Paradise Valley is a real estate microcosm.  Homes are much larger and median prices are significantly higher than anywhere else in the Phoenix area, including it’s neighbor, Scottsdale.

Commonly call “PV”, this city has irregular boundaries, that extend from Camelback Road on the south, to Shea Boulevard on the north.   The area is filled with acre plus lots, beautiful homes, and magnificent views of Camelback and Mummy Mountains.  Some homes border the Phoenix Mountain preserve. 

The city of Paradise Valley shouldn’t be confused with the geographical area to the Northwest that is home to the Paradise Valley School district.  This area is home to a number of private and charter schools, as well as sitting in mostly in Scottsdale Unified School District.

The number of homes for sale in Paradise Valley has been at an all-time high, but you can see that since April, there has been a drop of almost 20%.  In August, the number of listings dropped below 500, for the first time since October 2008.

One of the other changes occurring in the PV market is that time that the number of days of inventory (how long it would take to sell current home listings at the current sales rate) started has been decreasing since May of this year.

Paradise Valley has relatively few properties identified as short sales, and even fewer that are bank-owned (foreclosures). These properties however are impacting the local real estate market since they are being listed at significantly lower prices, around $300/square foot, as compared to $500/square foot for a typical listing.  When it comes to actual sales, short sales and foreclosures account for more than 25% of the sale in July.  Sales prices for typical sales are averaging almost $350/square foot, while short sales and foreclosures are selling at an average of $100/square foot less.

Taking a more historical look at the Paradise Valley sales price trends, you will see that the annualized average sales price per square foot has steadily decreased from $450 per square foot a year ago.  Comparing last year’s average sales price to this year’s (on a per square foot basis) shows that depreciation has been 19%. Recent trends, comparing last month to this year, do shows that depreciation is slowing slightly.

A few definitions (courtesy of the Cromford Report) that may help you further understand the charts above:

• REOs or lender-owned properties have already been through the foreclosure process and completed their trustee sale. These properties were sold by the trustee to the beneficiary (lender). In a few trustee sales (typically less than 5% at the moment), the property may be sold to an investor or wholesaler who is prepared to bid higher than the bank. These properties are not classified as lender-owned. The lenders use the ARMLS system quite heavily to market their inventory of homes and compete aggressively on price. At the moment we lender-owned properties constituting a significant share of the homes listed for sale, and an even large proportion of the homes sold.
• The Pre-foreclosure category includes those properties that have started the foreclosure process but have not yet had the trustee sale. We also include those which are being marketed in a short-sale situation, even if a notice of trustee sale has not been issued. In a full pre-foreclosure situation, the owner(s) have received a notice of trustee sale and the property is being marketed in order to try to sell the home before foreclosure completes. Many of pre-foreclosures are in a “short sale” situation, where the price asked is lower than the outstanding debt secured by the home. Such sales require the approval of the lender. A few may also (or instead) be the subject of bankruptcy proceedings and the sale may require approval by the court. We generally refer to all these situations as “distressed sales”
• Normal sales are those where the owner has the unencumbered right to sell the property without requiring approval from a lender, court or external corporation of any kind, and the owner is not a financial institution. In a normal market these constitute the vast majority of all listings and sales. The degree to which these sales become a smaller proportion of all sales indicates the level of distress being felt in the market.

I just published a post over at Click2AZ.com on the current foreclosure situation in the Phoenix Metro area.  Mike Orr at the CromfordReport.com has done some number-crunching to keep us in the know.

Is the REO bubble over in Phoenix?

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Mike Orr loves his numbers, even more than I do.  Last week he published an interesting article on “shadow inventory” on his subscription site, www.CromfordReport.com.

While I could add my two cents to Mike’s analysis, I think he’s done such a thorough job that I’ll include the full article.

Shadow Inventory?

Some analysts have written about a so-called “shadow inventory” of lender-owned property. They speak in dark tones of an ominously vast number of properties which have been foreclosed but are not being marketed. The banks are supposedly hoarding these homes to avoid flooding the market. The implication is that when the banks finally unleash these properties onto the market we will be overloaded with supply.

This is palpable nonsense.

Let’s look at why the shadow inventory is relatively insignificant:

First, we need to establish how many properties have been foreclosed but not yet sold to a third party. It takes much time and effort to establish this, particularly because government entities are not required to file an Affidavit of Value when they deed property. They get an “A-3″ exemption. However Tom Ruff of the Information Market is up to the challenge and has counted all the trustee sales, searched for subsequent sales to third parties, accounted for all the A-3s and produced a spreadsheet of shadow inventory counts by ZIP code within Maricopa county. There are a total of 18,386 homes within Maricopa county in REO status.

How many of these are in the ARMLS system as of this morning?

1. 5,213 are active
2. 7,170 are pending (i.e. in escrow)
3. 477 are temporarily off market (in many cases because multiple offers are being negotiated)

Thus there are 12,860 accounted for. So the “shadow inventory” of REOs not currently being marketed through ARMLS for Maricopa is 5,526. No doubt many of them will be listed in the next few weeks.

Is this number likely to cause a flood? Absolutely not. This represents less than 1 month of supply based on the current rate of purchase of REOs through ARMLS (which is 5,556 as of today). In fact if this is the only new supply, the inventory of active REOs will fall over the next month, just as we expect. The trustees would have to increase the rate of their sales substantially to keep up with the current market demand for REOs.

