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The Bedrock of the Market

The Bedrock of the Market

I’m a sucker for David McCullough’s histories. And so it was that last year I found myself reading “The Great Bridge: The Epic Story of the Building of the Brooklyn Bridge” and learned of the marvels of engineering involved with this iconic landmark’s construction.

Some may find the creation of Roebling wire the most interesting; others the series of angled support cables that allowed the spans to be draped over only the single mid-river support.

For me, though, what was most remarkable was the utterly grim and desolate work of men working within caissons, removing material from the bottom of the Hudson River until they reached bedrock. Without the presence of bedrock, without the ability to rest the bridge’s support on that bedrock, no vertical construction would hold.

Back in 2005, values in the Phoenix real estate market rose higher and higher while being constructed on top of an incredibly flimsy, unstable foundation – don’t ask, don’t tell no-documentation stated income loans; interest only loans; adjustable rate mortgages; 80-20 mortgages where the buyer had only a couple of skin cells in the game. And eventually the market collapsed upon itself like a bridge overwhelmed by flood waters or buffeted by too high winds.

At the moment, the buying frenzy we’re seeing is much like what we saw back in 2005. And with the utter lack of available inventory – 8,505 homes, no matter what the fairy tale artists at Zillow and Trulia may tell you* – and the emergence into the sunlight of the previously latent demand, values are rising … not just a little bit, but rather significantly in some areas.

Thus far this year, 9,653 of the more than 21,000 detached homes that have sold have sold for cash – no appraisal needed, no appraiser’s involved to interject their own oft-dated opinion of the state of the market. (Such as the appraiser earlier this year who claimed values had declined some 25 percent year over year from last year to this, even without any data to support the decision. Worked out well for my buyers who were handed instant equity, but that was the exception to the rule.)

Drill down (pun not intended – yet) and you see that of the 15,806 homes listed for $200,000 or less, about half sold for cash.

And look at the true foundation of the current market, the sub-$100,000 realm, and you’ll see two-thirds of the homes – about 4,400 of the roughly 6,800 homes sold – were straight cash sales.

So what, I ask, would cause these values at the bottom end of the market suddenly to reverse course and fall again:

  • A sudden influx of inventory. Possible, especially if you listen to the four-year-long prediction of a new wave of foreclosures. The French Lady on Lost didn’t spend nearly as much time repeating herself as these naysayers. The reality is with current demand, even doubling inventory tomorrow likely would cause little more than a blip as the new homes to the market would be absorbed within a month or two.
  • Buyers walking away? Foreclosures? Not a concern on cash sales.
  • A sudden decline in buyer interest? Um, I guess that’s a possibility but nothing has slaked the demand noticeably since 2008 – first it all was due to the homebuyer tax credit, then it was the interest rates, then it was the surge in confidence from the 2008 elections, etc., etc. Circumstances change, but demand hasn’t.
  • The end of the Mayan calendar? Hmmmm …

Now, before anyone gets carried away, at no point am I uttering the “real estate always goes up” phrase (except to say I’m not saying that.) What I am saying is, based on the current conditions and the sheer volume of cash sales – pure market mechanics, where value is determined solely by buyer and seller, by supply and demand – it looks like the foundation upon which the Phoenix real estate market is rebuilding is far more solid than it was during the bubble era.

* One agent today told me of a client who essentially told her she didn’t know what she was talking about because according to Zillow there are tons of homes for sale here in Phoenix and that she discussed a shortage only in an effort to collect a commission check. Okayfine. Whatever you say. Good luck buying those “listings.”

Photo credit: Emilio Labrador via Flickr Creative Commons

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