“Wake Up and Call John!” - John Wake, Associate Broker, HomeSmart Real Estate

A client had a full price offer out on a bank-owned home in Chandler 85286.

My client had some problems with the bank’s counter offer. The bank’s standard addendum said in any dispute that the buyer’s earnest money would be disposed of “at the sole discretion” of the bank, that the Buyer would pay for the Seller’s title insurance policy for the Buyer, and that the inspection period would be 5 days instead of 10.

My buyer client countered out those 3 items yesterday morning. I just found out, unfortunately, than in the interim a full price, all cash offer with a 2 week closing came in and was, of course, accepted. I’m guessing that the all cash offer was from an investor.

We are starting to see more and more real estate investors coming back into the Phoenix market. Many more investors are on the sidelines just waiting to enter.

We may see even more investment in the Phoenix real estate market as people shift their money out of the stock market and into real estate. [Dru Bloomfield first mentioned this possibility to me a few days ago and today I heard someone else mention it as well.]

On the good side, my client has now found a community that he loves where he will focus his house hunting efforts.

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Although Phoenix residential real estate prices are falling less than during the November through April period, home prices are still careening down.

I thought in recent months that prices seemed to start to stabilize but I’m really not seeing any slowdown in the rate of decline since May. The rate of decline slowed from April to May but it hasn’t really slowed again since then.

The July and August shenanigans with Fannie and Freddie and all the recent bank “failures” can only be bad news for home prices in Phoenix. However, it’s hard for me to see how Phoenix home prices could fall any more rapidly than they already are. All the Wall Street troubles will make it harder for Phoenix home prices to strengthen which will likely delay and/or lower the eventual bottom we see in Phoenix home prices.

Metropolitan Phoenix home prices in July 2008 were the lowest since November 2004. If prices keep falling at the June to July rate, by December we will be at March 2004 prices.

Phoenix homes have depreciated 34% from their peak value in June 2006 according to my analysis of the Case-Shiller data.

Let’s say that another way; Phoenix homes were 53% more expensive in June 2006.

From June to July, metro Phoenix, Arizona home prices fell 2.8%, according to the S&P/Case-Shiller Home Price Indices.

As always, the Case-Shiller index obscures the large differences within metro Phoenix sub-markets. This web site, Arizona Real Estate Notebook, is the best I’ve seen for allowing you to look at real estate trends by zip code and to tease out trends within the metro Phoenix area.

Race to the Bottom

The S&P/Case-Shiller Home Price Indices are calculated monthly using a three-month moving average and published with a two month lag.

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When I was describing options ARMs to my sister yesterday she couldn’t believe that any lender would be stupid enough to make such loans. I had to repeat it to her a few times before she kinda believed me.

Option ARMs allow borrowers to skip part of their payment and add that sum to their principal. Monthly payments increase after five years or once the loan balance reaches a predetermined limit, usually 110 percent to 125 percent. Introductory interest rates can be as low as 1 percent.

For the average option ARM borrower, payments will rise 63 percent, or an additional $1,053 a month, when their rates reset, according to a Sept. 2 report by New York-based Fitch.

Four out of the top five option ARM lenders are now out of business; Wachovia, Washington Mutual, Countrywide and IndyMac.

Number 4, Downey Financial Corp. of Newport Beach, California, has lost 97 percent of its market value since May 1, 2007. In the second quarter, 65 percent of it’s home loans were option ARMs. Good luck with that.

Beginning of the end for Wachovia

On a May 2007 conference call, Wachovia Corp.’s then-Chief Executive Officer Ken Thompson trumpeted the $24 billion acquisition of Golden West Financial Corp., a California lender that specialized in payment-option adjustable-rate mortgages.

“I think that 12 months or so from now people are going to look at the acquisition of Golden West as one that produced great success for Wachovia,” Thompson said.

Seventeen months later, Thompson is gone and so is Wachovia. After losing 82 percent of its market value since that conference call due to mounting losses on option ARMs, the bank was sold to Citigroup Inc. today in a deal brokered by the Federal Deposit Insurance Corp.

At the time I thought the Wachovia purchase was crazy and I’m no expert on the mortgage market.

I thought whoever sold Golden West to Wachovia would be like those guys that sold AOL to Time-Warner at the end of the internet boom.

