For the past few months, the discussion has been about the dearth of inventory here in the Phoenix real estate market and what could happen if the alleged second wave of foreclosures or the theoretically lurking shadow inventory were to be released en masse.
Now, let me pose a slightly different question … where does this market go, not just if there is no second wave and shadow inventory is thinner than some believe, but if there is not significant increase in inventory. How long can a recovery continue when there’s nothing out there to be purchased?
Think about it … there are three sources for homes right now, excluding builders and their new homes:
- Bank owned properties/foreclosures
- Short sales/pre-foreclosures
- Equity of “traditional” sellers
Foreclosures have been at a trickle for months and, while that trickle could become a legitimate stream if there’s a sudden pick-up in trustee’s sales with the robo-signing scandal in the rear mirror, the longer we go without a significant increase makes the likelihood of that increase increasingly slim.
(I think Dr. Seuss wrote that last sentence, but I don’t much feel like changing it.)
Short sales continue to come to the market, though not in the droves we once saw. So the needed increase of inventory likely won’t come from this group either.
That leaves the traditional sellers, who traditionally break into two camps – those who are moving out of the area and need to sell, and the so-called “move up buyers” who are moving from their home into something bigger, more upgraded, in a different part of the Phoenix area, etc.
There aren’t a lot of people with equity. Probably more than you might think, but less than is needed to really get the move-up group moving. And the lack of available inventory greatly impairs the ability of those with equity to find the right property to move up to. It’s a Catch 22 and there’s no clear catalyst to break the cycle.
So we go back to the original question … what becomes of the Phoenix market if the inventory levels we’re seeing now are the inventory levels we see for the next several months? Logic (and basic economics) say prices will continue to rise on the basis of the scarcity, but even with a stronger underpinning of cash sales it still feels like it would be a largely artificial recovery …
If prices keep rising because of the scarcity, that would put more owners into a situation where they have equity and then can put their homes on the market. Which would then reduce the scarcity and possibly short-circuit the rally except these sellers also will be buying so the market benefits for the old two-for-one transaction cycle – two transactions from one buyer/seller …
I feel like Tevya … on the one hand, on the other hand, on the other hand …
I don’t have enough hands. And I’ve got some thoughts, though they get a bit muddled given the possibilities. Should be an interesting ride.