Summary
The direction of the economy will largely be dictated by how many foreclosures occur during the next six months and how much further prices fall.
Analysis
Existing home prices are now falling faster than they ever have. According to the Case-Shiller Index, existing home prices in metro Phoenix have fallen 30.7% year-over-year and 21.9% since the beginning of 2008 (through August 2008). Existing home prices are being driven down, primarily, by lenders- lenders with an increasing supply of repossessions and lenders anticipating more supply in coming months. As supply mounts, these lenders feel more pressure to unload homes at prices that will garner the highest number of potential buyers.
Lenders’ sales strategies appear to be working. Existing home sales are up in recent months. In repossession-ridden Queen Creek, for instance, total closings increased 27% during the second quarter of 2008 compared with the same quarter in 2007 (DataQuick Information Systems). Third quarter 2008 closings increased 25% compared with the same period last year. The same phenomenon occurred in many submarkets throughout the western United States last month, as buyers adjusted purchasing habits, taking advantage of falling existing home prices.
An increasing portion of resale demand is at the expense of homebuilders and the new home market. At the beginning of the downturn, builders dropped prices rapidly and increased their percentage of total home market demand. In many submarket areas, builders were capturing 50% of total sales, whereas they had captured 35% in prior to 2006. Today, builders are capturing only 20% to 25% in most submarket areas, due to recent aggressive existing home pricing. Belfiore Real Estate Consulting data reflects a new home price drop of 11.7% from January 2008 to September 2008. Since the downturn, new home prices are down 41.7%. In market areas like Queen Creek, where existing home supply is newer and comparable to new home supply, buyers are purchasing repossessions in place of new homes- at prices 10% to 25% below new home pricing.
Foreclosures are not only a challenge for the lenders writing down their value and the builders competing with foreclosures, they are a challenge for everyone. What was once perceived as a subprime-affordability problem has morphed into a home value problem. Increasingly, foreclosures are not the result of homeowners’ inability to pay loans but rather homeowners’ unwillingness to keep making monthly payments on an asset diminishing in value. As repossessions sell for less, they become the comparables used in valuing the homes next door, homes down the street, and homes in neighboring subdivisions. The more homeowners perceive they have lost value in their own homes, the more likely those homeowners are to allow their homes to be foreclosed on. Foreclosures lead to erosion in home values, which leads to more foreclosures- a seemingly endless cycle the market is currently caught in.
If the third quarter of 2008 brought any good news to Phoenicians, it brought a slowdown in the increase in foreclosures. Rather than the 47%+ increases in foreclosures experienced every quarter since the second quarter 2006, foreclosures increased only 23%, and pre-foreclosures increased only 25%.
Thus far in 2008 (through September), more than 31,500 homes have been repossessed by lenders in metro Phoenix. Current trends suggest an additional 14,000 to 17,000 homes will be foreclosed upon during the fourth quarter, bringing the year’s total to more than 45,000 foreclosures. For perspective, consider that only 11,500 foreclosures occurred in metro Phoenix in 2007, and only 1,170 foreclosures occurred here in 2006. Current figures are astounding.
The biggest priority today must be slowing foreclosures, which will lead to price stabilization. Banks lending, consumers spending, businesses hiring (and firing), the Dow’s direction- most of the other bits of information we all track and watch are tied to home values. In upcoming months, watch foreclosure trends to understand where the market is headed.