The only explanation I can come up with is that option ARMs were crack cocaine for mortgage lenders.

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Rescue Includes Steps to Help Borrowers Keep Homes; Bill Would Give Government Power to Alter Mortgages

The bill not just gives the government power to alter mortgages, it essentially requires it.

The bill calls on the government, as the owner of mortgages, mortgage-backed securities and other assets backed by real estate, “to implement a plan that seeks to maximize assistance to homeowners and use its authority to encourage the servicers of underlying mortgages, and considering net present value to the taxpayer, to take advantage of…available programs to minimize foreclosures.”

You read about it first here at Arizona Real Estate Notebook.

The focus of the “rescue” bill is shifting towards creating a huge program to modify loans.

I have often wondered why banks don’t modify more loans.

“There’s a great deal of skepticism about the ability of modifications to improve the performance of loans,” said Rod Dubitsky, head of asset-backed securities research at Credit Suisse. “Investors think these loans will all redefault in a year or a couple of years and the losses will be higher.” Historically, modifications haven’t done that well, Mr. Dubitsky added, “but the key question is what will happen if you do mods that are a different flavor than before.”

One fear is that if mortgage companies or the government, is too liberal in offering help, more borrowers who might otherwise stay current on their loans will fall behind to get a better deal. “What we don’t want to do is undertake some kind of program that changes the behavior of those many, many people who undertake extraordinary effort to pay their mortgage and make sure they can stay in their home,” said Karen Weaver, global head of securitization research at Deutsche Bank.

Maybe the banks know something we don’t.

Loan modifications may help some home owners, however, the banks should be doing the modifications, not the government where loan modifications will tend to become political gifts to politically powerful constituencies.

We are almost through with our correction in Arizona. Now, with this bill the market won’t get back to normal until 5 years or more from now when this program ends.

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Holy Mackerel!

I was suspicious that Congress would use the crisis to promote agendas other than getting past this Wall Street meltdown.

Boy was I right!

Here are some passages that caught my eye in the Draft Wall Street Bailout Bill. (via Phoenix Real Estate Guy.)

SEC. 103. CONSIDERATIONS.

In exercising the authorities granted in this Act, the Secretary shall take into consideration—

… (3) the need to help families keep their homes and to stabilize communities;

… (7) the need to ensure stability for United States public instrumentalities, such as counties and cities, that may have suffered significant increased costs or losses in the current market turmoil;

(8) protecting the retirement security of Americans by purchasing troubled assets held by or on behalf of an eligible retirement plan described in clause

Hey, I thought the goal was to add liquidity to financial institutions.

(b) ADDITIONAL CONTRACTING REQUIREMENTS. —In any solicitation or contract where the Secretary has, pursuant to subsection (a), waived any provision of the Federal Acquisition Regulation pertaining to minority contracting, the Secretary shall develop and implement standards and procedures to ensure, to the maximum extent practicable, the inclusion and utilization of minorities (as such term is defined in section 1204(c) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 1811 note)) and women, and minority and women-owned businesses (as such terms are defined in section 21A(r)(4) of the Federal Home Loan Bank Act (12 U.S.C. 1441a(r)(4)), in that solicitation or contract, including contracts to asset managers, servicers, property managers, and other service providers or expert consultants. [Emphasis mine]

At least it’s a politically correct Wall Street bailout.

SEC. 109. FORECLOSURE MITIGATION EFFORTS.

(a) RESIDENTIAL MORTGAGE LOAN SERVICING STANDARDS. —To the extent that the Secretary acquires mortgages, mortgage backed securities, and other assets secured by residential real estate, including multifamily housing, the Secretary shall implement a plan that seeks to maximize assistance for homeowners and use the authority of the Secretary to encourage the servicers of the underlying mortgages, considering net present value to the taxpayer, to take advantage of the HOPE for Home owners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures. In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures. [Emphasis mine]

It’s really a bit of a public housing bill because the government will own those mortgages and will soon want to promote social housing policies.

(c) CONSENT TO REASONABLE LOAN MODIFICATION REQUESTS. —Upon any request arising under existing investment contracts, the Secretary shall consent, where appropriate, and considering net present value to the taxpayer, to reasonable requests for loss mitigation measures, including term extensions, rate reductions, principal write downs, increases in the proportion of loans within a trust or other structure allowed to be modified, or removal of other limitation on modifications. [Emphasis mine]

From the people that brought you Cabrini-Green, “affordable housing,” subprime loans, housing boom, housing bust and the current financial crisis.

