Bidding Wars in Phoenix

Everyone knows that certain parts of the country--the ones that were growing quickly--took the biggest hit in the recent downturn.  Arizona and Nevada, along with Florida, are always mentioned as places with thousands of homes for sale at drastically reduced prices.  Now, things are changing, even in those states.  Today's New York Times has an article about the return of bidding wars to Phoenix.  The story points out that this is not necessarily because prices would have risen on their own, but because the supply is finally drying up, and there is more demand for what's left.  That sounds like a normal explanation of supply and demand to me!

Prices in high-end neighborhoods in and around Phoenix are still dropping, but many of the foreclosures in harder-hit areas have moved through the system, leaving homebuyers with little to choose from.  Even new construction, which is finally picking up, cannot keep up with the pace of demand.  One suburban home, a foreclosed property, had 84 offers before the bank closed off further ones.  This illustrates how a glut of short sales and foreclosures can hold down prices, and what can happen when the flow of such properties ends.  

Declining Markets

We recently received a list of "declining markets", as defined by AIG (some irony there, huh?) for appraisal purposes. Some states--Arizona, California, Florida, Michigan, and Nevada--are considered Severely Declining in their entireties. Our county has a list of declining markets, defined by zip codes, which appears to cover almost every town in our region. Hartford's noted zip codes are listed as Moderately Declining.

What this means is that, when you go to get a mortgage in an area marked as Declining, you are subject to certain restrictions or rate adjustments, in order to protect the lender. Therefore, since a town like Guilford is on this list, everything in Guilford will be subject to a higher rate for the same LTV (loan-to-value) ratio than a property listed in, say, Cambridge, Massachusetts.
I chose Cambridge for several reasons: it's like New Haven in some obvious ways; it's still in the Northeast, where real estate sales are broadly down; and, finally, I knew the zip code. In case you thought New Haven might be spared, 06511 through 06515 are all there as well.

This may make it easier to understand why so many sales are falling apart after the contracts are signed, since people may not be aware of these rules before they actually sign a sales agreement on a particular house. They may have been counting on getting a higher LTV, or a lower rate, both of which may have been advertised, but then are not applicable in the zip code in which they are buying.

It's hard to know how to fix this problem, but it needs to be addressed if we are going to break the cycle of lagging real estate transactions. This rule is not only arbitrary, since there are submarkets within these areas which are selling well and where prices are not declining, but lags in time as well, being based on prior sales. In addition, it punishes those who most need to sell, but throwing another roadblock in the way of their attempts to find buyers.

Hello from Sunny Arizona

We arrived last night in Scottsdale, where it's almost 70 degrees and very sunny. I wanted grapefruit for breakfast, so I went out and picked a couple. I went running for a long time (with a few stops at new retail areas) without worrying about snow and ice. There are lots of real estate signs here--it's pretty much ground zero, along with Nevada and Florida, for the distressed real estate market. Inside my father's gated community, there are signs for the first time, and today there were multiple open houses. The median sales price in Arizona was $232,000 at the end of 2007, and $150,000 at the end of 2008. That makes Connecticut look pretty good!

We had our company holiday party at our house the night before we left--100 people for dinner. It was festive and fun, and spirits were high-enough so that those not in real estate were surprised. I'm not really, because people who come to parties tend to be a self-selected group of those who are going to have a good time under all circumstances, plus real estate agents in general tend to be resilient and optimistic. As Winston Churchill said, "I am an optimist. It does not seem to be of too much use to be anything else." Amen.