Foreclosed homes accounted for 37 percent of the total activity in the Phoenix metro real estate market in July -- down from February when foreclosures represented 51 percent of the sales. But despite the drop, foreclosures continue to play a major role, signaling that the market has a ways to go before it is healthy again.
Jay Q. Butler, Associate Professor of Real Estate in the Department of Finance at the W. P. Carey School of Business, reports that 11,500 resale houses were sold in July, compared to 11,820 in June and 8,165 in July a year ago. This is a record level of activity, but the driver is foreclosure -- the sale of lender-owned properties and the resale of recently foreclosed homes -- not the traditional owner-occupant segment. Foreclosures accounted for 4,200 transactions in July, but nearly half (46 percent) of the 7,300 traditional transactions involved properties that had been in foreclosure recently.
"Except for the sense of failure that surrounds foreclosures and bankruptcies, the current market is not much different than the 2003-2006 hyper-market," Butler said. "It is driven by similar-minded investors looking for the deal -- especially the potential of great appreciation. A recovery cannot really be established until foreclosure activity drops to historical levels, such as 3-5 percent of monthly recordings, and owner-occupants are the primary driving force."
The return of investors
Declining prices, especially in the lower income ranges, have piqued interest for potential investors and owner-occupants alike. Investors hope that home prices will rise again in the next few years. On the positive side, lower prices can greatly improve affordability, Butler said, but they can also adversely impact owners and potential sellers, whose limited equity erodes as prices slide below existing debt level. As well, rapidly declining value can affect eligibility of a property for some mortgage modification programs, which limit decline from the purchase and financing of the home.
In the traditional market, the median price in July was $135,500, down 33 percent from the $200,750 of a year ago. The median price for foreclosed properties was of $148,045, down from $159,200 in July 2008.
There are two fundamental reasons why the median price for foreclosed homes is higher than traditional transactions, Butler explained. More expensive homes continue to be among the foreclosed; in July, 32 foreclosures were valued over $1 million -- including six over $2 million. Another 4 percent of the foreclosures were in the $400,000 to $1 million range. Since most loan modification programs are designed for homes under $400,000, the increase in foreclosure activity for the upper-end market was expected.
Also, approximately 50 percent of the traditional sales during the past 12 months were foreclosed homes that were sold again with a median price markdown of 20 percent. The markdown varied throughout the Valley, ranging from 51 percent in Maryvale to 30 percent in El Mirage to 13 percent in Tempe.
Since the Greater Phoenix area is so large, the median price can range significantly:
North Scottsdale -- The median price for a foreclosed property was $400,495 in July ($451,595 in June), while the median in the traditional market was $500,000 in July ($460,000 in June).
South Scottsdale -- The median for foreclosures in July was $219,650 ($180,000 in June) and in the traditional market, $190,000 in July ($192,500 in June).
Maryvale -- The median for foreclosures was $86,000 ($76,285 in June), and for traditional transactions, $51,400 in July ($48,000 in June).
Union Hills -- The median for foreclosures was $215,500 in July ($210,500 in June) and for traditional sales, $190,560 ($193,725 in June).
Paradise Valley had a median square footage of 3,730 and a median price of $1,412,500.
Inside the numbers
Recorded sales reflect decisions that were actually made in preceding months, Butler pointed out, and so it is with the July's drop in foreclosure activity. Butler thinks this is the result of hiatus programs instituted by banks while they were waiting to see the results of the federal government's loan modifications and re-financing programs.
July is also at the tail end of the resale home season, which usually closes in August, Butler added. During the resale season, sales and median prices tend to increase, so some improvement in the local housing market would not be unexpected.
Low mortgage interest rates and prices would tend to strengthen the market, Butler said, but there are many obstacles.
"Tighter underwriting standards, a weak economy and poor job market -- including job losses and lost income through reduced pay and furlough programs -- continue to blunt the potential of the market," Butler said.
The 1,475 total recorded sales for July 2009 in the townhouse/condominium market included 555 foreclosed properties. A year ago, 280 of the 870 total transactions were foreclosures. In July 2009, the median price for foreclosed properties was $109,545, while the traditional market stood at $106,500. Last year, the splits were $125,800 and $160,000, respectively.