Metro Phoenix housing market showing signs of upswing

59 comments by Catherine Reagor - Apr. 20, 2011 12:00 AM
The Arizona Republic

Metro Phoenix's housing market took a turn for the better last month, and if current trends continue, home prices could start to climb again before the end of the year.

Market experts say now is still too early to declare the beginning of a recovery for the region's battered home values. But the number of successful home sales is at near-record levels, the number of homes for sale is dropping, future foreclosures are in decline and home prices, although low, are holding steady.

The shift in the region's housing market started in March. An upward turn, if one materializes, would be much more significant than just another twist in an ever-changing market. It would mark the end of the worst housing bust metro Phoenix has ever experienced.

Overbuilding during the first half of the past decade preceded a collapse of the American mortgage industry and, later, the global economy. Phoenix-area houses lost more than half their value since the peak in 2006. During the bust, foreclosures soared and home sales dropped. Arizona's economy, long dependent on housing, fell apart.

The years since have seen new construction grind nearly to a standstill. Job losses and foreclosures meant there were many more homes for sale than there were buyers. Prices finally rose slightly in 2010, then fell again as still more foreclosures flooded the market.

That "double dip" has made many market watchers wary of being too optimistic about the latest positive news.

Phoenix real-estate analyst Tom Ruff of the Information Market, a real-estate data firm, said almost all the key market indicators that turned negative during the summer of 2010 and led to the second dip in home prices late last year have now turned positive.

"I am not being overly optimistic when I say home prices could climb during the next six to nine months," he said. "Those same market indicators that went negative last year are now turning positive."

Home sales

Last month, existing-home sales in metro Phoenix climbed to their highest level since October 2005, which was in the midst of the boom. There were 10,031 resales in March. The number includes a record 1,311 homes that were sold at auction as part of a foreclosure.

Last spring, home sales jumped as buyers rushed to take advantage of a federal tax credit that gave first-time buyers $8,000.

Analysts believed the credit spurred most of the likely buyers in the market to make a move, meaning few other prospective buyers would exist after the credit expired. Indeed, by the expiration that summer, sales fell off substantially and remained low, averaging about 7,000 a month until March.

New homes accounted for as much as one-third of all metro Phoenix home sales before and during the boom but have since plummeted to only about 7 percent of the market.

Jay Butler, director of realty studies at Arizona State University, said March is traditionally a strong home-sales month in metro Phoenix. During the spring, homebuyers try to purchase so they can finalize their deals and move before the next school year.

Butler's monthly housing report, released Tuesday, was more upbeat about the market's recovery than it has been in past months.

However, he still is concerned that a "glut" of foreclosure homes on the market could continue to delay a recovery.

And although sales are up, most of those sales - about 65 percent in March - are what the industry calls "distressed" properties: homes sold at foreclosure auctions, taken back by lenders through foreclosure and resold, or short sales.

Foreclosures

Although foreclosures continue to drive the market, signs indicate those could soon start to decline.

The historic recession left many in metro Phoenix without jobs, and plummeting home values meant many homeowners who couldn't afford their mortgages also couldn't sell their homes for what they owed. The result was a huge wave of foreclosures: Buyers defaulted on their mortgages, and banks either sold the homes at auction or took them back and waited to resell them on the market.

The result was a glut of inexpensive foreclosure homes for sale. Experts have long said that home prices wouldn't recover until foreclosures subsided.

Last month, the number of homes foreclosed on actually climbed - but the shift was expected. Lenders last fall put a moratorium on foreclosures amid questions about their handling of the practice. Those foreclosures are now being finalized and artificially inflating the monthly numbers. In March, there were 5,000 foreclosures or trustee sales in the Phoenix area, up by about 500 from February.

The more important indicators are so-called pre-foreclosures, or notices-of-trustee sales. The legal filing notes that a lender plans to seize a home from a delinquent buyer and sell it at auction; it typically precedes a foreclosure by three to nine months.

Pre-foreclosures have been hovering around 5,000 a month this year, after averaging 7,000 a month in 2010. This signals fewer homeowners are falling behind on payments or abandoning their homes, meaning fewer future foreclosures.

For the past year, investors have bought the majority of the region's foreclosure homes and turned them into rentals that are filling up quickly with tenants who lost their homes or can't afford to buy.

