Challenging Year Not in Question, Depth is

Implications: Few will debate whether or not prices are actually falling; most every measurement has recently shown a decline, and with economic projections what they are, prices are expected to continue to fall.  How long and how far are the questions at hand.  Belfiore Real Estate Consulting (BREC) has some thoughts on the Phoenix metro area….  

Analysis: The weight of the world seems to be on Federal Reserve Chairman Ben Bernanke these days.  Despite all of the Fed’s best intentions to stimulate the economy, uncertainty seems to be the greatest certainty heading into the middle of the first quarter of 2008.  

According to the subject article, the most taxing question on Mr. Bernanke’s mind today is: “How much longer and farther will American house prices fall?”  The question is clearly a loaded one, evoking other questions related to the economy, jobs, supply, demand, the credit crunch, etc.   

Few will debate whether or not prices are actually falling; most every measurement has recently shown a decline, and with economic projections what they are, prices are expected to continue to fall.  How long and how far are the questions at hand.  Belfiore Real Estate Consulting (BREC) has some thoughts on the Phoenix metro area….  

BREC’s measurement of the fall in new home prices involves the study of “same store” net, new home offering prices.  Since the beginning of 2006, BREC data suggest metro Phoenix new home values have dropped an average of 27%.  And, January data, currently being input, suggests the drops have continued- despite some early-year optimism that pushed traffic levels upward.  

Resale home prices are another subject.  Resellers have not dropped prices significantly.  Data provided by Arizona Regional Multiple Listing Service, Inc. reflects resale offering prices in the Phoenix Metro Area dropped only 0.5% from the beginning of 2006 through the third quarter 2007 (NAR Market Watch, latest report published, weighted average offering prices for Maricopa and Pinal Counties).  Other indicators reflect resale price drops of less than 10% since the beginning of the current downturn.  

The gap between new home and resale home prices suggests resale prices have significant, near-term downward pressure.  A demand shift to new homes (from resales), particularly on the outskirts of the metro area, is clear today.   Resale prices stand to drop significantly in 2008.  BREC’s latest estimates call for a fall in resale prices of at least 12.5% this year.  

As mentioned above, the latest new home data collected by BREC reflects continued new home price cuts, as well.  BREC’s current forecast suggests net new home offering prices will drop 7.5% in 2008.   

Current finished lot inventories remain high in the most competitive areas of the metro area, pushing lot prices down.  A couple of positives today: (1) a limited number of transactions, which are being sold to buy-and-hold investors (these investors are taking lot inventory out of circulation, effectively decreasing competition), and (2) few lots are under development, and even fewer will be under development 12 months from now (limiting additional competition, allowing current supply to start to burn-off).  

Those worried with the direction of home prices, including Mr. Bernanke, should concern themselves with two items currently: (1) consumer sentiment, and (2) the availability of mortgages.  Nervous consumers- whether nervous about the direction of the economy, their own jobs, or home prices- historically have reduced household spending.  During the 4th quarter, the direction of consumer sentiment became clear as subdivision traffic levels fell rapidly.  Consumers are now hearing how much more difficult it is to attain mortgages.  Tightening underwriting standards have and will continue to result in fewer homebuyers.