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So slow to learn

April 12, 2012

So today I’m going to give you some information of actual value for a change. I would consider this is my equivalent of insider trading information — the real scoop behind the scenes instead of the worthless musings and ponderings you normally receive from this blog.

Many of my regular readers know that we have been purchasing real estate in Phoenix. The reason I specifically chose Phoenix over other real estate markets is because it is one of the most beat- up housing markets in our nation.  Most of the purchases we have made in the region have been at a discount of about two-thirds from their 2006 highs (on average we have paid less than $40 per square foot for the homes we have purchased). We have been in this market for a while, but have had a much more focused effort over the last year. What I have observed happening in the past three months is alarming. A year ago the few buyers out there were totally in the driver’s seat, really able to dictate prices, but for the last three months the situation has done a complete reversal.

My Phoenix realtor described the environment in Phoenix as being just like 2005 all over again. He said that homes are receiving multiple offers the day they come on the market and prices are being bid up well over the list price. He said that even new construction is seeing the old lottery system being reinstituted for those on the “waiting list.”

Think about this dichotomy: I have watched the Phoenix market closely and I have experienced firsthand just how much control the buyer has had. I think all of our purchases were short sales last year, so they had to be approved by the bank holding the mortgage. We looked at the most depressed areas and then made “lowball” offers. The banks would sometimes make a counter offer, but we seldom budged. They would also play the waiting game to see if a better offer came in, but about half the time we ended up being the only offer and ended up with the property on our terms. This was what it was like less than a year ago.

When we first entered the Phoenix real estate market, you could tell the emerging business in town was making and installing real estate signs; streets were literally flooded with signs: short sales, foreclosures, auctions and regular sales; there was an absolute glut of homes. Shortly after we got into the Phoenix market the inventory of homes for sale reached a record 54,000 on the MLS. Today, the inventory has dropped by a remarkable 43,000 to just over 11,000 homes for sale! Apparently this new real estate “gold rush” is fed by a desire to not miss out on the bottom. So is my “insider scoop” a message to get in on the action before it is too late?

I hope you realize by now that nothing I would say could ever be that simple or straightforward. There are a couple of things that cause me concern about the current Phoenix real estate market. This has been an astronomical bounce. There is a frenzy-type of buying going on and even though homes are listed well off their highs of 2006, I personally refuse to be in a bidding war — or to buy out of fear that I might miss out on the new gold rush.

However, there is a bigger underlying factor that is difficult to determine exactly how the market has been affected, or how it might affect it in the future. This factor is how the “robo-signing” controversy has affected the flow of foreclosed properties. The robo-signing scandal by the banks (the practice of processing foreclosure documents fraudulently) resulted in major lawsuits across nearly every state. Very recently, most of those states were part of a mass settlement. In the interim, however, banks clamped down on processing foreclosures. This kink in the flow of foreclosures affects inventory — possibly dramatically, and could account for much of the reason for the precipitous drop that occurred in the Phoenix market. Only time will tell. However, the kink in foreclosures also caused a buildup of inventory of distressed properties held by the banks. Those properties will need to be processed. Will the backlog cause a second opportunity for buyers in the near future? I don’t know, but it is at least worth considering. Certainly the backlog can’t be a good thing for the market in the long term.

The main point of this story is that we should not be too quick to forget the carnage we have just been through. Much of the housing crisis was fed by a mindset that no one wanted to miss out on the gold rush. Is it possible that we can repeat this same mistake on the heels of our nation’s biggest real estate collapse in history? It is beginning to appear so. Again, only time will tell, but if we repeat the same mistake, I would say we are extremely slow learners!

Furthermore, if Phoenix can possibly have such a memory loss as this, I think it is evidence of my argument that our entire society suffers from Attention Deficit Disorder (ADD). In this day of instant messaging, we seem to have deleted recent messages, at least in our brain, that might serve as a red-flag warning against the craziness resurfacing in the Phoenix real estate market.  

One Comment
  1. TTracy permalink
    April 20, 2012 10:41 am

    Hello Jon,

    Don’t mean to nitpick but a reduction of 33,000 homes from an inventory of 54,000 homes would leave a net available of 21,000 homes, not 11,000 as the article mentions. Please keep the information coming. Thanks.

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