Short Sales Creates Low Housing Inventory in Scottsdale and Greater Phoenix, Arizona Markets
Why Such Low Housing Inventory for Scottsdale and Phoenix, AZ?
As most people who are involved in the Scottsdale and greater Phoenix, AZ real estate markets intimately know, the number of active listings is at an All Time LOW of 16,218 homes for sale as of February 29th, 2012.
By most indications, a balanced market for Maricopa County is between 24,000 and 26,000 active homes for sale. These numbers indicate that Maricopa County, which includes greater Phoenix and Scottsdale residential markets, are approximately 8,000 homes under a balanced market.
With such a lack of inventory, a normal market should drive prices up with hyper activity until the residential market stabilizes at its natural equilibrium.
But, it's not happening this time.
There are several critical questions that this lack of inventory raises for real estate agents, home buyers and home sellers. These questions are:
- Why are the normal market functions not working with such low housing inventories?
- How will the Banks and their distressed properties affect the housing markets?
- How long will this lack of greater Phoenix and Scottsdale housing inventory last?
Although a real estate crystal ball would be great (and I wouldn't be writing this article if I had one), I believe we can partly answer the above questions by examining the current housing and banking trends to better predict the future.
The first question regarding why normal market conditions are not working to drive prices higher with low housing inventories is truly defined by using the word "normal" in describing current market conditions. There's nothing "normal" about our real estate markets. Without going into great detail, a normal real estate market is partly defined as willing and able sellers selling homes and property to willing and able buyers who purchase at fair market value as defined by the natural laws of supply and demand and who intend to use the property is their primary home. I probably don't need to elaborate further on these statements as most home sellers are not "willing" (short sales) or do not even consist of the original owner such as a Trustee/Foreclosure Sale or the sale of foreclosed homes by the banks. When lending restrictions are so dramatic that cash buyers make up a large segment of the home buying population, normal market conditions cannot exist.
For Maricopa County, it is not a normal real estate market which means low housing inventories do not necessarily create rising housing prices. Scratch that key presumption.
Although we do have some general answers to the second questions, it truly requires a crystal ball for better clarity. We do know several key things about the banks and their changing programs for distressed homeowners. The first fact is that due to a number of legal issues and the economics of foreclosure, most banks are now promoting short sales instead of foreclosures after other alternatives such as loan modifications and refinancing fail. The lack of bank owned homes for sale in Phoenix and Scottsdale are illustrative of the lenders new focus on short sales. As banks are focusing on short sales, the timeliness of the transaction has dramatically increased.
According to a recent Wall Street Journal article, new data indicate that foreclosure timelines have increased significantly. Arizona foreclosure statistics illustrate this point with loans under $250,000 taking an average of 410 days from initial delinquency to foreclosure. For loans over $1 million, the average number of days is approximately 620 days.
Finding data that measures Arizona short sales from the date of the homeowner's initial delinquency to close of escrow is difficult at best. However, in managing my firm's distressed property division, most short sales will close very near the foreclosure date and often will extend past the foreclosure date by requesting short sale extensions. I believe it would be conservative state that most short sales in Maricopa County will close escrow within 80% of the actual foreclosure date. Using this data, a Scottsdale or greater Phoenix short sale as measured from the initial date of delinquency to close of transaction would average 328 days for loans under $250,000 and 496 days for homes with loans over $1 million.
I believe the third question regarding how long will the low housing inventory last in Scottsdale and the greater Phoenix residential markets is actually answered by the first two questions.
Normal market conditions do not exist at this time. As such, low inventory does not necessarily mean that more homeowners will place their homes on the market for sale as they simply cannot sell their homes until general values exceed general mortgage debt. The normal market functions of low inventory creating higher prices which trigger increased product to balance supply and demand of the residential markets will not end this shortage of homes for a long time.
A large number of people believe that the banks will release a large number of homes that are held in their "shadow inventory". I do not believe that this is a factor that will increase the supply of homes as the banks have changed their foreclosure practices from foreclosure to loan modification and short sales. Assuming homeowners cannot sell their homes due to debt issues, to balance the market the banks would need to place homes that they currently own into active listings at around 8,000 homes per month. I believe this is unrealistic at best.
In conclusion, due to the banks changed focus to short sales and the length of time for foreclosure or short sale and normal market supply and demand processes that are not working, the greater Phoenix and Scottsdale residential markets will face a significant shortage of inventory stretching into 2013.
If you are a real estate agent, the old maxim "Lister Last" could not be truer.
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