Listings

The number of homes for sale in the Phoenix area has been dropping steadily during the past four months, signaling the supply of homes for sale is down while demand is up.

Homes being sold after foreclosure or homes offered for short sale - in which banks let homeowners sell for less than they owe - now typically make up about half of all homes listed for sale.

Although that remains the case, the total number of homes on the market was about 36,000 on Tuesday, a more than 15 percent drop from last year's supply.

"Both investors and owner-occupied buyers are starting to burn through the inventory of homes for sale," said Beth Jo Zeitzer, president of Phoenix-based ROI Properties and an expert on distressed property sales.

She said buyers who can pay cash, usually investors, continue to dominate the market.

Julie Bieganski, a Phoenix real-estate agent and investor, said it's becoming more difficult to find inexpensive homes, including foreclosures, in popular neighborhoods because there are so many more buyers vying for them.

Prices

The median price of resales in metro Phoenix has held steady at $115,000 since December.

Although it's good news prices haven't dropped this year, the median remains at the low it fell to last fall after the second dip.

Not every indicator points to an uptick.

The Arizona Regional Multiple Listing Service, an index of homes for sale run by local Realtors, maintains data on homes under contract for upcoming sales. This data, the Pending Price Index, has called for another big drop in Valley home prices this year.

However, in January, the index predicted the area's median would fall to $100,000 by March. Instead, prices remained steady.

The group's index is now forecasting the median price for metro Phoenix home sales will be $113,000 in April.

Based on the pending sales index from the "Cromford Report," a daily analysis of listings data and public records, home sales and prices this month are supposed to stay at March's levels or climb higher. Pre-foreclosure filings are down so far this month.

"The housing market is showing encouraging signs of a strong recovery in demand and a correction of an oversupply problem we have had since 2006," said Phoenix housing analyst Mike Orr, publisher of the report.

He said metro Phoenix home prices could start to gradually climb later this year or there could be a "sharp movement" up in prices.

"My guess would be (home prices will increase) sometime before the end of the year," he said, "and possibly quite sooner."

Phoenix real estate strategy of 'flopping' examined

Manipulated short sales resold for quick profits

93 comments by Catherine Reagor - Nov. 14, 2010 12:00 AM
The Arizona Republic

As more houses in metro Phoenix go on the market for short sales, some investors have begun buying and reselling them quickly for a profit, using strategies that some in the housing industry say could be unethical or worse.

The deals work in a variety of ways, but all involve the same basic strategy. An investor persuades a lender to agree to a short sale, buying a house for less than what the lender is owed. But the investor has another buyer lined up who is willing to pay more.

The bank, usually unaware of the other waiting buyer, accepts a lower price from the investor, who then quickly resells the home - for a higher price - to the waiting buyer.

The deals, which have become more common as short sales have increased, are now drawing the attention of real-estate and financial regulators.

Most lenders object to such deal-making because, had they been aware of the other waiting buyer, they would have taken the higher price. Banks take a loss on short sales, and the deals can make their losses greater.

Real-estate professionals disagree over the nature of the deals. Some insist they are a smart way to make a profit in a tough market. Others call them unethical at best and question whether investors violate the law if they conceal information from a lender.

Many real-estate market watchers agree that the deals have negative impacts. Neighborhood housing values suffer because, while the second sale might be for the home's true market value, the first sale represents an artificially low price.

In the industry, the deals have been dubbed "flops."

In a rising market, investors "flip" houses, buying them and then reselling for a profit as overall values rise.

"Flopping is the opposite of flipping," said Amy Swaney, regional Arizona sales managers for Citywide Home Loans and a past president of the Arizona Mortgage Lenders Association. "It is the art of profiting off the devaluation of property rather than an increase in value of a property."

It is impossible to know how many homes have been "flopped" since short sales began to be widely accepted by lenders in the past year.

But a key indicator is how quickly short-sale homes are resold. An owner who buys in a short sale and sells the home again within a few days most likely had the second buyer lined up in advance.

