Housing Market Case Study: Phoenix and California
Arizona and California were two of the four (the other two being Nevada and Florida) most affected by the housing crisis. In Phoenix, which was perhaps the epicenter of the bubble and subsequent implosion, “Median home prices for resold homes peaked at $268,000 in June 2006. Now the median price is $120,000. It is the biggest decline in the top 20 metropolitan areas tracked by the Standard & Poor’s/Case-Shiller home price index.” Next door in California, “The median price for a single-family home…was $256,700 in April, down 36.5% from a year earlier.”
It might then come as a surprise that these two markets are in some ways leading the national recovery that some analysts insist is already underway. In Phoenix, the decline in home prices slowed for the first time in two years, a sign of a market groping for a bottom. In California, meanwhile, home prices are now rising month-over-month, by double digits in some markets.
At this point, some of you – especially those that don’t live anywhere near these two regions – are no doubt wondering, “Who cares?” Whether you’re a buyer or a seller, however, it’s worth being aware, not because California and Arizona are bellwethers of the national housing markets (quite the opposite in fact), but rather because they represent a realistic approximation of what the housing recovery might look like if and when it does spread to other areas.
On the surface, the situation here is starting to resemble the bubble environment of the early 2000’s. Demand is outstripping supply, multiple buyers are bidding for the same properties, inventories are dropping (below the long-term average in the case of California), and investors (acting alone or on behalf of deep-pocketed institutional investors) are making their presence felt. “Absentee buyers, who can be either investors or individuals purchasing a vacation property, bought nearly 4 of every 10 homes sold in the Phoenix metropolitan area in April, according to the research firm MDA DataQuick. That is up 50 percent since late 2007, and is nearly the same ratio as at the 2005 peak.”
But there’s an important difference. Not only are homes being purchased for a fraction – and I mean a fraction – of what they sold for only a couple years ago, but it appears that the most competition is for inexpensive properties, especially those in foreclosure. To illustrate this dichotomy, consider that in California, “Inventories of unsold homes in the under-$500,000 segment, for example, shrank to nearly three months’ supply in April from about 10 months a year ago. But the inventory of homes priced at more than $1 million rose to about 17 months from 10 months a year earlier.”
This suggests a divergence has formed in the housing market, such that one end might recover well before the other end. Anecdotal stories feature eager investors rushing to snap up recently foreclosed homes, with the (some would say cynical) goal of renting the houses back to the original owners. “You’ve got people making multiple offers on multiple properties because they’re eager to acquire something…Anything that can be bought right away—like a foreclosure or a seller who has a home that is properly presented and isn’t underwater—they’re hot to trot.”
Banks, for their part, are naturally a bit more cautious this time around, insisting that buyers pay cash for foreclosed properties and put down more than 30% for mortgageable properties. This could ultimately prove to be more of a detriment to recovery than buyers trying to time the market.