Trent Powell is a peninsula in what has become a choppier sea in East Valley real estate. He’s stuck among a for sale sign, an unrealistic seller and a leery buyer. In the lucrative game of home sales, he is checkmated.
What a difference six months makes.
Last summer, the Mesa real estate agent drove with investors through neighborhoods while they snapped up houses in hours or days. Buyers didn’t think twice about the home’s condition, and sellers did dances over the amount of money they were getting.
While the market clearly cooled with the weather, it has done nothing to change the perception that home prices are still soaring through the the roof and into outer space.
Sellers still want top dollar, so houses are staying on the market longer. Buyers aren’t buying because they figure homes that have been for sale a month or more aren’t worth considering, despite the fact it generally takes about 45 days to sell a house.
“This has got to change. Otherwise the market is never going to change,” says Powell, who works with Denman Realty Group. “You can’t just put a sign in front and sell your home. It’s not like that now. Buyers are gone, investors are gone. It’s just normal people in Arizona buying homes.”
While the market has slowed from a frenzy that began in the spring of 2004, it must be put in perspective, real estate experts say.
“This is still an expanding market, minus the hype involved in it,” said Jay Butler, director of the Arizona Real Estate Center at Arizona State University Polytechnic.
Nonetheless, the bubble is gnawing at affordability. “It would be hard from an economic standpoint to sustain the kinds of growth rates we’ve seen for the last year and a half given our income levels,” Butler said.
The softening in sales is classic economics at work, said R.L. Brown, publisher of the Phoenix Housing Market Letter.
“Nothing changed except prices reached a point beyond where consumers are willing to pay it,” he said.
“What we’re seeing now is that period where the adjustment will begin. Those that have to sell will become more and more realistic about their prices. At a point in time when they have reached market reality, their properties will sell. Until they do, they won’t sell.”
Brown predicts the market overall for 2006 will fall in volume.
He expects to see the biggest period of adjustment in the first six months of the year and then sales will normalize.
There is nothing to suggest the bottom will fall out, Brown said.
“The economy in this state is superb. I don’t know of anybody expecting it to change dramatically,” he said.
“The population growth, which of course is the feeder of all things in this state from the economy to the housing market, continues unabated. For Arizona, times are good. Tourism is up, so are tax collections. That’s all positive for the housing market in the normal flow of business.”
The growth in the median home prices, especially in previously owned homes, has disappeared, Butler said.
“We’ve been running pretty close to $260,000, give or take a little bit, for several months now,” he said. “It peaked at $263,000 in September and was $257,000 in January.”
The median is the point where half the homes sold for more and half for less.
Sales activity has also slowed for the last several months. The high was 10,700 homes sold in Maricopa County in August, Butler said.
The number was down to 5,260 in January.
“We’re slowing and we’re returning more to a normal pattern,” he said. “There are going to be areas that may get hit harder than others because of the role of the investors, the nature of the home buyer and other things.”
Brown said it will be anywhere from hours to days, weeks, months before some sellers realize that they’re not in tune with the consumers.
“Those sellers that have no real reason to move, no real reason to sell, they’re just trying to cash in and make a profit . . . will probably try to hold their prices,” he said.
“That’s a common thing that occurs in a real estate market, especially a market that has seen rising prices over a period of time. The seller will list his house at an unrealistic price and say ‘Well, when the market gets there, then I’ll sell it.’ We’ve got that going on right now.”
PRICED TO SIT
That’s one of the reasons why Powell is frustrated.
Just like last year, sellers wanting to cash out are listing their homes for higher prices than comparable homes on their blocks. Powell shows them a list of the homes that have sold in their area the last three months.
He also tells them what an appraiser would give them before suggesting a sales price.
“Most of the people say ‘No, we want to start here,’ ” he says.“They’re starting $20,000, $30,000 or $40,000 above.”
In a month or two, they want to know why their home hasn’t sold. When Powell reminds them the price is too high, there’s resistance. They want more than the neighbor sold his house for months ago.
“It is very hard to get them down from that price they started at, ” he said. “What happens probably a majority of the time in 90 days, which is a normal real estate contract, they get rid of me and get another one. I know it’s their house. They’re my boss, but they’ve hired me to sell their home. So, let me help you sell your home.”
Prices for homes he sells in Queen Creek, Mesa and Gilbert began their descent in October, Powell said.
To make matters worse, more houses than normal hit the market in the new year. And they were overpriced.
The spongy market will force a new way of thinking in the industry, Brown said.
“It’s been a seller’s market for so long, you could say there’s 20,000 new real estate agents who have never been involved in a buyer’s market because that’s the number of new licensees in the state over the last couple years,” he said. “Those folks could think that real estate in general is always a seller’s market, the seller calls the shots. Well, the reality is most of the time the real estate is indeed a buyer’s market or certainly the optimal market is a balanced market between buyer and seller, but it’s incumbent on the seller to come to the balance point.”
On the new home side, the boom allowed builders to dramatically raise their prices almost at will, Brown said. It resulted in no housing inventory, long lines at subdivisions and backlogs.
“All of that is in the process of changing,” he said.
“The builder is a little bit different situation price-wise. He can’t just cut his price because if he does he has the mob gathering at his corporate office of all those people that bought last week, last month, last year.”
Builders are doing more aggressive marketing.
“The sales people start answering the phone, which they haven’t been doing,” Brown said.
“The builders start advertising and you’ve seen it in the last three weeks. You’ll also see incentives, the free pool, the buy-down mortgage rate, the 50 percent discount on your upgrades and all of that stuff. You’re already seeing all of that.”
Houses under construction will likely become available at a discount because buyers who haven’t closed yet will back out of contracts because they can’t sell their current homes, Brown said.
Builders began softening price increases using discounts and incentives in May when buyers began to resist prices, Brown said.
A number of owners could have trouble paying their monthly mortgage because of the creative financing it took to qualify at the height of the market, experts said.
But it’s hard to know exactly how many of those people there might be, they said.
“You hear that nontraditional mortgages may make somewhere between 30 and 40 percent of the market out there,” Butler said.
“Because the economy is still good, job growth is still there, pay seems to be OK, there’s no real reason for these people to get in trouble. But foreclosures may pick up.”
He said investment groups could grow weary trying to sell homes they paid higher prices for.
If gas prices skyrocket or there is another terrorist attack, the market could get even more nervous, Butler said.
Median prices have risen enough to rank the Valley among the 25 or so most expensive markets in the country during the fourth quarter of 2005, according to a recently released National Association of Realtors study.
The list shows the area’s median price is higher than Denver, Salt Lake City and most of Texas, but still much less than large cities in California.
“There are buyers out there, other investors who may be a little slow, home buyers who are looking to change their residency for whatever reason, especially those who want to move in from the outer suburbs to the more older, more infill-fill type areas,” Butler said.
“So the market is still reasonably good in that area. The concern is you get the hypernegative market where you start suddenly seeing sales going down, more and more signs in the neighborhood, People sort of push the quasipanic button, then you can have some serious issues. But right now, we don’t see that.”