In the past year, nearly 20,000 short sales closed in metro Phoenix. Of those, at least 1,000 were flops, according to an analysis by Tom Ruff of the real-estate research firm Information Market. A few examples: a Tolleson home sold for $90,000 through a short sale and then was flopped within 20 days for $106,000; a northwest Phoenix home was purchased first through a short sale for $28,500 and then resold through a flop within two weeks for $50,000; and a Scottsdale house sold via short sale for $90,000 and then for $122,000 through a subsequent flop less than a month later.

The Arizona Department of Real Estate, mortgage giants Fannie Mae and Freddie Mac and the FBI are all investigating flopping deals.

"Short-sale flopping is one of our real-estate industry's biggest issues right now," said Judy Lowe, Arizona Department of Real Estate commissioner. "We are all looking at the legality and ethics of these deals. And it varies by flop because it appears every deal is done a little differently."

The art of the deal

Short sales slowly have grown more common as more homeowners in the region face losing their homes to foreclosure.

In some ways they are more attractive to lenders and sellers. A short sale does less damage to the seller's credit record than a foreclosure. And a lender typically is paid more money in a short sale than it could make on the home after foreclosing, partly because it has to incur costs related to taking back the home before reselling it.

But as short sales have expanded, so have the strategies some investors appear to use to make a profit. Investigators and industry professionals describe several common approaches.

- Price high, then sell low: A real-estate agent lists a home for a short sale but knowingly prices the house too high so it sits on the market for several months. As the homeowner edges closer to foreclosure, the agent recommends reducing the offering price. A buyer appears who is willing to pay less than the reduced price. The lender is persuaded to accept the deal, arguing that the home has been on the market for so long because it is overpriced and that foreclosure is imminent. The lender agrees, and the short sale is completed.

But the new buyer already has a plan to resell the house and often already has a second buyer lined up ready to pay more. The key to the arrangement is the price-setting. The high price keeps other potential buyers away and sets the lender up to be more agreeable to a low offer at the end.

The agent can receive a quick two commissions on the same property.

The lender gets less for the house than it otherwise might, and the seller may be damaged, too. The more time that passes before the sale, the more damage is done to the seller's credit from missing monthly payments.

- Steering the deal: A third party working with the seller to help facilitate the deal or a real-estate agent representing the seller ignores higher offers for a short sale. An investor buys the property without the lender ever knowing what other offers the home might have drawn. The investor then quickly resells the property for a higher price.

If a third party was in on the flop to steer the deal away from the open market and to the investor, the agent often doesn't know. If the agent was in on the flop, the agent may have received an additional payment from the investor.

The deals rely on finding a second buyer, usually another investor, willing to pay more after the short sale. In some cases, the second buyer doesn't even know that an investor is orchestrating a short sale before reselling. In other cases, buyers are looking for deals but are reluctant to deal with the paperwork hassle and uncertainty of a short sale. A flop allows them to pay a low price for the home, while the interim buyer deals with the short-sale technicalities.

The deals also require people to coordinate the arrangement and sometimes conceal information. Arizona regulators are concerned that loan officers, appraisers and real-estate and escrow agents could be acting unethically and even illegally, and some may be getting caught up in these deals without realizing it.

Many in Arizona's real-estate and lending industries are against flopping.

"I hate flop deals," said Kevin Kaufmann, a Phoenix real-estate agent specializing in short sales with Keller Williams Realty. "The deals look like a great way to make fast money, but they aren't usually in the best interest of the seller who is dealing with financial hardships and facing foreclosures."

Investigators also are watching for another type of short-sale deal that is a short-sale version of a fraud scheme used in boom times.

A buyer or buyers use a "straw buyer" to purchase a home. The buyer uses fake identification and financial information to obtain a mortgage and then never makes payments, triggering foreclosure proceedings. Immediately before foreclosure, the people running the scheme offer to buy the home in a short sale. The lender isn't aware of the connection between the original buyer and the short-sale buyer. The people in on the deal buy the house for a low price and can resell it.

A pair of Connecticut real-estate agents were convicted on fraud charges for a flopping scheme earlier this year. Both agents admitted to providing their own appraisals for the homes, acting as straw buyers to purchase homes through short sales and then reselling the homes at higher prices.

Industry concerns

Homes listed for short sale are at a record high in metro Phoenix, so the potential for more flops is significant.

In an effort to stop potential short-sale fraud, Fannie Mae and Freddie Mac recently issued warnings that homes it approves for short sale can't be resold within at least 30 days.

