Real Estate Update

April 12, 2011

Transcript:

Ted Simons: March was a huge month for residential home sales in the valley. The Phoenix business journal reports that nearly 10,000 homes were sold in the month of March according to data from the Arizona Regional Multiple Listing Service, it was the strongest showing for monthly sales in over five years, but while sales are up, prices continue to decline. Earlier I spoke with ASU real estate professor Jay Butler about what it all means. Jay good to have you here, thanks for joining us.

Jay Butler: Glad to be here again.

Ted Simons: OK, let's talk about some recent numbers that have been released, month-to-month sales. In the month of March, up, looks like up considerably. What does it mean?

Jay Butler: Basically we had a lot of reasons. About 40% of the activity is foreclosures being recorded. And some of that is due to the moratoriums that were in effect toward the end of last year. Also, lenders are now after the moratorium selling back to the marketplace to previously foreclosed properties. So the problem is yes, it's a big number. For the last couple years we've been setting record numbers, but for all the wrong reasons. Heavy foreclosures, properties being -- REO properties being sold, short sales. It's far from quotes around normal, that we haven't had safe in a long time.

Ted Simons: The idea we haven't seen this activity since maybe back as far as '04 and '05, very different market.

Jay Butler: Very different. Much more positive market back there, although we were beginning to create the beginnings of this market. There was a more sense -- the strange part is it to say motivation is driving both markets. Investors looking for the deal for flip or rental purposes.

Ted Simons: I was going to say, how much are these investors driving the market?

Jay Butler: They're driving it. Owner occupancy basically nonexistence. Either entry level or people moving here. If you're trying to sell your home, you're going to have a real difficult time. We have virtually no move-up market. And that's usually at this time of the recovery, you have the people selling their homes, say, entry level, and buying new homes and moving up the ladder. We're not doing that. They can't sole because they're underwater, or they don't want to sell. They bought nice homes, and they're underwater, and they're having issues, but it's a nice place.

Ted Simons: The traditional homeowner who buys that house on that pretty street they've always looked at, because that's where they want to live, and the seller is able to sell to that particular buyer, that's almost an anomaly right now?

Jay Butler: Right now it is. Basically it's because of tight underwriting, interest rates are low. Back in 2004, interest rates were low and money was available. Right now we have interest rates that are low but not readily available. Back in 2004, if you had a FiCA score 600 or you could fog a mirror you got a loan. Nowadays, some of the stuff they're talking about, 700, 720.

Ted Simons: That's keeping these entry level buyers out of the market too, correct?

Jay Butler: Yes. The only advantage they have is that homes are fairly cheap, and they can work directly with the investor to buy that particular home and not have to go through institutional lending.

Ted Simons: What are we looking regarding short sales?

Jay Butler: Again it's a very active market, but it's active in some areas and not others. And it's really based on the lender's willingness to get involved.

Ted Simons: So you're saying if the house is not, or home is not distressed financially in some way, shape, or form, very difficult to sell right now?

Jay Butler: Yes, it is. And a lot of people don't want to sell because they're remodeling. Remodeling activities are very heavy right now. Or they're just perfectly happy where they are.

Ted Simons: Talk more about the challenges of getting a home loan. We talked -- I know you referred to this a couple times, but jest in general, is that easing at all?

Jay Butler: There appears to be no evidence it's easing. FiCA scores are 720 for sort of the low rates we're talking about, down payments, unless you go FHA or VA, down payments are still fairly significant. If you're putting less than 20% down for a conventional loan, you've got to go through mortgage insurance, which is also tough. It is a lot of requirements. And they're looking much more tighter. It used to be that we would take the FiCA score, the highest if you were married. Now they look at both. So it's a lot more tighter rules and regs than what they had. And everybody is following those because the regulators are looking at them closely right now.

Ted Simons: So we're seeing, again, with some of these investors buying right now, a lot of cash buys?

Jay Butler: Basely. If you're going to buy a home that's being foreclosed you have to have cash. But what's happened is many times they'll turn around and sell them to people who are financing their home purchase. And they will sometimes do the financing themselves.

