Bidding adieu to 2007 was not a hard thing to do for many people. Article after article labeled 2007 as one of the most brutal years in real estate history, both nationally and locally here in Tucson, Arizona. Sales of both new homes and resale homes were down. Some months in Tucson they were down 40%+ from 2006 levels. Inventories skyrocketed. Prices nose dived. Mortgage companies folded. It was not a good time to be swimming in the real estate sea- unless you were a shark! Sharks being few and far between, most folks were lucky to be able to tread water. Today, in January 2008, many homes in the Tucson area remain unsold, some after a year or more on the market. Nationally, vacant unsold homes (whether new builds or existing) are at 2.6%, the highest level they have ever been. This hurricane climate makes the common homeowner want to button down the holes, and hideout until the skies clear. Will 2008 bring smooth sailing in Tucson real estate, or will we continue to be futilely plugging holes in a sinking ship? That is anyone's guess, but one can ascertain some common denominators from looking at both the national and local picture here in Arizona.
First and foremost, real estate is a regional phenomena. Markets perform differently in different parts of the nation. Nationally, some areas did not experience the 'boom times' of 2004 and 2005, and are therefore currently considered healthy, balanced markets. It's the markets that ballooned the most during the boom times that will inevitably lose the most air. This is better know simply as gravity, or 'what goes up must eventually come down.' The local factors that influence real estate markets are mainly economic ones such as unemployment, job creation, consumer spending, etc. The result of what happens when a local real estate market takes a sharp blow is a trickle down affect, and has the ability to create a large chain reaction. The impact of a decline in the real estate market can be a great blow to a local economy. And right now, all of the facts point to the possibility that we haven't seen the worst of it yet. To illustrate an example of the trickle down affect, consider this scenario: a builder is sitting on a large number of unsold homes. The builder cannot obtain the capital necessary to finish those homes until buyers exist for them. Because the builder has his operations on hold until the homes sell, the subcontractors are out of a job. The real estate sales staff are idle. They too are losing money. This creates a withdrawal affect from the economy. If you consider the money multiplier principle, the individuals employed in this industry no longer have the spending power they once had. They can no longer afford as many meals out in restaurants, trips to the mall, vacations- you get the idea. The losses can be staggering, especially considering that consumer spending accounts for 70% of all economic activity. But this is why markets are local, and markets have a tendency to be indicators of the overall state of the economies they are a part of. Considering this, many local economists-including Marshall Vest, have stated that we are already in the midst of a recession that has the probability of lasting through the end of 2008. If you believe that, then it would be logical to assume that we haven't seen the 'worst of times' in Tucson real estate just yet.
If that weren't enough of a pill to swallow on this mild January night, here's another iron to put in the fire! Adjustable rate mortages and 100% financing options, be they subprime or their less risky cousin Alt-A mortgages, gained popularity (starting in 2002-2003) so that consumers could leverage their real estate purchases and investors could buy packaged loans and (in theory) 'spread their risk.' This was aptly named securitization. In early 2008, we are now at a juncture when the first of these 5 year adjustable rate loans will be kicking up their interest rates. Couple that with the fact that nationally 40 percent of all mortgages made in 2006 fall into the subprime or Alt-A category, and the potential for disaster becomes a dark shadow looming like a wolf over a field of sheep. In theory, if a homeowner borrowed 100% of the purchase price of a home in 2003, he may be okay- since it is safe to say that home values overall have gone up significantly since then. But if a homeowner borrowed 100% of a home's value in 2005, he may be in over his head, and 'upside down' in his mortgage, as the property is now worth less than what it was worth when he bought it. You don't have to be a mathmatical genius to do the numbers. What this means in simple terms is that it is highly likely that banks are going to be foreclosing on a greater number of homes in 2008, and perhaps we have only seen the tip of the iceberg thus far. Luckily the government seems to recognize this as a plausible outcome, and is stepping in to help homeowners in trouble refinance their mortgages into more sensible and hopefully affordable options. But the fact of the matter remains that many of these houses are not worth what they were even six months ago. And that is a troubling factor that is bankrupting many homeowners, and also contributing to the number of unsold homes, whether bank-owned, builder-owned, or individually owned.
With the glut of unsold homes on the market, it's no wonder buyers are trying to wait out the market until they believe it has bottomed out. But if you compare the real estate market to the stock market, people buy stocks in bull markets, and they buy in bear markets. It's a far better bet to buy in a bear market. The chances of making a profit are a lot better. My opinion is that there are a lot of deals out there in the Tucson market right now. The houses that are selling are the ones that are presented in the best possible way (clean and shiny, freshly painted, all repairs done!) and priced fairly. It's true, buyers want a deal. Can you blame them? When we are daily brow beaten by article after article of blows delivered to our local and national markets, its no wonder buyers are running scared and waiting for the absolute perfect time to buy. Hint- there is no time like the present!
One other thought for this article, and for the new year has to do with real estate professionals. The current real estate market has acted like a sheath, weeding out real estate agents who were either not full time or career agents. It would stand to reason that the professionals remain. Those die hard agents who are going to stick it out through thick or thin for their clients. One thing is for certain, those are the agents you want on your side, representing you in a real estate transaction. I'm happy to count myself among that camp, so if you desire professional real estate advice- I'm only a phone call or e-mail away. I'm almost afraid to say it now, but it's such a tradition- I have to... Happy New Year~May 2008 bring you closer to your real estate dreams coming true!
Written by Sarah Ley
BSBA, ABR, CRS, CNHSA
Tucson Realtor with
Long Realty Company
(520) 404-0544
http://www.sarahley.longrealty.com/
sley@longrealty.com
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