Flipping Phoenix Houses

Lately, much of the discussion around these parts has centered around single-family housing inventory, or the lack there of. However, over the past 30 days levels here in greater-Phoenix ticked up a little, around 3-4%.

I’ve been noticing a trend lately that may explain the increase. Each day, I bid on 6-8 homes at the auction. Prior to bidding I must determine an after repair value for the property. So when I find one scheduled to go to auction that meets my criteria the first thing I do is type the address of the house in the multiple listing service to see if it has ever been listed for sale. Next, I pull up all of the active/pending/closed listings in the home’s subdivision for the past 6 months. This gives me a feel for all sales activity in the area.

The active listings I find in the subdivision I’m researching are almost always overpriced by as much as 10-20%. This got me wondering – how many single-family homes that are NOT A SHORT SALE OR REO in Maricopa County have been on the market 69 days or more (69 days is the average amount of days on market according to Michael Orr of Cromford Report). In other words, how many normal sales have been on the market above the average of 69 days? Here’s what I learned:

• There are 5,574 active single-family homes for sale in Maricopa County that are not an REO or short sale (the Arizona Regional Multiple Listing Service has a box to check under Special Listing Condition called N/A – when checked short sale and REO properties are removed from the active listing count list).
• Of those 5,574 active single-family homes for sale in Maricopa County, 2,154 have been on the market for 69 days or more.

That means 38% of all active single-family homes not in foreclosure, a short sale, or bank-owned have been on the market 69 days or more. In a red-hot real estate market how can that be? I’ve got one word that will explain it – PRICE. It’s likely that many of these houses are overpriced. If the owners of these properties would drop their list prices no doubt they would sell very quickly.

There is no problem price can’t fix.

Haboob. Say it out loud. Haboob. Sounds funny right? Almost dirty.

What is a haboob? A haboob is a dust storm. So I guess it is a dirty word. In August, haboobs are pretty common here in the desert southwest. These towering walls of dust approach our city limits quickly and cover everything in their path with a thick layer of silt, much to the delight of local car wash owners.

But automobiles aren’t the haboob’s only victims. These gusty walls of dirt like to knock down trees too. The last haboob that blew through town knocked over my Palo Verde tree.

Haboobs remind me a little of all the cash paying out of state real estate investors that have descended upon the greater-Phoenix area. While they don’t destroy (they actually improve) these investors do blow through town quickly.

Check out this chart from ASU’s Michael Orr:

In June, investors bought up 31.9% of all houses sold in Maricopa County. For some prospective, in June 2011 they bought 25%. Michael Orr had this to say:

“Investor purchases are an increasing share of the market, particularly those bought by large companies as rental properties. In Greater Phoenix we have never seen so many single family homes used as rental accommodation and it will be interesting to see how elastic the demand is for such rental homes over the coming year. It is possible that landlords will need to lower their standards for tenants’ credit worthiness in order to keep homes occupied.”

This demand has driven up prices in practically every category, particularly with investor flips and trustee sales. Look at this:

Fix and flip investors like me that buy at the auction are paying 28.7% more today than we were one year ago. No wonder good deals are so hard to find.

Here’s a look at inventory and demand levels as of today from the Arizona Regional Multiple Listing Service:

• Active listing count – 13,865
• Pending listing count – 17,809
• Closed sales last 30 days – 7,507
• Months supply – 1.8 months

Now enjoy your weekend. I plan to wash my car. Again.

Have a look at the chart below. The only thing that it’s missing is a loop-the-loop. The greater-Phoenix housing market is a roller coaster. Volatile would be another good word to describe the last three years.

As you can see we’ve had three bottoms and two tops (although the most recent peak is for August and we’re just three days into the month – under contract price per square foot sales suggest we may see a continuation of the downward trend from July).

For July here’s the breakdown for normal sales, short sales and REOs.

• Normal sales – 54.6%
• Short Sales – 31.4%
• REOs – 14%

Bank-owned properties made up over 70% of all sales in February 2009. While some national housing experts believe lenders are holding back I don’t think that’s really true. The increase in short sales suggests banks are more willing to work with buyers than foreclose. I could also make an argument that banks are running out of people to foreclose on.

Whether I’m right or wrong, you don’t have to be a math major to figure out where the highest percentage of distressed sales can be found.  If you’re looking for a bargain you better start filling up your pipeline with short sale offers. According to Michael Orr of Cromford Report, short sales are now selling, on average, for less than bank-owned properties.

Happy hunting!

“Investors will soon be priced out of the housing market. Consumer confidence and normal home sales have taken over the market.”

