Phoenix Market Update from Expert Bill Gray

Phoenix Market Update from Expert Bill Gray -- Highlights of a 3-Hour Seminar

I attended a Continuing Education class today taught by Bill Gray, the reigning eminence of metropolitan Phoenix real estate. As former CEO of the Arizona School of Real Estate and Business, he is uncommonly well-connected and well-versed on the goings-on in the Arizona real estate market. He is also a superb presenter, so the three-hour session, which was billed as an update on the status of the current local real estate market, was both lively and informative.

Here's a brief summary of the highlights of this Phoenix Market Update from Expert Bill Gray:

• There is still an oversupply of homes on the market, and although the number of homes sold is climbing it does not necessarily mean that every sale represents another home absorbed from the oversupply. Population growth is what matters in the absorption of oversupply, and while Arizona's population is still growing, it has slowed to just around 1%. That is because people used to move here for jobs, but the poor economy has put the kibosh on that. In fact, Arizona used to trade the lead in the nation for job growth with Nevada. Today, Arizona is typically ranked at or near the bottom of all 50 states in job growth. So in Arizona, oversupply is here to stay for a while.

• However, it appears that there is no oversupply in the forclosure category. MLS data shows that the average price for foreclosure houses is now above the average price for other home-sale transactions. One of the reasons is undoubtedly the level of investor activity, which Mr. Gray estimates to be approximately 35% of all transactions. That, of course, means that investors see a future reward for buying now.
  

• Mortgage interest rates, currently hovering in the low 5%'s, will probably rise probably beginning this spring, and according to Mr. Gray will not return to these low levels for the foreseeable future. Let's see, low home prices now attracting investor activity, and low interest rates which might not last much longer -- would be a recipe for what? -- buyer opportunity? Duh.
  

• How are the majority of homes in Arizona financed today? -- with cash or an FHA loan. My, how things have changed!

• In November 2009 the average price for a home in the Phoenix area was $175,524. Even so, the maximum amount of an FHA loan, now $346,250, will stay at the current level. It doesn't seem justified based on the average home price, but sometimes we get lucky. 

• While the FHA loan limit stays the same, according to Mr. Gray there are credible rumors that rules will soon be changed resulting in the tightening of eligibility for these loans. The minimum down payment may be raised from 3.5% to 5%, the amount which sellers can give to buyers in concessions may be reduced from 6% to 3%, and perhaps most ominously, the mortgage insurance premium (MIP) may be raised from 1.5% to 3%. Ouch.
  

• Apartment rents are dropping and apartment owners are struggling. Here is how you know when apartment owners are hurting -- when eviction rates are low, as they are now.

• No one knows precisely when it will come, but the commercial market in Arizona has not seen the bottom of its current decline.

• In terms of land, small parcels in Arizona with streets and roads in place are selling (to builders). But large parcels are not selling, in fact, for the first time ever the State of Arizona took back land that a developer bought at auction but could not see a path for development in a reasonable time.

• Many people think they can walk away from their home and not be subject to any action to collect the deficiency left on the debt. It's true for those who are owner-occupants and have only a first mortgage on a house with a lot 2.5 acres or less. Even the IRS can't come back and try to claim that a mortgage deficiency is the same as income and therefore taxable -- on a first mortgage, that is. But what most people, including Realtors, do not seem to have absorbed, is that this is not true for second mortgages such as home equity lines of credit. In those cases a foreclosure will remove the lien from the title, but it will not necessarily extinguish the debt, even if that debt was spent on the house! In fact, unless forbearance is agreed to in writing, the second lender has six years to come after the borrower for the amount of any remaining deficiency. 

• Here's another interesting but apparently not widely known fact. Short sales do not extinguish indebtedness unless, again, the lender agrees to it. Once again, the lender may agree to settle their lien against a property (thus clearing the title), but unless the lender specifically states that the debt is also satisfied, the homeowner could still be liable for the deficiency from a short sale. How could that be? Because the governing Arizona anti-deficiency statute is only about foreclosure, not short sales. After all, a short sale is really only a conventional transaction with the lender's negotiated approval.

• Regarding the above two points, real estate agents should always advise their clients to consult an attorney in such complex matters.

• Homeowner associations (HOAs) have been hurt badly by the flood of foreclosures and short sales, because homeowners often stop paying their monthly HOA fees, and so typically do banks that take title to foreclosed properties. Many assume that these HOA fees are unrecoverable by the HOA, but just like the debt from a second mortgage, the HOA can go after either the former homeowner or the bank for these unpaid fees. The lien may be removed against the title, but the debt remains.

• One of the ways that HOAs are coping with this is to invent new fees for incoming buyers, such as an "orientation fee" for say, $1,000. It's just a way to get the new buyer to pony up for part of what the defaulting seller (or bank) didn't pay.

• Here's a little help for ailing HOAs. The monthly payment of future conventional loans will no longer be quoted in terms of principal, interest, taxes and insurance (PITI). A fifth element is expected to be added, HOA fees, and just like the other items, it will be impounded in advance to ensure payment.
  

• Interesting fact: if you have an IRS lien on your house that is making it impossible for you to refinance or sell your home, the IRS will "discharge" it! It only takes about three weeks.

• Here's another government program that probably is well-intended but makes little sense, at least here in Arizona -- the so-called deed-for-lease program. This little-known program, an attempt to keep people in their houses and minimize vacant property in the neighborhood, allows a homeowner to remain in their foreclosed home for up to one year by paying rent. Sounds good, but as usual the devil is in the details. For example, the homeowner must have made at least three payments on the loan, but cannot be more than 12 payments past due. Gee, let's not raise the standard too high! There is no provision in the program for what happens after the 12 months rent is finished, or how the property will be maintained or repaired if needed.