Ted Simons: With that in mind, back to the investors, that was one of the concerns regarding the initial bubble if you will. A lot of investor activity. If we're seeing investor activity right now, what does that mean for the future?

Jay Butler: Well, there's an issue. A lot of these investors are going to look for the first time the market starts to improve to sell these homes to make their profit. They're not looking for big profit, but some profit. I've sort of the idea of shoving the elephant through the key hole. A lot of homes coming on sale as soon as the spring blossoms start. And it's going to be difficult. Again, it's going to put pressure on prices in many neighborhoods, which are really impacted by foreclosures and lower valuations etcetera.

Ted Simons: OK, talk about some of those neighborhoods where is -- first of all, what's hot right now?

Jay Butler: Basically the east valley. Gilbert and Chandler are really good communities. If you're looking at investors, they start in El Mirage and they're spreading out into Glendale and Buckeye and other places. The prices are lower there.

Ted Simons: I find it interesting, if an investor buys in Buckeye, just sitting on it, are necessity able to rent in Buckeye?

Jay Butler: To some degree they're able to rent. They're looking a lot of times they think they're going to rent, the problem it's getting to be is you're getting a lot of homes for rent clustering in the same area. And they're competing with each other. What happens is, the renter looks at whatever the most available rent and the guy who bought the cheapest gets the tenant.

Ted Simons: Overall, valley wide, rental market, what is it looking like?

Jay Butler: From my perspective it's a very competitive and tight market. Apartments, vacancy rate, varies over the valley from over 20% in some of the older areas, to less than 7%. Rents are down to about as low as they're going to go. There's very little concessions and it's not because they don't want to give could be sessions, they just lowered their rent ask don't feel they need to give concessions. Tenants are looking around, but from an investment standpoint, for commercial properties, the hottest market is the apartment market. You can buy them cheap. Especially the condo conversion. So you can buy a very nice A property for maybe B or C prices, rent them out, and what you're going to do is take the tenants from the A guy and put them in your project which is as good as his, but cheaper rents.

Ted Simons: You mentioned rents are as low as they're probably going to go. I always ask this when you're here or when other realtor guys are here, have we hit the bottom with prices? Everything is so skewed do, we know what is bottom?

Jay Butler: Well, in a sense, I always tell people the "Titanic" found bottom. It just never recovered. The problem is, the price of what's being sold and what is being sold is investment price driven properties, because the move-up market and intricate decisional owner occupants predominantly on the sidelines. Even in the new home market we're looking at tremendous price differentiation because the biggest competitor is the model built two years ago that's been foreclosed on. So there's a lot of pressuring. Gilbert is doing well because you can buy a very nice family community home for half the price than just a few years ago.

Ted Simons: So it almost the effect where new homes, you know, lived-in homes, there's almost a different market there?

Jay Butler: Well it really is. The new home people are stressing, their homes are greener. So that you can have the -- it will cost you less to operate the new home than the older home. We've even seen ads where they talk about the new home smell. So they're competing against this same model competitive price, and they're pushing the green aspect of their new homes.

Ted Simons: You mentioned condos. Real quickly here, the condo sale market, is anything happening?

Jay Butler: There is some activity. It's a good investment. You can buy condos in some parts of the valley fairly nice ones for $35,000. And they're probably pretty easy to rent out. And even if some of the nicer ones, etcetera investors are looking at these and looking very heavily.

Ted Simons: Last question -- what should we look for? What kind of index, when kind of research study, what report should we look at next to say, all right, now we've got a pretty good idea what's going on here.

Jay Butler: I don't think there is such a thing. Every number tells us something different. Right now the key issue, people must feel confident in the income they're earning. And that's difficult to do right did you moment. And it's really the net income, because people are talking about higher health care costs, all sorts of things that are going to hit their net income, and when people begin to feel confident in that, then we'll feel more confident in the housing market.

Ted Simons: The other aspects of the economy, look at those, work them into the real estate.

Jay Butler: The numbers are people making decisions. The question is, what impacts those people making those decisions?

Ted Simons: All right. Jay, good stuff. Thanks for joining us, we appreciate it.

Jay Butler: Glad to be here.