Who Controls the Phoenix Real Estate Market?

I have been ruminating on this recently given the rapidity of changes that have taken place in the past few months in the Phoenix real estate.  So, here’s my question…

“Who controls the Phoenix real estate market?”

Many would argue that no one controls the market.  It is a market after all and subject to many inputs and factors and is the great example of capitalism at work.  There is the laws of supply and demand.  There are risks and rewards for those risks.  There are buyers and sellers, etc.  

The Phoenix Real Estate Market Freely Operates Under ”Normal” Market Considerations

In a normal real estate market in the Phoenix area, buyers and sellers really do come together in a way that is largely the free-market system at work.  Sellers are predominantly homeowners who set the prices that they are willing to sell and the buyers are predominantly homebuyers who plan to live in the homes with a small level of investor activity thrown in (my estimate is about 15% in a normal market environment). 

Because the homeowners themselves set the prices, the market is essentially diffuse and not subject to any overarching control.  And it is in balance between buyers and sellers. 

Free markets can work and do work in this regard.  Of course, it is the manipulation of the free market principles that can alter this picture and any force that acts to push market principles to extremes.  Ironically, the aggressive pursuit of free markets could very well be what has created the environment we are in now.  That’s not intended to dive into any political ideology rather than suggest that extremes in any market disrupt and imbalance the market. 

A Severely Distressed Market Can Become Less Free

When a market such as those we have seen with housing come into play, the imbalances are blamed on extremes taking hold in the market.  Our market was largely created by extreme speculation exacerbated by actions based on false assumptions.  One could argue that the market was indeed very free to allow what happened.  However, the counter is that forces came into play that essentially manipulated the market in an artificial way and so the market became less free market oriented.  Whereas information flow is considered a positive in a market, poor information and false assumptions spread across the marketplace and helped contribute to the problem.

So, Who Controls the Phoenix Real Estate Market?

The answer is that the banks do.  These are the large and small lenders and Fannie Mae and Freddie Mac.  The banks could arguably be controlling the operation of the Phoenix real estate market.  This is a serious notion and one that I will support with information below. 

The fact is that in the Phoenix real estate market, 63% of the homes that have successfully sold this year were bank owned properties.  Of the remaining homes that have successfully sold, nearly 11% were short sales.  Short sales require lender approval in order to close successfully - the lender or lenders have to sign off on a short sale for it to sell.  So, combined, foreclosures and short sales represented approximately 74% of home sales for the Phoenix area this year.  Between foreclosures and short sales, the banks are essentially controlling the fate of these properties in the market today. 

So, banks directly or indirectly controlled 74% of the market in terms of closed transactions. 

The lenders are directly or indirectly setting the prices for these properties across our market.  As a collective industry or body, the lenders and banks have near monopoly influence in setting pricing across the market.

Now, the counter argument is that there are many banks and lenders acting independently of each other to make determinations as to pricing and the handling of these properties.  And to suggest monopoly or any -poly would not be correct given the large number of involved banks and that there would have to be conversations and collusion going on between them.  However, there is enough information in the marketplace as to strategies and tactics banks are employing to see where an industry could move in a generally collective way.  There is a benefit to the players in the market acting at some level of unison, particularly in holding back inventory.   

What’s Going On With Current Inventory?

When we review current inventory, we see the opposite.  Consider again that 63% of closed transactions were bank owned or foreclosed properties across the Phoenix area.  One would imagine that given all the talk of Trustee Sale notices and forecloses across the Phoenix area that the current inventory would reflect a similar composition.  For instance, the Arizona Republic reported 10,635Trustee Sale notices were issued in March alone and more recently reported there being 45,700 “pending” foreclosures across the Phoenix area, with nearly 5,000 homes that foreclosed in June. 

However, this is not what we see with current on-market inventory.  We see the opposite occurring. 

Of the “Active” or number of properties currently available for sale…

• 14.8% are bank owned properties
• 23.3% are short sales
• 61.7% are considered normal transactions (non-distressed)

Of the “Pending” or “Active with Contingency” (under contract for purchase) properties on the market…

• 34.3% are bank owned properties
• 43.2% are short sales
• 22.4% are considered normal transactions (non-distressed)

Looking at the statistics, it is clear that the foreclosures get picked up at a disproportionately high level than any other property type.  Short sales are then next.  Normal transactions have the hardest challenge in the marketplace. 

The numbers should spur the questions of…

“With all the reporting on the sheer volume of Trustees Sales notices and foreclosed properties, where are these properties in the marketplace at this point in time?  When sold activity is composed of 63% of foreclosed homes for the year, why is it that they only compose 34% of under contract properties and only 15% of available properties today?  In other words, does this inventory exist and if so, where is this inventory?”

There is a collective belief based on reported foreclosure information that there are indeed a large number of foreclosed and potential foreclosure properties across the Phoenix real estate market.  So, where are they?  If we excluded this belief and took the contrary argument that there are no more waves of foreclosures in the market, then the circumstances we are seeing in the numbers above would indicate that we have passed the bottom of the market and are actually improving. 

So, which is right?  If we took away the notions of any looming inventory and assume that the foreclosure population is declining rapidly, then the current market picture looks as it should.  If we believe that there are foreclosures looming, then where are they?

Where are the Potential Foreclosures?

We come back to the banks.  There is much talk amongst the Realtor community that this inventory is being held back.  Indeed, Fannie Mae and Freddie Mac did have foreclosure moratoriums in place up until March 30.  So, it is possible that this volume hasn’t translated yet.  However, in my opinion, we should be seeing more foreclosures currently in the marketplace. 

The reasons that lenders might hold back on releasing inventory is a simple inventory problem.  If there is demand for a product and supply is limited, the price of that product will go up to reflect that demand.  Right now, there is tremendous interest in foreclosed homes.  If inventory was dumped into the market in large volumes, we can expect to experience a second dip in values.  If it is trickled in, values obtained for properties likely will be higher. 

As well, the banks can time the write-offs that they experience with these properties. 

Summary

The fact is is that the banking and lending industry have near total control of the Phoenix real estate market in terms of being responsible for the setting of real estate prices and the overall authority for decisions on what properties will sell.  As such, the possibility exists that the industry, through similar market approaches, could exert a capacity to manipulate the market so that values run higher than they otherwise would if inventory was put into the market as quickly as it is obtained. 

Whether this is good for the local Phoenix real estate market or detrimental is one that will likely be debated a few years into the future.  At the moment, many are likely not asking the question of ‘who really controls the Phoenix real estate market?” nor want to by asking such a question.

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Tagged as: phoenix real estate market, phoenix real estate market and lenders