(1) IN GENERAL. —To the extent that the Federal property manager holds, owns, or controls mortgages, mortgage backed securities, and other assets secured by residential real estate, including multifamily housing, the Federal property manager shall implement a plan that seeks to maximize assistance for homeowners and use its authority to encourage the servicers of the underlying mortgages, and considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures.

(2) MODIFICATIONS. —In the case of a residential mortgage loan, modifications made under paragraph (1) may include—

(A) reduction in interest rates;

(B) reduction of loan principal; and

(C) other similar modifications. [Emphasis mine]

I think they want loan modifications.

(c) ACTIONS WITH RESPECT TO SERVICERS.—In any case in which a Federal property manager is not the owner of a residential mortgage loan, but holds an interest in obligations or pools of obligations secured by residential mortgage loans, the Federal property manager shall—

(1) encourage implementation by the loan servicers of loan modifications developed under subsection (b); and

(2) assist in facilitating any such modifications, to the extent possible.

Loan modifications seem to be a top objective of the legislation. It sounds like Treasury can buy up to $700 billion of mortgages but it must modify each individual loan after they buy it! Like that’s not going to lead to a corruption fest.

Tell me it ain’t so!

(b) USE OF MARKET MECHANISMS.—In making purchases under this Act, the Secretary shall—

(1) make such purchases at the lowest price that the Secretary determines to be consistent with the purposes of this Act; and

(2) maximize the efficiency of the use of taxpayer resources by using market mechanisms, including auctions or reverse auctions, where appropriate.

(c) DIRECT PURCHASES.—If the Secretary determines that use of a market mechanism under subsection (b) is not feasible or appropriate, and the purposes of the Act are best met through direct purchases from an individual financial institution, the Secretary shall pursue additional measures to ensure that prices paid for assets are reasonable and reflect the underlying value of the asset.

The Treasury should use auctions or reverse auctions unless they don’t want to.

The political pressure to make sweetheart direct purchases will be crushing.

SEC. 116. OVERSIGHT AND AUDITS.

(a) COMPTROLLER GENERAL OVERSIGHT.—

(1) SCOPE OF OVERSIGHT.—The Comptroller General of the United States shall, upon establishment of the troubled assets relief program under this Act (in this section referred to as the ‘‘TARP’’), commence ongoing oversight of the activities and performance of the TARP and of any agents and representatives of the TARP (as related to the agent or representative’s activities on behalf of or under the authority of the TARP), including vehicles established by the Secretary under this Act. The subjects of such oversight shall include the following:

(A) The performance of the TARP in meeting the purposes of this Act, particularly those involving—

(i) foreclosure mitigation; [Emphasis mine.]

The #1, top area listed for oversight is foreclosure mitigation which supports the idea that foreclosure mitigation is the top objective of the bill.

(H) The efficacy of contracting procedures pursuant to section 107(b), including, as applicable, the efforts of the TARP in evaluating proposals for inclusion and contracting to the maximum extent possible of minorities (as such term is defined in 1204(c) of the Financial Institutions Reform, Recovery, and Enhancement Act of 1989 (12 U.S.C. 1811 note), women,
and minority- and women-owned businesses, including ascertaining and reporting the total amount of fees paid and other value delivered by the TARP to all of its agents and representatives, and such amounts paid or delivered to such firms that are minority- and women-owned businesses (as such terms are defined in section 21A of the Federal Home Loan Bank Act (12
U.S.C. 1441a)).

It started out as a 3 page draft and now it’s 101 pages.

SEC. 132. AUTHORITY TO SUSPEND MARK-TO-MARKET ACCOUNTING.

(a) AUTHORITY.—The Securities and Exchange Commission shall have the authority under the securities laws (as such term is defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)) to suspend, by rule, regulation, or order, the application of Statement Number 157 of the Financial Accounting Standards Board for any issuer (as such term is defined in section 3(a)(8) of such Act) or with respect to any class or category of transaction if the Commission determines
that is necessary or appropriate in the public interest and is consistent with the protection of investors.

Oh yeah. Accounting practice requires that assets be counted at their market value not some value pulled out of a hat.

Apparently Congress believes it’s good for the country if these financial institutions can better hide their loses from the public.

Arizona

Arizona’s real estate market was very likely to bottom out next year. This bill could end up delaying that for many months or years.

If the boys at Treasury lived in Queen Creek, Arizona they would have had a bailout bill for home owners a year and a half ago. Now that their buddies are getting wiped out financially, they step in with a bailout bill for Wall Street.

Worst Case Scenario

• The Treasury buys zillions of dollars of mortgages then puts a moratorium on foreclosures while they do the mandated loan modifications (read; sweetheart deals).
• That leads to tremendous political pressure to outlaw all foreclosures temporarily (it’s already been proposed).
• Private financing for mortgages dries up because lenders now fear foreclosure moratoriums and stifling regulations.
• The federal government becomes the dominant mortgage lender in the United States and their lending programs soon become dominated by social engineering goals.
• Home prices continue to fall (well, at least that’s good for affordable housing!) since the private sector has become very skiddish about investing in residential mortgages.
• Only politically correct or politically connected people can get a mortgage and buy a home.

When I do a worst case scenario, I want to do a worst case scenario.

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It wasn’t long ago that Sacramento was called the worst real estate market in the county because it’s median home price had fallen more than any other.

Now, with a 3.9 months supply of homes, you could say it’s a seller’s market in Sacramento.

Even though about 25% of home sales are bank owned properties, the inventory of homes listed for sale in Sacramento continued to decline.

After such a long spell of lousy news on the housing front – for sellers and owners, that is – here’s a surprise: In today’s housing market, there are just 3.9 months of for-sale inventory in Sacramento County and West Sacramento.

The number, from the Sacramento Association of Realtors, means it would take just about four months to sell every listing inside its territory at the current sales pace.

A year ago, SAR pegged that number at 11.4 months.

The article says many home owners are putting off selling their homes until prices rebound. That’s silly. The real reason is many home owners have decided they now don’t want to sell at all at such low prices.

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I got a bad feeling about this tentative bailout deal.

And it could be a game changer for some races as emotions are running high for and against it. It will likely become a major talking point in some races, anyway, especially if it doesn’t pass next week.

My guess is that it will get bogged down in Congress until the politicians figure out how it shakes out with their voters.

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I was running late on sending out the Home Sale News e-newsletters.

I was very busy last week with closing a transaction, preparing a new listing to look great before putting it in the MLS, attending a tour of Scottsdale City government sponsored by the Scottsdale Association of Realtors, and following all the breaking news about the financial crisis.

When I finally got around this morning to sending out Arizona Home Sale News, I realized I didn’t receive the raw data from The Information Market last week. Whoops! I should have called Tom last week.

Anyway, I should get the data from them tomorrow and I should be able to send out the Home Sale News e-newsletters out soon after I receive the raw data.

I’m sorry for the inconvenience!

Home Sale News

By the way, Home Sale News is quite a project. There are 124 Home Sale News e-newsletters covering the homes sold in 124 zip codes in Maricopa County, Arizona.

I send out a total of 59,000 Home Sale News newsletters each week. The average subscriber subscribes to just over 3 zip code newsletters so that would be about 18,000 total subscribers to Home Sale News. I started Home Sale News in 2001.

Call me

If you find Home Sale News helpful, imagine how helpful I would be to you if you hired me to be your Realtor!

P.S. I’m looking for some help. Some possibilities are a transaction coordinator, a listing coordinator, an internet customer coordinator, or a HomeSmart agent that covers the West Valley. If you know anyone you can recommend, please call me at 480-596-3851.

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Brain made a comment in a post below which agreed with the idea that the government’s promotion of “affordable housing” (especially, subprime loans) was an important factor in the housing boom, housing bust and the current financial meltdown.

So, how much success did promoting affordable housing and subprime loans have on increasing the rate of home ownership in the United States?

Source: Wikipedia

Let’s say the “natural” rate of home ownership in the United States is about 64%.

By lowering the minimum standards for getting a mortgage the United States was able to raise the home ownership rate 5 percentage points to 69% in 2004. (That will likely be a record for the United States that will never be broken.)

Unfortunately, that extra money chasing homes caused home prices to skyrocket which ended up making American housing extremely UNaffordable, far less affordable than before the changes to the affordable housing programs in the 1990’s.

Since the home ownership peak in 2004, the minimum standards needed to get a mortgage have been raised substantially and home ownership is no doubt down substantially.

A temporary 5 percentage point gain in the rate of housing ownership in the United States is certainly not worth undermining the U.S. financial system.

The way the United States housing market is set up, we would probably need to have large government housing subsidies to ever get the rate of home ownership permanently above the mid-60 percent range.

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First Congress needs to replenish the FDIC with funds or give it a blank check, and then come back to address the Paulson bailout plan.

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Here are points made by the CEO of a healthy bank in the Southeast arguing against the Paulson plan.

1. Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high.

Again “affordable housing.” I’m now starting to think the federal affordable housing policies which mandated banks make sub-prime loans were an important piece of the problem.

2. There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.

3. While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.

4. Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post “rescue” punish the poorly run institutions and not punish the well run companies.

The physician’s mandate is to “do no harm.” If the Paulson plan would hurt healthy companies, we’ve got a huge problem.

6. This is a housing value crisis. It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction.

My position is that this crisis is caused by dramatically falling housing values and the crisis won’t start to improve until housing prices start to bottom out. Once house prices start to bottom out, then even a government program couldn’t stop the housing industry from improving.

7. The guaranty of money funds by the U.S. Treasury creates enormous risk for the banking industry. Banks have been paying into the FDIC insurance fund since 1933. The fund has a limit of $100,000 per client. An arbitrary, “out of the blue” guarantee of money funds creates risk for the taxpayers and significantly distorts financial markets.

8. Protecting the banking system, which is fundamentally controlled by the Federal Reserve, is an established government function. It is completely unclear why the government needs to or should bailout insurance companies, investment banks, hedge funds and foreign companies.

Good points.

9. It is extremely unclear how the government will price the problem real estate assets. Priced too low, the real estate markets will be worse off than if the bail out did not exist. Priced too high, the taxpayers will take huge losses. Without a market price, how can you rationally determine value?

This is a great point I hadn’t thought of!

13. The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. The Treasury has a number of smart individuals, including Hank Paulson. However, Treasury is totally dominated by Wall Street investment bankers. They do not have knowledge of the commercial banking industry. Therefore, they can not be relied on to objectively assess all the implications of government policy on all financial intermediaries. The decision to protect the money funds is a clear example of a material lack of insight into the risk to the total financial system.

So the Paulson plan is a Wall Street bailout that may create a Main Street problem.

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You may have heard me call him the “Mortgage Curmudgeon.”

Jack Guttentag is a retired professor of finance at the Wharton School of the University of Pennsylvania and an expert on the mortgages. I respect his opinion tremendously.

He believes the credit rescue plans proposed by the Federal Reserve and currently being discussed in Congress are “a disaster in the making.”

But he also offers a solution to the credit crisis.

Current Proposals

This mammoth transaction, which could have ramifications lasting decades, is a disaster in the making… It will provide taxpayer gifts to every selling firm, with no quid pro quo… And since there are no existing institutions to execute the plan, implementation could become the boondoggle of the century.

Yep. A huge new bureaucracy would be needed and it would be politicized immediately.

Who benefits most

Who would benefit most from the mortgage auction plans currently being discussed?

Bids would have to be expressed as a percent of face value, which has little relationship to market value. The firms that would benefit the most are those with the worst assets that meet the eligibility requirements of the auction. There is no reason to believe that these firms are also the ones most likely to suffer a cash shortage that would threaten their survival.

So the government would buy the worst mortgages which would help those lenders who took the greatest risks or committed the most fraud and who are least worthy of receiving any help at all.

The Result

Government as Owner: After the auction, the government would own the mortgages that it had purchased. Because it has gifted the sellers, it will be under enormous pressure to gift the borrowers as well. But if it does this a chasm will open between the treatment of those borrowers and the borrowers who were left behind because their mortgages were not sold. From the borrowers’ standpoint, whether they are in one category or the other is completely arbitrary.

It is unlikely that the government could resist the political pressure to gift its borrowers. Would it require other investors to provide the same breaks to their borrowers? Or would the government feel compelled to go back into the market and buy up the rest of the loans? These are frightening possibilities.