-       Beth Jo Zeitzer, a real-estate attorney and president of Phoenix-based R.O.I. Properties from an Arizona Republic article July 21^st, 2012

At last, some good news about the greater-Phoenix housing market. So why would a fix and flip investor like me think that investors getting priced out of the market is good news? Because the investors Beth Jo Zeitzer is talking about have a different exit strategy than I do.

I call them buy and holders. They have a long-term approach and are more concerned about cash flow and appreciation than profit spreads. Because these investors are leasing their properties they don’t have to account for sales costs and premium upgrades like granite countertops and stainless steel appliances. I, on the other hand, flip houses to earn a living and have to bid 10-15% below a buy and hold investor to acquire a house at the right acquisition price.

With prices on the rise here in greater-Phoenix buy and holders are no longer getting their desired cap rate or return on investment. They leave and I can start getting decent margins again.

On Monday, I bid on 8 houses at the auction. I was outbid by a combined $95,000 on four of them. However, I came with $400 of another, which is the closest I’ve come in six months to winning a bid.

Here’s a look at some important numbers for greater-Phoenix, provided by Michael Orr of Arizona State University and Cromford Report:

• Active Listings – 13,440
• Pending Listings – 18,349
• Active Listing Count (Single-Family Homes only) – 10,613
• Months Supply – 2.1

Further evidence that investors may be leaving the market is the number of normal sales (those not in foreclosure or bank owned). Have a look:

• Normal sales – 56% market share
• Short sales – 29.7% market share
• REOs – 14.2% market share

The theory is that as the distress begins to leave the market the long-term investors follow. If it’s true I bid them farewell.

“The huge price gains we’ve seen in Miami and Phoenix are not built to last. These increases will shrink or reverse as the backlogged foreclosures in these metros hit the market.”

- Jed Kolko, Trulia’s chief economist from a July 10^th, 2012 Inman.com post titled Home price gains at risk in distressed markets.

Backlog? What is this backlog you speak of Jed Kolko of Trulia? Surely you didn’t get your information from RealtyTrac.com – a firm that uses an incredibly flawed formula to determine foreclosure activity?

Oh, that’s right. You did.

Saying there’s a huge backlog of foreclosures in Phoenix is woefully irresponsible. Take a look at this chart on RealtyTrac.com’s website for Maricopa County (Phoenix):

Could it really be that 1 in 284 houses received a foreclosure notice last month? We’ll see here in a moment. But let’s look at how they came up this number in the next chart:

According to graph above, there were 5,773 new foreclosures in Maricopa County in June 2012. But, according to Michael Orr, Director of the Real Estate Center at the W.P. Carey School of Business at Arizona State University, there were actually 3,852. Here’s his quarterly chart for 2012:

Now have a look at this next graph. RealtyTrac.com claims that 4,022 homes went to auction in June 2012 and that 1,747 became REO (real estate owned properties). That’s a total of 5,769 houses. You’ll notice on the far right that it says the 6 month trend is RISING.

However, Michael Orr’s quarterly chart for 2012 Trustee Deeds tells a different tale:

971 homes were auctioned off and purchased by third party bidders in June 2012. The other 819 went back to the beneficiary (bank). That’s a total of 1,790 houses. And if you look closely since January 2012 the numbers are FALLING.

Michael Orr also tracks the total amount of houses in foreclosure at any given time. Something RealtyTrac.com doesn’t do. Here’s his chart for that:

There are 16,237 foreclosures pending right now in Maricopa County, Arizona, down from 25,237 in July 2011.

So here’s a recap:

• There were 3,852 new notice of trustee’s sales recorded in June 2012 according to Michael Orr – 5,773 by RealtyTrac.com
• There were 1,790 homes that were sold at auction or went back to the bank according to Michael Orr –  5,769 by RealtyTrac.com
• There are 16,237 foreclosures pending right now in Maricopa County, Arizona, down from 25,237 in July 2011 – a figure RealtyTrac.com doesn’t track at all.

Who’s data do you trust? Michael Orr, a local, well-respected housing expert and Director of the Real Estate Center at the W.P. Carey School of Business at Arizona State University, or RealtyTrac.com, a large company with corporate offices over 350 miles away from Phoenix?

Don’t get me wrong. I’m sure there are lots of really smart people at RealtyTrac.com. I believe their conclusions about Phoenix in the Inman.com post to be reasonable – IF they had accurate data. The problem is, they don’t.

There is NO backlog of foreclosures in Phoenix. However, I do believe prices will flatten out and even go down a little in the coming months. Heck, Michael Orr reported lasted month that the median price in greater-Phoenix was down 2.8% in June. However, this is not because of a “backlog” of foreclosures. It’s because there were fewer luxury home sales in June and a greater percentage of short sales closed.

Now, for a little history lesson about the term “garbage in, garbage out” and other greater-Phoenix housing numbers, watch this video:

Brace yourself. