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.

Today, I’ve created some charts (with the help of Altos Research) to show the current differences in these varying markets.

Current median list price for South Scottsdale (85257) has dropped down to just over $200K. While the area just north of downtown Scottsdale (85250), the median listing price is now running about $375K.  The area around McCormick, Gainey, and Scottsdale Ranches (85258) has not see a drop in listing price.  To the north, where DC and McDowell Mountain Ranches are located in zip code 85255, median listing prices have hovered right around the $1 million dollar range.

In this next chart, you can see that in all areas have really experienced a reduction in price, if you look at it from a median price per square foot basis.  South Scottsdale has taken the brunt of this depreciation.

Although the northern part of Scottsdale has kept its listing prices high, inventory has actually increased slightly, where as in the other zip codes to the south, fewer homes are now available for sale. 

Finally, pricing really does have an impact on how long it takes to sell a home.  As you can see here, in 85255 and 85258, it is taking longer and longer to sell a home.  However, in downtown and South Scottsdale, you are seeing a plateauing of days on market, or the number of days it takes to sell a home.

Scottsdale’s real estate market has not been as impacted by foreclosures as many of the other areas around Phoenix.  Also, the majority of the homes on the market in north Scottsdale do not qualify for FHA financing or fall into the jumbo loan category, and with the tightened mortgage market, there has been an impact, resulting in a slower market. 

Move-up buyers have been sitting on the sidelines waiting to see what is going to change.  However, once there’s an increased level on confidence in the real estate market and our economy, I do think that we will see an increased number of home sales.  Owners who purchased prior to the market run up, with equity in their homes, will decide that selling their current home in today’s market will give them the opportunity to buy up.  Lower home prices and the lowest interest rates in years will drive this change.  It’s bound to happen, it’s just a matter of when.

Listing prices appear to be stabilizing. Time to sell is definitely still on the rise.  When you look at the percentage comparisons, there’s another story. Median listing prices are $25,000 from two years ago, which equates to about a 3% drop.  Then, you look at the median number of days a listing has been on the market, and you see that its a 15-fold increase, from 10 days to 160.  What does that say?

The number of listings being absorbed (sold or taken off the market) is down, way down. 

I tend to post mostly positive news about the market, which means that I’ve been pretty quiet lately.   I’d like to make some comments about what’s going on, but this two year history is pretty telling and pretty much says it for itself.

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.

Reasons for Optimism

Price

The area within the 85257 zip code has the most affordable homes in Scottsdale. Most qualify for FHA financing, and first time home buyers have been purchasing here. Investors are also beginning to see options that provide for a positive cash flow when renting.

Location

Close proximity to ASU and Sky Harbor Airport. Close to the night life of downtown Scottsdale, too.

Neighborhoods

Many of the neighborhoods in South Scottsdale have a strong sense of community, with a blend of long-term and newer owners.

Recreation

With the Indian Bend wash running through the zip code, access for biking, running, and walking are close by. Fishing in the city lakes is available. So is a nearby skate park. And the new Senior Center is another draw for some resident. The zoo and desert botanical gardens are also a 10 minutes drive.

Transportation

The free trolley runs in and around this southern most zip code in Scottsdale. Some use it to get to work, or to downtown Scottsdale, or even to connect to the Tempe transportation system.

Shopping

Old Town Scottsdale, Fashion Square, and the new Tempe Marketplace provide a unique blend of established and new shopping options and are within easy driving distance.

Schools

Scottsdale public schools are among the best in the state. Several elementary schools, Supai Middle School, and Coronado High School, all reside in the 85257 zip code. Scottsdale community college is nearby, as is Arizona State University.

Home Prices Today

Comparing Median Home List Prices in Scottsdale to 85257

Median home listing price in Scottsdale is currently about $775,000, while in this southern zip code of Scottsdale, it’s closer to $260,000.

Comparing Average Days on Market in Scottsdale to 85257

As a whole, it’s taking much longer to sell a home in Scottsdale, somewhere in the range of 175 days, while in 85257, the days on market has stayed in the 100-110 day range for over six months.

Median Homes Prices by Price Range

To see if any one price range of homes was doing better than another, I broke down the list pricing into quartiles, and you can see that home prices have been falling steadily in all price ranges.

Days on Market by Price Range

I did the same breakdown again for average days on market. Most price ranges have tracked in a similar manner, with some variations during the year. At this point, the lowest price housing has been on the market, the fewest number of days, averaging about 95 days since the first of September.

Scottsdale 85257’s Most Expensive Homes

Scottsdale 85257′s most expensive homes are now listed at a median price of just under $350,000. Average days to sell has been steadily increasing to an average of 120 days.

Scottsdale 85257’s Mid to Higher Priced Homes

Scottsdale 85257′s second quartile of mid to higher price homes (the 2nd quartile) homes are clearly dropping in price while taking significantly long to sell. Median price of these homes is now approximately $280,000, while increasing to a high of 135 days on market and recently dropping back to an average of 120 days.

Scottsdale 85257’s Lower to Mid Priced Homes

Listing prices are also dropping steadily in Scottsdale 85257 homes priced in the 3rd quartile. Median listing price here is $240,000. Average number of days to sell has increased to an average of approximately 112 days.

Scottsdale 85257’s Lowest Priced Homes

Median price in the lowest priced quadrant are now under $200,000 for the first time in a very long time. The really good news is that days on market is dropping too, and this number has been under 100 days since late summer.

Positive Changes for South Scottsdale

So as I shared earlier, there’s a glimmer of hope. It’s difficult to say when we will see pricing stabilize, but I would suspect that it come sooner for these entry level homes in South Scottsdale, than it will in other parts of the city. This southernmost area has so much going for it. It will be much easier for a positive change in the market to occur here, so we will need to keep an eye on this area and report back in a couple months.

In the meantime, if you have any questions, please leave a comment or call.

Scottsdale Homes Sold in 2008 for $100k or less

Here are a few of the details:

Most of the condos and townhouses are in Belcara at McCormick Ranch (85258) and Woodland Springs (85251), with others in Ciento, Rancho Antiguia, Summerfield, Hallcraft Villas, and Quail Point.

As of today, three homes listed at $100,000 or less are under contract, and 48 more are on the market.  The average time to sell since the beginning of the year has been 110 days, but in looking at just the past three months, the average has dropped to 74 days.  Still, we have a significant inventory in this price range.

Prices for single family homes are starting at $121,000 today.  In my next market report, I’ll focus on the homes price between $100,000 and $200,000, since that is where most first-time home buyers are looking.