A nightmare scenario! But very realistic if the current plans being discussed are passed by Congress.

The Solution

A far better approach is to allow mortgages and mortgage securities to be used as collateral for loans. This would extend the traditional lender-of-last-resort function, which has already been extended to cover investment banks and insurance companies, to everyone who can post acceptable collateral.

It’s a concept with a successful track record…

In addition, this approach could be implemented through the existing Federal Home Loan Banks, as lending on the basis of mortgage collateral is what they do.

… that can be carried out through an established institution.

The Alternative Approach: A loan program will provide cash to firms with acceptable collateral, rather than to firms that bid successfully in an auction. Further, following traditional lender-of-last-resort practice, the government would charge a penalty interest rate high enough to discourage borrowing for the purpose of relending at a profit.

Implementation: The Federal Home Loan Banks have been in the business of making loans collateralized by mortgages since 1935, and they have all the required systems, including systems for valuing and safe-guarding mortgage collateral. Under existing rules, the banks lend only to their members. Under the rules applicable to the new program, they would lend to a larger list, which should include any firm (including hedge funds and foreign-based firms) that can post collateral acceptable to the banks. To move this program forward, the banks require only the new rules specifying authorized sellers and acceptable collateral, plus incremental funding.

Sounds good to me!

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Were you planning on renting your current primary residence and buying a new primary residence?

Smart Financial Mortgage which is affiliated with HomeSmart Real Estate had a clear description of the change.

FHA made a major change to their underwriting guidelines this week with regards to a borrower that rents out his current primary residence and then buys a new primary residence. In the past, a borrower was allowed to provide a rental contract on the primary residence that he was vacating which could wash out the mortgage payment when calculating qualifying debt to income ratios. The new guidelines say that a borrower is only allowed to do this if they have 25% or more equity in the primary residence they are vacating. If they do not have 25% equity they need to qualify with both mortgage payments. Fannie Mae and Freddie Mac have already implemented a similar rule requiring 30% equity.

I’m not a mortgage expert but I bet the change was influenced by those folks who “rented” out their current (very much underwater) residence, bought a similar new (but much cheaper) residence, and then quit making payments on the first home.

Of course, if you have 25% equity, you are unlikely to let it that home be foreclosed on.

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Elliott Pollack used to say Arizona home builders built an extra half-year supply of homes during the boom. I have used that number here many times.

Now Pollack says Arizona home builders built an extra 2 years supply of homes during the boom.

It was probably 2 years ago that I heard Pollack say half-year. (I could search this blog for the post on it.) I assume that since then the inflow of new residents into Arizona has slowed and perhaps they found out the non-investor demand for homes during the boom was over stated so he updated his estimate of overbuilding.

Arizona home builders, as I often rail here, build until they run out of money. They have been terrible about getting their inventory under control. The over supply of new homes is still way too high which is mind boggling to me because it’s been clear the sales peaked 3 years ago in the summer of 2005.

The “they built an extra 2 years worth of homes during the boom” factoid explains a ton about the current market for new and resale homes in Phoenix.

Since Arizona home builders build until they run out of money, the best thing that can happen to the Phoenix real estate market is for more builders to run out of money and stop building.

There’s no doubt that too many new homes went up across metropolitan Phoenix during the 2004-06 boom. What has been in dispute is just how “overbuilt” the housing market is now.

New research from the firm of Arizona economist and real-estate investor Elliott Pollack shows the housing market built up to 75,000 more homes than there were buyers for in the Valley. That figure is based on “demand” for 35,000 homes a year in metro Phoenix.

In 2005, almost 64,000 new homes went up, according to RL Brown’s Housing Market Report. Home building has slowed considerably since then. Last month, only 970 single-family permits were issued Valley-wide, making it the slowest month since the real-estate crash of 1991. And though home builders are on track to build only about 15,000 homes this year, there’s still overhang from the boom.

Pollack estimates there are still 30,000 to 50,000 new homes that need to be “absorbed” or bought and lived in Valley-wide.

But he said these factors are slowing the absorption of new homes: a decline in population growth, too many homes for sale, rising foreclosures and the continued construction of homes.

The surplus of new homes will put off the housing market’s recovery, but by how long depends on all those other economic factors.

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