Friday, May 11, 2007

ARMLS Marketwatch Report, Q1 '07

The Arizona Regional Multiple Listing Service just released their ARMLS Economic and Market Watch Report for the first quarter of 2007.

The report says that the current market in Maricopa County (MC) for residential real estate is neither a buyer's nor a seller's market - it's right in the middle. As I have argued elsewhere, to call the current Phoenix market anything other than a seller's market is absurd. If you buy right now you lose, in my humble opinion.

In spite of the fact that MC housing inventory grew from 43,164 homes (at the end of Q4 '06) to 52,055 on March 31st, and that the number of homes sold fell by 910, the report has the audacity to claim that "[c]ombined with historically low mortgage rates, home sales should continue at a steady pace", and that Q2's average sales price will be higher than Q1's $350,400 (I'm not a big fan of using the average price as a gauge of anything. Its value is too easily influenced by outliers on the high end).

In the section on "Trends", Ken Fears says the following:

...there were 26,135 sub-prime loans issued in 2005 [sic - I think that should be 2004] for the Phoenix-Mesa-Scottsdale metro area, which represent 15.4% of the total population of loans for this area. In 2005, the percentage of sub-prime loans in the Phoenix-Mesa-Scottsdale area rose to 31.5% for a total of 69,997 sub-prime loans issued. This figure was higher than the nation as a whole where 28% of loans in 2005 were sub-prime compared to 14% in 2004.

So what does this mean for local Realtors®? There is no doubt that the rules for making sub-prime loans have been to [sic] lax. Furthermore, defaults will rise as mortgage rates rise and employment begins to falter with the waning economy. However, banks learned an important lesson in the last two mortgage banking crisis [sic]. It is much better to help the holders of sub-prime loans to meet their monthly payment than it is for the bank to write off the loan as a loss; a small bite to profits is better than a total loss. So banks will be much more inclined to re-work loan agreements. In addition, sub-prime loans make up a small percentage of the total number and dollar volume of existing mortgages. These factors help to mitigate the notion that there is a large overhang of defaults about to splash on the market, bringing down home prices and sales and the overall economy with it.

David Lereah's "Commentary" had this to say:

On balance, I expect about 10 to 25 percent of subprime households to be unable to secure a mortgage loan because of today’s stricter lending standards. However, many of these households will probably, over time, purchase a home when they have attained the financial capacity to do so (e.g., saving for a down payment, growing their income). So the long-term health of the housing market will probably stay in tact. In the near-term, I would expect home sales to fall by 100,000 to 250,000 annually during the next two years due to tighter underwriting practices, slowing the nation’s housing recovery.

As for the over 8 million adjustable-rate loans (25 percent of which were sub-prime) originated during the past three years, First American Corelogic estimates that about 1.1 million of them totaling about $326 billion are likely to end up in fore-closure. A bit over $300 billion of subprime adjustable mortgage loans are due to re-set by October 1st of this year. Most lenders will attempt to work out problem loans by refinancing borrowers into other mortgages. A disproportionate share of these foreclosures will occur in high cost regions, like California. Certainly, a rise in foreclosures results in an upward blip in housing inventories, depressing home values. But the good news is that these foreclosures will occur in relatively healthy local markets that boast decent levels of economic activity and job creation, improving the prospects of selling the foreclosed properties in a reasonable amount of time. Foreclosures will create temporary inventory problems, but inventories will be eventually worked out.
"Inventories will eventually be worked out," which will be "depressing home values" - but, nonetheless, Q2 in MC will see a "steady pace" in home sales and a higher average sale price? Hmmmmm...

Dr. Lawrence Yun, in his "Forecast" section, says that in the last year Phoenix jobs grew by 89,000 and that this may increase the number of potential homebuyers. Yun acknowledges that Phoenix has seen a fall in home sales, but he says that rental rates have, as a result, been "climbing fast." He asserts that, "very soon, the squeezed renters will begin to search for a home purchase."

Rents in the area are definitely rising, as you would expect, but they'll have to rise a long way to catch up with area home prices!

Forecasting the impact of the subprime fallout, Yun presents this analysis:

Consider, the subprime loans comprised about 13% of the overall mortgage market, and 20% of mortgage originations since 2005(though there are divergent figures depending upon the source). The recent overall rise in default rates is primarily associated with the subprime loans rather than with the predominant prime loans. The delinquency rate on prime loans was only 2.8% by comparison with the foreclosure rate running at 0.5%. Both delinquencies and foreclosures for prime loans have been steady with very little movement. Therefore, a 14.3% delinquency on 13% of the loan market means subprime problems are impacting close to 2% of all loans. Factor in the fact that one-third of all homeowners own their home free-and-clear, the subprime problems are associated with about 1.4% of all homes. History says that less than half of these homes with delinquent mortgage payments ever move into actual foreclosure. So roughly speaking, 0.7% of all homes will at most run into eventual foreclosure from recent meltdown in the subprime sector.
Something tells me that Yun's numbers are overly rosy. Using his 1.4% figure only gives us an average of 1459 Trustee's Sale Notices per month in Maricopa County. Since we're already seeing numbers higher than that, and there's no indication that things are going to be slowing down, Yun appears to be missing a piece of the puzzle. To be fair, Yun's numbers refer strictly to subprime loans - so one could argue that the additional numbers seen in the real world are delinquencies in alt-A and prime mortgages. In any case, the next few months should prove very interesting.

No comments: