Last week, I was with an investor traversing the Valley and we talked at length about the local market and what to expect over time. A question came up that on its surface would suggest one answer but with deeper consideration, the real answer likely emerges. I will paraphrase the question here.
“What is it that will indicate that Maricopa’s home values should begin to rise again? How will Maricopa really work through all the foreclosures and short sales when values are so low and foreclosures and short sales simply contribute to more foreclosures and short sales?”
My initial thoughts on this question were to answer that when the volume of foreclosures and short sales begin to subside, then we should expect to see values improve over time.
But this doesn’t really explain the “how.” Here’s the next question that I posed to myself…
“How does Maricopa and some of the outpost cities that are heavily affected by foreclosures and short sales such as Queen Creek Johnson Ranch, Buckeye, and others get to this point that the volume of foreclosures and short sales begin to diminish?”
I thought about it more and came to the following conclusion…
A large percentage of the homes in Maricopa and other areas where the bulk of home construction and sales took place during the 2004-2007 timeframe at the highest market values will have to turnover.
In other words, a high percentage of long-standing homeowners will need to give up their homes through short sale or foreclosure before these markets experience substantial improvement.
Whether we are talking that 30% of the homes overall in Maricopa or elsewhere will have to change hands during the market low or a higher percentage such as 50%+ is the last question which I don’t have an answer to.
Why? Because you simply cannot have a large percentage of homes across a town or city be underwater. The volume of short sales and foreclosures are working to reset valuations in those markets. At some point in the future, the number of homeowners that bought during the market lows will reach a level whereby there simply isn’t as many foreclosures or short sales that can take place.
These markets simply need to reset in valuations. For as much pain as the foreclosures and short sales create, eventually they will serve to correct the imbalances that exist.
So, this is how it can happen in these extreme markets where values have fallen so far. Foreclosures and short sales force lower valuations in a market. This in turn works to create more properties in the market as lower prices force more homeowners under water. Eventually, enough homes transact so that the number of people who may have to sell begins to subside as more and more people have attained stronger values. When there aren’t as many deals to be had, prices begin to move upward.
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