Phoenix-area home prices remain too cheap

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Phoenix-area home prices remain too cheap

by J. Craig Anderson, Ryan Konig and Matthew Dempsey - Oct. 8, 2011 08:35 PM
The Arizona Republic

The Phoenix-area housing market has seen significant improvement in a number of fundamental areas thus far in 2011, including decreases in housing supply, the number of monthly bank foreclosures and the length of time it takes to sell a home. Still, these promising changes in the market have given rise to a question that has confounded many sellers, lenders, real-estate agents and brokers:

If the fundamentals have improved, why haven't home prices increased?

"Normally, the laws of supply and demand would kick in, and it would affect the price, just like you learn in economics class," said Matt Widdows, president and CEO of Phoenix-based residential-real-estate brokerage HomeSmart International.

The supply of available homes has shrunk dramatically during the past year, while buyer demand - particularly among investors - remains strong.

But an Arizona Republic analysis of Valley Home Values data provided by Glendale-based Information Market from Jan. 1 through Aug. 31 shows that home prices continued to drop from 2010 to 2011 in all but a handful of Phoenix-area communities.

In metro Phoenix, just three communities - Carefree, Litchfield Park and Rio Verde - experienced positive growth in the median home price from 2010 to 2011.

Wittmann had zero growth in its median home price, and all other communities had negative growth.

Overall, the Phoenix area's median price fell to a 10-year low of $116,500 through the year.

The laws of supply and demand, it would seem, have been suspended. Why?

Appraisal issues

The first thing to understand, investment homebuyer Jeff Hale said, is that home prices are not driven entirely by supply and demand.

There is an intervening force that affects the sale price of every home purchased with a mortgage: the appraisal.

Hale, purchasing coordinator for Phoenix-based AZ Equity, said the appraisal places an artificial cap on the amount a home's seller can charge, because lenders will not allow the buyer's mortgage to exceed a home's appraised value.

Appraisers look at a home's size, quality, age, condition and location, along with recent sales of comparable homes in the same general area, to determine an appraised value.

Those comparable sales, or "comps," are where the problem often lies when an appraisal comes in unreasonably low, Hale said.

"They can choose whichever comps they want," he said, such as the sale of a bank-owned home in which the kitchen had been ripped out. "That becomes a really difficult thing to overcome."

Sue Miller, president of the Appraisal Institute's Phoenix chapter and a certified residential appraiser, said appraisers have been doing their best to match homes they are hired to evaluate with relevant comps.

Miller, of Phoenix-based Miller Pipher Inc., said appraisals merely reflect the local housing market's many ongoing problems.

"As appraisers, we have to look at the data," she said. "In some of the areas we're appraising, 80 percent of the sales are foreclosures."

When the housing market crashed, appraisers became easy targets for blame and criticism for the way they had evaluated home values during the bubble years, when home prices were inflated to an unsustainable level.

Their reaction has been to err on the low side, Hale said, to steel themselves against further accusations of overvaluing properties.

Widdows said another problem is that appraisers sometimes don't have enough available information to determine the appropriateness of certain comps.

"The Number 1 complaint that we hear from our agents is low appraisals," he said. "There is a little bit of confusion in the marketplace, because you're comparing bad apples with good apples."

Miller agreed that lack of information can be a problem, particularly if the comparable sale occurred at auction or if the buyer was an investment firm.

In some cases, she said, the appraiser simply doesn't do a very good job.

"There are a lot of appraisers that aren't doing as thorough a job as they should," Miller said.

Investment homes

The explosion of demand for single-family rental properties in the Phoenix area also has affected home values in various ways, according to investors, agents and brokers.

Most significantly, it has set the optimal price point at the low end of the market, they said, because investors can minimize their financial risk and turn a profit more quickly on a rental home if the purchase price is low.

Many investment firms that amass large portfolios of rental homes have connections within the housing and lending industries that allow them to buy homes at well below market price, Miller said.

Those bargain purchases contribute to the overall downward pressure on home prices, she said.

"Investment firms can buy homes cheaper because they know who to go to," Miller said.

Sometimes, mortgage lenders anxious to unload a large quantity of foreclosure homes will slash their asking prices in order to sell them in bulk to investment firms.

Phil Mahr, an investment homebuyer and real-estate agent with Glendale-based Arizona Property Management and Investments, said one of the biggest contributors to low prices is the unending flood of homes coming up for auction at trustee sales, where lenders attempt to avoid repossession of foreclosure homes by allowing third parties to bid on the properties.

Most of the homes up for bid at trustee-sale auctions are being purchased for significantly less than market value, because they are sold as is, with no warranty against damage or defect.

The typical buyer is a rental-home investor, although Mahr said that trend has begun to shift as consumers have gotten more comfortable with the idea of competing with investment buyers on the courthouse steps.

"It's become popular now, so we're actually seeing prices rise here at the trustee's sale auctions," he said.

As home prices in most areas continue to decline, Miller said, some investors are questioning whether they should hold back until the market stabilizes.

"A lot of these investors are saying, 'Whoa, whoa, whoa - let's wait,' " she said.

Lack of confidence

Rental-home investors aren't the only prospective buyers feeling trepidation about future home-price declines, said Kristie Austin, a Scottsdale-based investment buyer of foreclosure homes.

"I think everybody is still scared to buy a home," including consumers, Austin said. "It's still a big financial risk."

Jim Sexton, owner and designated broker of Phoenix-based residential-real-estate brokerage John Hall & Associates Inc., said lack of consumer confidence continues to plague the housing market and is one of the biggest factors dragging down home prices.

With a non-stop barrage of depressing or contradictory statistics about the housing market presented to the public, many eligible homebuyers have decided not to buy until they see clearer evidence of an economic recovery on the horizon.

Sexton said there are two serious problems with the way housing-market trends are being reported by the news media.

The first problem is timeliness, he said. By the time home-price analyses reach consumers, the data upon which they are based can be anywhere from 1 to 3 months old.

That means consumers are using information about the past to make decisions about future buying behavior, which Sexton said perpetuates the housing market's downward cycle.

The second problem is that most of the housing-market data reported by the media is too general, he said, lumping together hundreds of discrete submarkets and localized pricing trends into a single, useless statistic.

"Grouping Maricopa County into all sales doesn't tell you much about the market," Sexton said.

Economic woes

Still, most housing-market experts agreed that low prices aren't just the result of a perception problem.

There's a serious reality problem to contend with, too.

High unemployment, consumer credit woes, lender losses and other broad economic factors have contributed to the prolonged home-values slump.

"A big part of it is just the stagnant economy," Miller said.

Arizona is expected to gain jobs within the coming year, but it will be fewer than earlier forecasts had projected, state economists said last week.

By the end of 2011, Arizona should have gained about 15,500 non-farm jobs since December 2010, and by the end of 2012 it is expected to have gained an additional 14,400 jobs.

Those figures are lower than the gains state economists had projected in April.

Arizona unemployment in August was 9.3 percent, slightly above the national jobless rate of 9.1 percent.