Is The Bottom of the Market Nigh? Opinions Vary

There’s been an interesting debate the last week or so among the more urbane, economics-heavy real estate blogs about the fate of the real estate market for the remainder of 2012.

Says Bill McBride of the consistently bearish Calculated Risk:

There have been some recent articles arguing the “housing bottom is nowhere in sight”. That isn’t my view.

First there are two bottoms for housing. The first is for new home sales, housing starts and residential investment. The second bottom is for prices. Sometimes these bottoms can happen years apart.

For the economy and jobs, the bottom for housing starts and new home sales is more important than the bottom for prices. However individual homeowners and potential home buyers are naturally more interested in prices. So when we discuss a “bottom” for housing, we need to be clear on what we mean. For new home sales and housing starts, it appears the bottom is in, and I expect an increase in both starts and sales in 2012.

And it now appears we can look for the bottom in prices. My guess is that nominal house prices, using the national repeat sales indexes and not seasonally adjusted, will bottom in March 2012.

There are several reasons I think that house prices are close to a bottom. First prices are close to normal looking at the price-to-rent ratio and real prices . Second the large decline in listed inventory means less downward pressure on house prices, and third, I think that several policy initiatives will lessen the pressure from distressed sales.

Meanwhile, Barry Ritholz of The Big Picture says prices will keep falling:

No evidence of a bottom, prices continue to fall, volumes are anemic..despite record low interest rates…the data is pretty explicit, year over year prices are lower and we are just about back to fair value if u look at things like median income or % of GDP, but if this is the bottom than this would be the first time that a major boom & bust hasn’t careened past fair value into deeply oversold don’t just mean revert back to fair value.

Noah Rosenblatt at Urban Digs adds buyer confidence to the mix:

My gut is to talk about one psychological element that is not so easy to track but that we all know means everything when it comes to housing: BUYER CONFIDENCE!

Lets face it, not even record low mortgage rates of 3.87% & a 20% rise in equities over the last six months can stimulate buyers to rush into new home purchases!! What does that tell you?

It tells me that record low rates, engineered by our Fed to combat extreme debt deflationary forces, are indicative of broader economic conditions that are still strongly tilted to the negative.

And here’s where I point out Noah is in New York and all of these commentaries are taking a macro-level view of the national real estate market, a view which doesn’t necessarily translate locally.

For instance, Noah talks about buyers not being stimulated into making a home purchase. That clearly isn’t what is happening here in the Phoenix area, where in 2011 there were more than 100,000 housing units sold per the Arizona Regional MLS – a total second only to the 2005 bubble.

Anyone attempting to purchase a home over the last several months and being faced with multiple counter offers on most everything they try can attest to heightened demand. And with that heightened demand, at least in some areas, have come slightly higher prices.

(And tangentially, can I said thank goodness for cash sales – the one place where true market value as determined between a buyer and seller can be set without interference from an appraiser dampening the value with his or her own opinion of the direction of the market.)

Source: ARMLS blog with a h/t to John Wake

Joining the “we’re not out of the woods yet” chorus is the esteemed Jonathan Miller of The Matrix:

He provides a logical argument but I think he’s missing a key ingredient in the logic – how will the market be impacted by distressed properties and how they will impact the price trend:

  • 2M additional foreclosures in 2012-2013 per RealtyTrac
  • Falling inventory is masking significant shadow inventory built-up during the credit crunch. Inventory is declining to more manageable levels, not because there are fewer homes to sell, but because sellers are holding back until conditions improve – big difference.

In other words, the call of a bottom is missing a huge element from the equation – supply. The forecast of a housing bottom could certainly be right in the short term, and housing prices could bottom in March temporarily, but there is a lot of excess supply to be dealt with and I suspect that prices will begin to slide as REO activity begins to slowly enter the market. It simply has to – there is too much of it.

I don’t have hard data to share with you about the existence (or lack thereof) of a significant shadow inventory here in the Phoenix real estate market. But what I can tell you is this:

We have heard about the new wave of foreclosures, the tsunami that will swamp the market, since March 2008. For those keeping score, that dates back to before the talk of predictions of the world ending this December. Inventory, however, has declined steadily for these past four years until we are where we are now – 11,500-odd single family detached homes across an area the size of New Jersey

Inventory was supposed to increase after the banks instituted and withdrew self-imposed moratoriums on foreclosures.

It didn’t.

Inventory was supposed to increase after the robo-signing scandal stopped many foreclosures in their tracks.

It didn’t.

Inventory was supposed to increase after the end of the Homebuyers Tax Credit.

It didn’t.

For all the talk of shadow inventory, the actual inventory has continued to fall to a point where lenders could double the amount of available homes tomorrow and the Phoenix market could absorb the excess without more than a blink.

Phoenix was one of the first markets to tumble. Logic would dictate we’ll also be one of the first markets to lead the recovery.

Photo credit: Islandguy via Flickr Creative Commons

Jonathan Dalton

Jonathan Dalton is a 40-plus-year resident of the Valley and has been helping folks buy and sell homes since 2004. He can be reached at 602-502-9693 or info at