Phoenix Real Estate Market Showing Strong Signs of Recovery

The Phoenix Real Estate Market is showing strong improvement in buyer demand as the number of homes under contract for sale is reaching levels not seen since the market high in 2005.

The Phoenix Real Estate Market by the Numbers

To understand the Phoenix real estate market, one must look at three critical areas: available inventory, pending sales or homes currently under contract for purchase, and closed sales.

As a result of heightened buyer demand, the inventory of existing homes across the Phoenix real estate market has dropped to 47,600 properties. This represents a two-year low. Though the numbers are generally high as estimations for a normal market range from 25,000 to 35,000 properties actively on the market at any point in time, the improvement is a significant development. However, foreclosure moratoriums by Fannie Mae and Freddie Mac may be artificially masking inventory in the marketplace.

“Pending” sales activity, also referred to here as buyer demand, currently shows the strongest improvement. Buyer demand, as measured by the number of actively trading homes currently under contract for purchase, has reached nearly 13,000 or 22.7% of total properties on the market Valleywide. Surprisingly, the Phoenix housing market has not experienced a statistic this high since August 2005 during the market peak.

In regards to existing home sales, the Phoenix real estate market already shows improvement with 15,909 closed transactions year-to-date. At this rate, we should expect approximately 65,000 closed sales for 2009, a 9% improvement. However, the rapid rise in pending sales activity means that the closed sales pipeline could show substantial, cumulative improvement month over month and propel sales to 70,000 transactions for 2009, a 20% improvement.

Buyers Taking Advantage of a “Cocktail” of Purchase Incentives

Buyers have been spurred on by three major factors in the marketplace. First, prices have declined to such an extent that the prices are attracting attention. Second, interest rates are at historical lows and many home buyers are attracting rates at even sub-5% levels. Third, the Federal Government’s implementation of a $8,000 “first-time homebuyer” tax credit is providing an additional tangible incentive for prospective buyers to purchase a home.

Continued market improvement along with raised public awareness of the improvement would draw out additional home buyers who otherwise have been sitting on the sidelines.

International Investment

Though the past year has seen significant investment activity on the part of Canadians interested in a second home or investment property in the Phoenix area, the recent relative strength of the U.S. dollar has negated much of the benefit Canadians previously enjoyed six months ago. Like other buyers and investors, Canadians now share many of the same concerns in buying a home as those of their American counterparts. Anecdotally, some Canadians are looking to U.S. based mortgage institutions for financing based in U.S. dollars.

As exchange rates and pricing evolve in the marketplace, we may experience additional specific international investment in the Phoenix area.

Further Trouble Brewing from Foreclosures?

The number of foreclosures do represent a trouble spot for the Phoenix real estate market. Indeed, the 90-day rolling average for the number of Trustee’s Sale notices issued daily continues to grow with over 300 notices given per day. As well, the number of actual Trustee’s Sale or foreclosure auction proceedings per day continues to grow and represents approximately 125 foreclosures daily. Together, these two figures point to an increased number of foreclosed homes entering the marketplace in the near term, potentially driving down pricing for existing homes.

In addition, any further erosion in prices puts the area at greater risk for self-feeding cycle of foreclosures in the core areas of the Phoenix area. As seen in outerlying parts of the Valley, where prices have declined as much as 60% off of 2006 highs, most homeowners who are forced to sell will likely do so through short sale or foreclosure. This is simply due to the decline in prices completely wiping out any equity the homeowners previously enjoyed.

Near Term Outlook

The Phoenix real estate market should begin to see a downward tapering of buyer demand as measured by the number of properties currently under contract for sale within the next 1-3 months. This pattern would be consistent with prior years as the school season comes to a close and many residents take vacations during the hotter months of the year. Nonetheless, the buyer curve should maintain a level that is a clear improvement over 2008 and prior years.

Foreclosures will continue to hit the real estate market here and create challenges. There does not appear any sign of abatement in this inventory for the foreseeable future.

Overall, it is possible that the buyer curve will remain resilient if potential home buyers sense a fundamental shift in the direction of the market. The increase in buyer demand does indicate a belief in opportunities to purchase. Further strengthening could eventually mean that buyer demand is ready to take on any deluge of foreclosed homes in the marketplace.

Positive Signs But Challenges Remain

The rapid increase in buyer demand is reaching levels not seen in several years as home buyers take advantage of low prices and buyer incentives in the marketplace. Indeed, continued resilience of the buyer demand curve could work to break the downturn that the Phoenix real estate market has experienced for over three years.

Challenges remain in the Phoenix real estate market. It is no secret that Fannie Mae and Freddie Mac have held a moratorium on foreclosures and may continue to do so for some time. Though the arguments for may be to allow time for reworks and to let existing inventory work itself out, a sudden deluge of foreclosure inventory could have a serious dampening effect on the Phoenix real estate market’s recovery.

Overall, there is cautious optimism that the Phoenix real estate market has been experiencing sustained improvement and is finally showing signs of working through the challenges highlighted here.