“Phoenix Overshot the Downside”

From Steve Cook of the BiggerPockets real estate investment blog:

A new study of some of the hardest hit markets like Phoenix suggests that prices have been so low that they have been offering bargains for buyers because they became detached from economic fundamentals and now prices are rising as inventories reach record lows.

“Phoenix provides a good case study of a market which has been in transition over the past year,” said Tom O’Grady, CEO of Pro Teck Valuation Services.  “Market drivers here have all turned positive for home prices, with months of remaining inventory (MRI) dropping to the lowest in the country.  The big drivers are that these homes are selling at significantly below their replacement costs and rents, and the rental yields these homes can generate are far above historical levels.”

Such a concept might sound familiar to long-time readers here. From November 7, 2010

This couple just happened to purchase a home in June 2005 and since have watched the value dive. The good news, if there is any, is that their home happens to be in one of the areas that to my mind at least have over-corrected fairly seriously. The bad news is even with the over-correction, we’re years away from seeing even the slightest hint of a significant upward movement in price.

As it turns out, “years away” turned out to be “months away”. From last July

Oft mentioned was the concept of reversion to the mean, that prices eventually settle back to historic  levels. In very basic terms, you can think of this as the equivalent of water finding its natural level. And put yet another way, there’s a reason why historic averages tend to be historic; while you can’t predict short-term values and movements based on the larger average, long-term trends are easier to identify.

Why do I mention all of this? Take a look at the following chart displaying the average price per square foot in Peoria as provided by the Cromford Report:

… Looking at the chart there are two distinct possibilities – either the market in Peoria, Glendale and the rest of the Valley has to rebound to come back to the mean, and likely fairly soon as the longer we muddle along the bottom the further from the mean the market ends up – or the entire concept of mean reversion no longer exists.

Some two years after the fact, others finally have noticed that it didn’t make sense for homes in Phoenix’s Maryvale neighborhood to be selling now for the same price they sold for when new back in 1973.

Unfortunately, the folks caught in the middle are those buyers just now trying to get into the market. Last night, local Channel 3 profiled a buyer who has written seven offers in two months only to fall short to investors and cash buyers at every turn.

The reality is the market has been operating that way for at least the past year – in other words, it’s not “news” in the classic sense … it’s old news, if anything.

Also in the old news category is the concept of blaming investors for snapping up homes, which conveniently ignores the fact these were the folks still purchasing during the doldrums before inventory evaporated.

“We have over 500,000 Canadians alone that are now titled in Arizona,” Martin said. “So when you have that amount of people coming into the state, then you have a lot of investor involvement.”

Both believe heavy investor involvement isn’t good for the Valley, especially if we hope to avoid another crash.

“This is critical to create the kind of place that we talk about wanting as an overall community,” Stapp said. “We need to have support for arts, culture, education, healthcare and all of those various systems require vested community participants.”

What has been forgotten in six short years is the reality that investors didn’t cause the market to crash, per se. Ludicrous lending standards and farcical loans for both owner occupants and investors led us into the abyss. Buyers paying cash for homes, whether for occupancy or investment, only can be a good thing – again, it’s little more than common sense.

Some still insist this nascent recovery is a mirage. Okayfine. More and more, however, it feels like the Phoenix market finally is gaining its equilibrium again.

Photo credit: Satoru Kakuchi via Flickr Creative Commons

About Jonathan

Jonathan Dalton is a 30-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 allphoenixrealestate.com.