So is the vast hoard of shadow inventory hiding in Pinal county? Well to be honest we can’t count REOs with such accuracy in Pinal due to the delays in recorded documents becoming available. What we can say is that in the ARMLS system this morning, among the lender owned properties:

1. 549 are active
2. 951 are pending
3. 40 are temporarily off market

Thus there are 1,540 accounted for and we know the current monthly sales rate is 779. It would appear that Pinal’s supply is about 10% of Maricopa’s and Pinal’s demand is about 13% to 14% of Maricopa’s. As a result we would estimate that shadow inventory in Pinal is about 550, representing about 3 weeks supply.

So we can conclude, at least for Greater Phoenix, that shadow inventory is a fake issue.

QED

(By the way, the RealtyTrac analysis of these shadow inventory numbers seems to be flawed. They appear to have excluded pending and temporarily off market MLS listings in their analysis and only counted REOs listed “for sale” (active). Thus we believe they may have over-estimated the shadow REO inventory across the whole country.)

What I can add to Mike’s commentary is that:

1. I have one lender-owned property that is not on the market yet, but will be. I’ve already been approached about its availability, but do not have a price yet to share.
2. Most of Phoenix area REO properties that I have listed and are now under contract have received multiple offers.  It’s been the norm, rather than the exception. For the most part, properties are selling very close to list price, or over.
3. And just this past week, I called on a new lender-owned listing in Pinal County.  This foreclosed property had been on the market 4 days, and the listing agent said she had 15 offers, 10 were cash, and the highest offer was 30% over asking price. 

Times – they are a changing.

photo credit: TheTruthAbout…

The real estate auction company, Hudson & Marshall, is in town this weekend, for an auction of foreclosed properties to be held at the JW Marriot at Desert Ridge. 

We had a 2 bedroom single family home listed that the bank entered into the auction about 2 weeks ago.  Several pre-auction offers came in, so that property in Surprise has been pulled from the auction.  However, there are still quite a few other properties available.

You may want to know a few of the helpful home buyer tips that the auction company provided to me: 

• Anyone can attend the auction, it’s free and open to the public.
• The auction moves fast and the bidding process on 20 properties typically take less than 40 minutes.
• Hudson and Marshall does not have an opening bid, although I’m under the impression that there is a reserve on some properties.
• You should definitely pre-inspect the home(s) you may are interested in prior to the auction.
• You can bring your real estate agent with you to the auction.
• Arrive early to register for the auction. Bring your photo ID and $2500, in the form of a cashier’s check or cash, if you are going to bid.
• The $2500 earnest deposit is required upon winning the bidding for a property.
• Homes are sold with a “clean title”, free and clear of back taxes and liens.  Seller pays for title insurance.
• Property is sold in “AS IS” condition.
• Closings typically take place within 30-45 days.

Auction starts at 1 pm, both today and tomorrow, May 16/17.

1. “Is this property still available?”
2. How many offers?” 

Sales are up all over the Phoenix metropolitan area. When it comes to foreclosures, the number of days on market for active listings has dropped 42% in the last quarter, from 201 to 116 days.  Our average time on market for current pending sales is 28 days. 

According to ARMLS statistics, 7600 properties sold in the month of March. Over 2,000 more than the month before.  Almost 70% of these homes were bank-owned. 

Foreclosures are driving the market.  Houses are selling.  The home sales price free fall may be almost over, at least for lender owned properties.

Real Estate Market Distress for Scottdale, Arizona 85258, including McCormick Ranch (Click chart for a larger view)

In reviewing the Cromford Report this morning, I stumbled on the fact that the Scottsdale zip code, 85258, is experiencing the least stress in today’s real estate market. While it’s still in the Caution zone, compared to other areas of Scottsdale and the Phoenix metropolitan area, the area that’s home to McCormick Ranch and also, Gainey Ranch is doing reasonably well.

Approximately 15% of the homes on the market in this area, which is roughly between Indian Bend and Shea, Scottsdale Road and East 106th Street, are either bank-owned or advertised short sales.  These homes are selling at a faster rate and during December 2008, accounted for 36% of the sales.

One very interesting and very unusual aspect I’m seeing in this chart is the price per square foot of short sales.  Typically, normal sale will have a noticeably higher price per square foot, when compared to short and bank-owned sale.  Not so, here.  Even more interesting is that the price per square for solds is higher than those listed, and you will see for normal and bank-owned sales, that the sales price is quite a bit lower than listing price.

Good news is that McCormick Ranch and Gainey Ranch seem to be doing better than most in this tumultuous real estate market.  At the same time, you can see that it’s still a tough market to sell a house in.

I’ve included the full slide show, and invite you to take a look.

Highlights for the Phoenix area resale market include:

1. Seven straight months where number of home sales surpassed 2007.
2. The number of 2008 homes sales surpassed 2007 by almost 10%.
3. Results from the second half of 2008 showed significant improvement over the first half of the year.
4. Sales increases are definitely being fueled by dramatic price decreases, especially in the second half of the year.
5. Bank-owned properties are a significant portion (approximately 33%) of the homes sales.
6. Bank-owned properties are priced much lower than owner sold homes, and are selling at a faster rate.

I’m in the process of looking into home sales individual cities around the valley, and will be sharing some of those highlights.  The results have been surprising and may signal some significant opportunity for buyers who have been waiting on the sidelines, looking for the bottom.