Phoenix Real Estate & The Broader Economy – “Earned It Forward”

When the Phoenix real estate market took off back in late 2004 through 2006 (though inventory was already shifting about mid-2005), many Realtors and Mortgage lenders made a tremendous amount of money in a short amount of time.  That’s not to say everyone did but there was a lot of money to go around.

Little did many in the industry know that, in a sense, they were “earning it forward.”  What I mean is that the money they made was literally taking away from their future incomes as the market began to feel the after effects of the run-up in home valuations.  They made a lot of money upfront when they would make very little in later years.

2006, 2007 and 2008 all proved to be tough years with everyone feeling the pinch.  Not only were transactions way down, but as prices began to sharply decline, commissions were down as well.  The house a Realtor sold for $350,000 three years ago is now being sold for $200,000.  So, many Realtors not only do fewer transactions but the value for each transaction is markedly lower.  If you averaged incomes across 2004-2008, Realtors and remaining mortgage brokers probably would have a modest average by now.

This doesn’t include the many who ended up leaving the business because they couldn’t make enough money to stay afloat.

The Homebuilders Earned it Forward As Well

Having said that, the difficulties with the home builders including Fulton Homes which just filed for Chapter 11 bankruptcy protection is that they also “earned it forward.”   But in my opinion, they are only about half-way through their retribution period.

The home builders continued to build even when the market was clearly shifting.  Instead of more aggressively slowing down construction, they continued to build at a high rate of production and eventually lowered pricing to  undercut the resale market which included their own customers in the very communities they were building in.’  By the way, city councils across the Valley should have stepped in as well to slow new build construction.  It may have been unpopular but it would have been prudent and the right thing to do.

Instead of resale inventory being allowed to breathe and ease potentially, home buyers were enticed with huge incentives to buy new build homes versus resale homes.  The market eventually dictated that the builders truly slow down production but only when it was too late.  So, today, we have an overbuilt and overextended situation with respect to builders.

By the way, this situation is one of the most dangerous for any company or corporation to find themselves in.   Overextension has hobbled or toppled some of the biggest companies across history.

The Broader Economy “Earned it Forward”

We are now seeing the effects of many other industries that have “earned it forward.”  Those connected to the housing industry directly or indirectly that made wonderful returns during the run-up period slowed way down to a crawl with the decline.

But, other industries unrelated to the real estate industry may have also “earned it forward.”  Credit card companies are experiencing major challenges as the money borrowed against credit cards is now being defaulted on in record numbers.

The automobile industry “earned it forward” as well and is now experiencing a huge decline in sales with GM and Chrysler requiring government assistance.    Ford is hanging tougher but still sapped.  Even Toyota has experienced serious declines in sales.   Home equity loans allowed many people to buy a lot of new and expensive automobiles by borrowing against the false value in their homes (“spent it forward”).

Consumer products companies are now, in my opinion, about to experience the same decline as many of them “earned it forward.”  Again, their great results were a by-product of a society overspending and overextending themselves to an unparalleled degree.

As a result of all of this, we are now seeing huge job losses with much uncertainty in the country.

Reset, Then Move Forward

But once we reset, we can then move forward.

In the Phoenix real estate market, we are seeing an overall resetting of valuations and market conditions.  This is being done primarily through foreclosures that have hit the market hard and will continue to do so.  However, as bad as all the discussion is regarding foreclosures, there is one aspect that doesn’t get talked about as much.

Foreclosures are working to bring down pricing which eventually entices buyers back into the real estate market here.  The foreclosures are accelerating the path to equilibrium for Phoenix real estate that the market simply failed to do before these properties hit in large numbers.

Values are getting low enough in patches across the Valley to attract a serious pool of buyers.  We can’t say if the bottom has passed in some areas or not while in other areas it certainly stands before us, but no one can doubt that what is happening in the market is a “correction” and that the increases in buyer activity are not a positive development.

The Phoenix real estate market, like some other markets is resetting.  It may be further along the curve than many think, especially when comparing to other industries.  And once it is done resetting, then we can move forward and the rest of the economy will follow.

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