Mortgage research firm CoreLogic estimates that lenders will lose at least $50 million from the deals nationally this year.

The FBI has identified the deals as one of the nation's top mortgage scams now, but they are difficult to investigate and prove.

State regulators talked to the real-estate industry about foreclosure and short-sale schemes at a conference held by the Arizona Real Estate School in September.

Lauren Kingry, superintendent of the Arizona Department of Financial Institutions, said because there are so many different ways flops are handled, it's difficult to determine if the deals are illegal.

"Though many Valley attorneys say flopping is completely legal as long as it's disclosed, it's still a growing problem for the real-estate market and lenders," Swaney said. "Some deals may skirt the law, but that doesn't make them ethical. We as professionals in the industry have to watch out for our clients, whether they are homeowners, buyers or lenders."

She said some Valley escrow agents are turning away deals that require them to process the documents on a short sale and then a second sale of the same home for a higher price within days of each other.

Some groups involved in the deals say they disclose the planned resale up front so they aren't defrauding the lender or acting unethically. Some mortgage servicers may be agreeing to the deals to avoid a foreclosure. But big lenders say they are opposed to flopping.

"I am telling people flopping homes they must give full disclosure to lenders," said Phoenix real-estate attorney Scott Zwillinger. "If banks don't know about all the deals involved, then a flopper is committing fraud. That's the bottom line."

Even if deals do take advantage of lenders, public sentiment is not necessarily on the banks' side. With banks awash in criticism of how they have handled foreclosures and refused to modify loans for many needy homeowners, consumers are less likely to be outraged at a deal that takes advantage of a lender.

But in some deals, taxpayers - not lenders - may be the ones taking a loss.

For mortgages that are federally backed, lenders can seek some federal funds to cover their losses on short sales.

So if a flopping deal drives down the selling price, the lender may seek more money from the federal backer to cover the loss. It is unclear how much money lenders have been paid to recover losses in short sales.

"Flopping may be legal if all the deals are disclosed to everyone involved, but they make me furious," said Ruff, the real-estate analyst. "The money flopping deals are costing lenders ultimately is money the taxpayers are going to have to cover on mortgages that are government- backed."

Have seen more and more of these when showing clients lately. Most state in MLS that an appraisal has been done to justify the price, not sure I would trust that. A comp is a comp is a comp. Although the home has been updated and made to look pretty the close date is usually not more than 6 months prior. Something I defiantly keep my eyes on for my clients!

10 Reasons To Buy a Home

Enough with the doom and gloom about homeownership. Brett Arends explains why owning a home is a good thing.

• By BRETT ARENDS

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Enough with the doom and gloom about homeownership.

Sure, maybe there's more pain to come in the housing market. But when Time magazine starts running covers that declare "Owning a home may no longer make economic sense," it's time to say: Enough is enough. This is what "capitulation" looks like. Everyone has given up.

The Sept. 6 cover of Time magazine: This is what capitulation looks like.

After all, at the peak of the bubble five years ago, Time had a different take. "Home Sweet Home," declared its cover then, as it celebrated the boom and asked: "Will your house make you rich?"

But it's not enough just to be contrarian. So here are 10 reasons why it's good to buy a home.

1. You can get a good deal. Especially if you play hardball. This is a buyer's market. Most of the other buyers have now vanished, as the tax credits on purchases have just expired. We're four to five years into the biggest housing bust in modern history. And prices have come down a long way– about 30% from their peak, according to Standard & Poor's Case-Shiller Index, which tracks home prices in 20 big cities. Yes, it's mixed. New York is only down 20%. Arizona has halved. Will prices fall further? Sure, they could. You'll never catch the bottom. It doesn't really matter so much in the long haul.

Where is fair value? Fund manager Jeremy Grantham at GMO, who predicted the bust with remarkable accuracy, said two years ago that home prices needed to fall another 17% to reach fair value in relation to household incomes. Case-Shiller since then: Down 18%.

Brett Arends discusses why he thinks now is a particularly good time to buy a home.

2. Mortgages are cheap. You can get a 30-year loan for around 4.3%. What's not to like? These are the lowest rates on record. As recently as two years ago they were about 6.3%. That drop slashes your monthly repayment by a fifth. If inflation picks up, you won't see these mortgage rates again in your lifetime. And if we get deflation, and rates fall further, you can refi.

