Yes, Prices Are Really Going UP

Home Prices Go UpThe Market Experts have been telling us it was coming for years now….and now it’s here. I’’s official, and the numbers simply don’t lie.  Inventory in the Phoenix East Valley housing market is extremely low.

Just a few short years ago, we had over 50,000 homes for sale here in the Valley. Everywhere you turned there was a foreclosed home or pre-foreclosure available for sale on the market. It was a Buyer’s Market.  A Buyer’s Market, by definition, is when there are more buyers than sellers.  Low, falling prices result from this excess of supply over demand, also called a soft market. Generally, there should be more than (6) six months of inventory on the market for it to be considered a Buyer’s Market. Well, guess what folks? Those times have come and gone.

It is a Seller’s Market now.  Foreclosures are way down in Arizona, we are no longer one of the top states for foreclosures. With prices flat for the last year and with inventory so low, in my opinion houses will never be this cheap again in the Phoenix metro area, especially the East Valley.

Inventory is around just 14,000 properties! That is equivalent to just (25) Twenty Five days of inventory! Yes, less than ONE MONTH!

By the way, for those who wish to know: How to Compute Months of Inventory

1.      Find the total number of active listings on the market last month.

2.      Find the total number of sold or closed transactions for last month.

3.      Divide the number of total listings by the number of total sales, which results in the number of months of inventory remaining.

Let’s face it, folks.  Less than ONE MONTH of inventory is incredibly low…. and with just as many homes pending and AWC (which really means under contract but that contract is contingent upon something like lender approval on a short sale). These days, we have very little time to see a property and make an offer. It is not unusual that there will be 15+ offers on a property within the first 48 hours that it hits the market!

Check out this article on www.azcentral.com, “Phoenix Area Homes Prices up Twenty Percent”.  It shows that out of the last twelve months, prices have increased TWENTY percent (20%).  But what it just touches on is that out of that 20% increase, EIGHT (8%) percent has occurred just in March!!

Don’t believe me? Think I’m full of hot air? Still convinced that the banks are sitting on piles of foreclosures that they have yet to release to the market (also known as ‘shadow inventory’)? Well, don’t believe everything you hear! For the past 3 years we have all heard about backlogs of inventory that banks are holding and will be released soon….Hmmmm….really? I think there may be some homes out there due to “robosigning” and lawsuits, but in general I do not see any signs of HUGE amounts of flow just hitting the market.  Even if there is still ‘shadow inventory’ looming….we need a good 15,000-20,000 homes to hit the market to normalize things.

Values are rising rapidly! Here is a quote from the Cromford report “Today set a new record of 8.68% for positive percentage change in average sales price per square foot over a single 30 day period. This beats the fastest price rise we saw during the bubble era, which was 7.47% on February 2, 2005. The fastest rate of change over the last decade was measured on October 1, 2007, but this was a negative change of 9.02%”  This is great news and at the same time makes us wonder if it is artificial based on supply and demand? So, the new question is, are investors driving prices up and creating an artificial level of demand?

The reality is, it is extremely difficult for the FHA or VA buyer to compete in today’s market.  They are getting inched out by 20% down conventional and cash buyers every time.  Overall, we are seeing a large demand from International buyers, Vacation home buyers, First-time home buyers and investors. With a high demand, and low inventory, prices have to eventually go up. It’s simple supply and demand. No, I don’t think we will see the crazy increases of 2004-2006, but we are currently seeing that level of demand and competition on available homes for sale.  There is no doubt in my mind that, at the very least, we will get back to a moderate 3-5% increase per year.

Are the Investors Taking Over in Phoenix?

Without a doubt, Investors are a huge part of our current market. I have heard it said that 2012 is the year of the investor in the Phoenix and East Valley real estate markets.  The auctions are saturated and cash Investors are chomping at the bit for opportunities that will net positive cash flow or a good long term return on their investment. Flipping may be a challenge because of the competition to get a house, however, anyone looking to buy and hold and rent or do seller financing is in the position to make a good investment that will net a positive ROI.

Opportunities for Seller Financing, Lease Options, and Lease Purchases

There are many people who over the last few years have done a short sale or have foreclosed and let their home go, and yet are current on every other bill they have. These people will make great home owners again, but they cannot get a bank to finance them for a few years. This is a perfect opportunity for Sellers who have some cash reserves to offer a Lease Purchase, Lease Option, or even offer seller financing.

Seller financing is a no brainer with a buyer that has a significant down payment (typically 10-25%). Most Lease Options or Lease Purchases don’t require quite as much down, typically 5% or less. Either way, the buyer is truly invested as they have some skin in the game, and will hopefully treat the home as if it is their own.  If something goes wrong, the seller can keep that original investment and evict if it is a Lease Option or Lease Purchase, and can always foreclose if they did seller financing, just like a bank would. The seller who is doing seller financing, a Lease Option, or Lease Purchase, also does not need to worry about repairs and upkeep like they would with a traditional rental property.  Not to mention that they should net positive cash flow monthly!

The overall Return On the Investment is going to be much better on a transaction like this. When a seller offers seller financing, they do not need to worry about an appraisal, which seems to be the biggest challenge in today’s market as values are rising before the closed deals can catch up and reflect in time for appraisal to be truly indicative of the market. With Seller Financing, the home is worth what both the seller and buyer agree the home is worth, period.  With a Lease Option or Lease Purchase, the agreed upon purchase price can be based on a projected value to be realized in the future.  The buyers get to lock in at a price that may be lower than what the true value will be in the following years, and the seller gets to make a guaranteed profit.

So….what’s the moral of the story?? BUY NOW.  Don’t wait! We likely have 2-3 more years of frustration! We cannot sell inventory that does not exist so hopefully we continue to see appreciation in the market so that those out there who want to sell but are upside down actually can…and maybe even actually walk away with a little money in their pocket! Once people can sell their existing homes, it will create more inventory and of course more buyers too….which will slow down the rate of appreciation to a normalized rate. Additionally, many folks who did short sales and had foreclosures will become eligible for a loan again.

There are a lot of good things coming, but we are still a little ways away from getting there. So take advantage TODAY before it’s too late!