeah, the 3rd option is certainly the smart and conservative move. Luckily my girlfriend is open to the idea as well.
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As someone who recently bought and went through the whole buying experience, I too can attest to the fact that "things are different" from what they were even 6 months ago. I have a few humble opinions about it.
There seems to be a few things happening at once. First of all, there seems to be a generally improved outlook amongst many in regards to the Bay Area economy: Things are improving and people are less scared of the idea of buying. So demand has probably picked up. That opinion seems to have spread like wildfire and now many are like : " we gotta buy now!" Perhaps because the memories of the recent housing bubble are all too fresh in people's minds. I'd be willing to assume many of these same people probably also patiently sat out the bubble, have saved up, and been very careful. But lo and behold the market turned a corner and perhaps many feel that they'll sure as heck not get "priced out" again. Whether this is true or not or whether the current situation is a fluke I have no clue.
As constantly mentioned, inventory has fallen. That's an understatement. There are literally only about 40% of the homes for sale in our town as there was last year. Of those, it seems like there is very little within the "reasonable" ( by Bay Area standards) range. The weird, really crappy, or bad location houses sit. So there is a lot of competition for the "good stuff".
Secondly, as also mentioned interest rates are ridiculously low. In other words money has gotten cheap to borrow again. Doing the math, there isn't a whole hell of a lot of difference between buying a 500k and a 600k house: The rates are so low that we're not talking about a huge delta in monthly payments.
At the same time rents have gone up, and especially for rental houses. There are very few homes for rent in our area at this point and if you do find one the rent is pretty high. We were lucky in that the landlord never raised the rent on us. But if we had had to find another similar home the cost of renting would be more than what we now pay for the mortgage. When we first moved into our rented house there was about a 60% delta between the cost of renting and buying in our area. Now its about even or even slightly more to rent the same thing.
At least from my experience I very shortly found that bidding on foreclosures, short sales, and whatnot was a useless endeavor: Not only were the houses nearly impossible to see, but more often than not investors would swoop in at the last minute. So I didn't even bother to look at them.
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Los Angeles, CA
Wild card is future interest rates. But todays buyers will still be 'sitting pretty' if rates rise - even if they have to move or lose job its not like they are paid cash.
Only risk is downpayment AND you can easily get back your downpayment by squatting for 3 years before the foreclosure.
Lets remember CA is still non recourse state so a 3.5% downpayment is NOT at risk. Buying is risk free financially (unless u refi, then you can alwasy declare BK)
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BMWman
The 4 decades of a technical professional:
20-30 Go wherever, do whatever it takes to gain the edge.
30-40 You are gold. They will recruit you.
40-50 Hang on or move up.
>50 Jump off or be kicked off.
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Santa Cruz, CA
I'll pass on the joys of being a landlord in *Phoenix* which rhymes with "fucked".
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Roberto is lucky, he had the HUGE media focus on foreclosures in Phoenix plus all the overbuilding and very little hype in the aftermath of the bubble imploding. On the other hand SFBA still has the aftermath hype in full motion. Heck, his area may well start seeing more jobs migrate to Phoenix due to high costs. Not what I want to see, but certainly when cost of living is lower, its more attractive.
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Fred Flintstone says
Remind me again why Silicon Valley companies shut down operations and moved it to Arizona, upper New York, Colorado, Texas and other lower costs regions. All due to higher home costs. Not something im cheering about.. but at least the jobs are going to Americans.
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Madison, WI
Reversal = investors with shitpiles of money/easy credit, just like OP, so they can live/ride off the backs of ordinary working Americans. Nothing wrong with that, it's the American way.
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Reston, VA
RobertoAribas is perfectly credible IMO. He got a little lucky that he was living in an area where there were good buying opportunities and was smart enough to see it for what it was. I appreciate his highly localized but interesting info.
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Tarzana, CA
YesYNot says
Agree. I think many people on this site wish we had similiar opportunities where we live, thus, more inclined to hopefully jokingly give him a hard time.
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hehe, by the end of the decade there will be a widespread awakening to Arizona's water future AND peak oil. The double whammy will make houses much less desirable in that desert, and everywhere really. But in the desert they are going to be worth dogshit.
Prices may be bumping there now, but the coming crash will make what's happened so far look mild.
Get ready for the end of growth homies.
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BRACE for Cannibal Anarchy!
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Los Angeles, CA
Global warming and peak oil are hoaxes created to get $ out of suckers and pass agendas/power grabs.
Jim Kunslter is a hack writer who only starting making real $ by pandering doomsday books to the global warming religion IMO.
There are probably 500 different doomsdays you can choose to believe in. I'm choosing zombie apocalyspe - its the most fun.
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Peak Oil a hoax? Zombie needs to eat more brains.
As for the butt pulling Realtor, he's sticking his head in the desert sand
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But lo and behold the market turned a corner and perhaps many feel that they'll sure as heck not get "priced out" again.
