It’s been my contention for several months now that the number of homes sold in metro Phoenix in 2008 will be a bit better than 2007 but still very low. However, 2009 will be in the range of a normal year as far as number of homes sold. At least that’s my guess.
And as I talk to people it appears that that is becoming the conventional wisdom.
That view is spectacularly summarized in this quote from Kieran Quinn, “Things will be fine in 2009.”
The Center for Real Estate Theory and Practice at the W. P. Carey School of Business at ASU had a conference on February 15 “Risk, Reward and Real Estate.” They recently put some articles about the talks online.
I particularly like the article on the talk from Kieran Quinn, chairman and CEO of Column Financial, Credit Suisse’s Atlanta-based mortgage lending subsidiary for commercial properties and current chairman of the Mortgage Bankers Association.
Prior to 2001, he noted at the conference, the record for single-family originations never exceeded $2 trillion. Then along came the boom years and from 2003 through 2006, “the market averaged well in excess of $3.5 trillion, almost reaching $4 trillion,” reported Quinn. “We think the number of originations this year will be $1.8 trillion, right back where we were in 1999-2000.
On the commercial real estate lending side, it looks like portfolio lenders, for example, insurance companies are facing significantly less competition and are making significantly more profitable loans.
One reason is that since the portfolio lenders are about the only game in town for the financing and refinancing of commercial real estate, they can “cherry pick what they want” and underwrite even more conservatively than they usually do. The portfolio lender generally underwrote loans at 75 loan-to-value. Now, they are doing 65 percent loan-to-value, said Quinn.
Then there is residential.
In residential, homebuilders were on a construction tear to meet buyer demand. The problem was a demand for new homes was not based on actual need.
“Excess,” or “artificial,” demand was created by speculative investors who were not going to be living in the houses they were buying. Unfortunately, even when it became clear that the demand for single-family properties was artificial, homebuilders couldn’t turn off the spigot. They owned land so they continued to go about their business of construction.
“The builders continued to build all through 2007,” said Quinn. “And the builders are still creating supply.”
This phenomenon was explained to me this way. Arizona home builders in 2004 and 2005 built an extra one-half year’s supply of homes. It’s now 2008 and Arizona home builders still haven’t cut out that extra half year’s production of homes to put the market back in balance.
What’s the Mortgage Bankers Associations agenda?
On the buyer end, Quinn reported, there are 9 million adjustable-rate mortgages in the market, 6 million of which are prime and 3 million subprime. “Although subprime ARMs are just 7 percent of all loans, they are 43 percent of all foreclosures,” he said. “We have got to reset those loans.”
To help stabilize the single-family market, which Quinn says will show increasing delinquencies through 2008, the MBA is pushing to modernize the FHA; supporting the Hope Now Alliance, a program that tries to get homeowners in delinquency to work with counselors and servicers; and lobbying for higher loan limits for Fannie Mae and Freddie Mac.
{ 4 comments… read them below or add one }
Shailesh Ghimire 03.03.08 at 10:12 am
Very good quotes. It seems to be a safe bet that 2009 will be the first year of the turnaround (normal market). I read one mortgage industry expert state that 50% of loan originators have left the business, so with business back to 1999 levels it would be safe to say that the remaining lenders will slowly start to become more profitable.
I’m going to have to check out the articles you mention. Thanks.
boston512 03.04.08 at 8:26 am
John,
Among the many reasons for the sales to be low this year, I can think of two main reasons that would keep prices and sales lower than 2007.
1. Same time last year we have 47,000 listed for sale, while currently we have 56,000 homes.
2. Number of sales for last Feb was about 5000, while we had only 3400 solds this Feb.
The other big reason is that we are heading into recession apart from the fact that the Fed chair openly admits that the mortgage crisis will continue.
Another thing to note is that the lenders were not too cautious making loans until mid-2007, after which sales dropped considerably.
The tightening lending practices continue.
Brian McMorris 03.06.08 at 6:49 pm
I don’t agree at all with the conclusion that 2009 will be a “normal” year for residential real estate sales That is definitely a case of looking at the world through rose colored glasses. While, 2009 may be the beginning of a “turnaround” this will come from severely (historically) depressed levels.
It looks from John’s chart like Phoenix inventory averages around 3 months supply normally (5000 sales / mth and 15,000 homes for sale). That inventory overhang, an extra 40,000 units in Phoenix, will take years to work down, not months.
Demand for homes coming out of the real estate depression (worst since the 1930s) will increase slowly, as people who lost all their equity when they were foreclosed will require years to rebuild capital and gain the courage and the credit rating to buy once again.
There will be little speculation to drive up demand. And lending will remain tight for many years with much fewer mortgage companies around, which will limit supply with higher credit quality and lower loan to value required by the remaining and severely wounded mortgage lenders.
The turn around will begin in 2009, but it will be five years or more after that before a return to pre-2003 normalcy.
Roberto 03.07.08 at 7:35 pm
“fine in 2009″ what a load!
Prices dropped 12% in 2007, and all the factors causing that drop are noticebly worse right now:1. Foreclosures running at 2000 a month, compared to 500 a year ago 2. Supply of 20% more homes for sale 3. Demand down 30%, year over year 4. credit is much tighter today.
I predict a 20%+ drop in home prices across 2008; Will sales pick up afterwards? maybe if the drop is even more severe investors will come in at value prices. IF a fine year to you guys is a price crash, then I suppose it will be fine in 2009!