3. You'll save on taxes. You can deduct the mortgage interest from your income taxes. You can deduct your real estate taxes. And you'll get a tax break on capital gains–if any–when you sell. Sure, you'll need to do your math. You'll only get the income tax break if you itemize your deductions, and many people may be better off taking the standard deduction instead. The breaks are more valuable the more you earn, and the bigger your mortgage. But many people will find that these tax breaks mean owning costs them less, often a lot less, than renting.

The June 13, 2005 cover of Time.

4. It'll be yours. You can have the kitchen and bathrooms you want. You can move the walls, build an extension–zoning permitted–or paint everything bright orange. Few landlords are so indulgent; for renters, these types of changes are often impossible. You'll feel better about your own place if you own it than if you rent. Many years ago, when I was working for a political campaign in England, I toured a working-class northern town. Mrs. Thatcher had just begun selling off public housing to the tenants. "You can tell the ones that have been bought," said my local guide. "They've painted the front door. It's the first thing people do when they buy." It was a small sign that said something big.

More on the Developments Blog

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5. You'll get a better home. In many parts of the country it can be really hard to find a good rental. All the best places are sold as condos. Money talks. Once again, this is a case by case issue: In Miami right now there are so many vacant luxury condos that owners will rent them out for a fraction of the cost of owning. But few places are so favored. Generally speaking, if you want the best home in the best neighborhood, you're better off buying.

6. It offers some inflation protection. No, it's not perfect. But studies by Professor Karl "Chip" Case (of Case-Shiller), and others, suggest that over the long-term housing has tended to beat inflation by a couple of percentage points a year. That's valuable inflation insurance, especially if you're young and raising a family and thinking about the next 30 or 40 years. In the recent past, inflation-protected government bonds, or TIPS, offered an easier form of inflation insurance. But yields there have plummeted of late. That also makes homeownership look a little better by contrast.

View Full Image

Associated Press

A house for sale in Shelby, Ohio.

7. It's risk capital. No, your home isn't the stock market and you shouldn't view it as the way to get rich. But if the economy does surprise us all and start booming, sooner or later real estate prices will head up again, too. One lesson from the last few years is that stocks are incredibly hard for most normal people to own in large quantities–for practical as well as psychological reasons. Equity in a home is another way of linking part of your portfolio to the long-term growth of the economy–if it happens–and still managing to sleep at night.

8. It's forced savings. If you can rent an apartment for $2,000 month instead of buying one for $2,400 a month, renting may make sense. But will you save that $400 for your future? A lot of people won't. Most, I dare say. Once again, you have to do your math, but the part of your mortgage payment that goes to principal repayment isn't a cost. You're just paying yourself by building equity. As a forced monthly saving, it's a good discipline.

9. There is a lot to choose from. There is a glut of homes in most of the country. The National Association of Realtors puts the current inventory at around 4 million homes. That's below last year's peak, but well above typical levels, and enough for about a year's worth of sales. More keeping coming onto the market, too, as the banks slowly unload their inventory of unsold properties. That means great choice, as well as great prices.

10. Sooner or later, the market will clear. Demand and supply will meet. The population is forecast to grow by more than 100 million people over the next 40 years. That means maybe 40 million new households looking for homes. Meanwhile, this housing glut will work itself out. Many of the homes will be bought. But many more will simply be destroyed–either deliberately, or by inaction. This is already happening. Even two years ago, when I toured the housing slump in western Florida, I saw bankrupt condo developments that were fast becoming derelict. And, finally, a lot of the "glut" simply won't matter: It's concentrated in a few areas, like Florida and Nevada. Unless you live there, the glut won't have any long-term impact on housing supply in your town.

Yes I sell real estate for a living so you would expect me to agree with this article. With the other articles out there talking about how bad it is to own your own home I believe that while renting might be what some have to do now they will ultimately get back to wanting to buy a home, why? For most of the reasons already stated in this article. The only reason people are jumping on the "bad to own a home" bandwagon is because of the downturn we have seen. But the bottom line is real estate is cyclical, to old what goes up must come down theory. It's tough right now, yes but, not to be too cliche, this too will pass so if you can buy explain why now would not be one of the best times in history...