I know of a couple of young families in the Bay Area who are in that boat and bought earlier this year. That said, I was talking to a friend recently about some of his work colleagues. The highlights included one that was 'well off' but sold his two houses (one primary and one rental) at a loss. He did, though, take his remaining equity and bought a nice place east of the hills. Another had an ARM resetting and was trying a short sale on a million dollar home. Yikes.
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Reston, VA
http://www.wired.com/science/planetearth/magazine/16-05/ff_peakwater?currentPage=all
Intel is stockpiling water in Arizona. Maybe Robert can get himself an aquifer :).
Seriously, the above article has a good discussion of the two big water projects for Pheonix. It would be silly to write it off as a non-issue.
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PockyClipsNow says
His "Geography of Nowhere" and "Home from Nowhere" are excellent reading and well worth the time of anyone interested in city planning.
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Los Angeles, CA
All Kunstler does is bash everything and promote mixed use development and local everything (due to oil will run out). same message forever. He predicted TEOTWAKI back from the y2k scare days. (lots of IT work for that, not so much for peak oil/global warming scare mongering)
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Phoenix is one of those places where they ripped off the bandaid quickly (due to non-judicial foreclosures). Extremely painful initially, but why delay the agony? From the WSJ today:
Nearly 94% of Phoenix ZIP Codes and 90% of Denver ZIP Codes saw values rise during the three-month period ending in April, up from 5% and 6% a year ago, respectively.
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Hermosa Beach, CA
CrazyMan says
How about a remodel in SC? Cheaper than buying and would make it "your house."
I am soooo with you on the rat race. I am 47 and looking at essentially retiring in the next 3-5 years to a more laid back, "work when I want to" sort of job, doing something that I really enjoy. My career has lost a lot of the fun in the past couple years. Three years ago, I imagined I'd work in this field "forever" because I was having fun.
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Ross, CA
PockyClipsNow says
Holy fucking cow. You're gullible.
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EBGuy says
Well, that's a start in the right direction, but this is after a decline of like 75%, so it's got a long way to go..
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San Mateo, CA
APOCALYPSEFUCK is Shostakovich says
How can you be so sure..... We'll only know in hindsight. But yeah, I do agree with this (in theory) or rather, I wish this were true -- thanks for the succinct perspective, Strategic Renter (like your name btw):
"Everything is being thrown at housing to make prices rise. Simply wait this temporary situation out and prices will resume their fall. Mortgage rates rose this week and huge tax increases are coming in january. Time is the buyers friend."
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San Mateo, CA
It may be worth it to see how things go during the traditional "slow" season for real estate especially in the year that many sources are now declaring as the housing bottom. Will the end of the year witness sustained (higher) prices or will things reverse? As a buyer, I have taken myself out of the market temporarily to see what happens.... at least till later in the year or till any improvement in inventory, whichever happens earlier.
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55 threads
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Scottsdale, AZ
robertoaribas's website
clambo says
thank you for that erudite analysis of Phoenix metropolitan market conditions... You must be a PhD in Finance to have so seamlessly woven the macro and micro economic conditions into such a succinct observation!
you might want to look up what 'rhyming' means though...
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Scottsdale, AZ
robertoaribas's website
pazuzu says
By the end of the decade, global warming induced severe coastal flooding, combined with multiple pacific coast earthquakes, and California's delusional government will have forced everyone to leave, doubling the population of Arizona, and causing a real estate price increase like never seen in history!!!
see, i can pull stuff out of my butt to rationalize the future I want too!
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Scottsdale, AZ
robertoaribas's website
values have done nothing but rise during the may, june, july period as well. Take it from ANYONE who has actually been looking at homes over that time period... I've blocked the douche-bag who keeps screaming 'they will be cheaper by fall' based on nothing but his own wishful thinking, I'm sure he already trolled his non fact based nonsense on this thread... Inventory is still ultra low, and multiple offers are common, so the next several months are virtually assured to see rising prices. Notice of trustee sales haven't risen significantly enough to knock this market down, and the number of short sales both available, and pending are falling... I can't explain this sudden market reversal, but there is no denying it, except by brain dead fact ignorers.
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San Mateo, CA
RobertoAribas,
I don't mind a healthy, intellectual debate on these matters and welcome opposing views, arguments and such. But I agree that the trolls are completely useless and bring nothing but noise to these threads. Glad I blocked them all too.
I'll add some other reasons for the market reversal. There are other threads explaining the tight inventory and low supply. But allow me to posit where I'm seeing the source of the extra demand --
- foreign money coming in after fear of global slowdown or European debt crisis coming to fruition. This is a "flight to safety" in a way. U.S. real estate appears much better priced now, so foreigners are wanting to shovel their money here to escape the uncertainty elsewhere.
- Strong stock market in early 2012 with people unloading liquid assets and now needing to put it somewhere else.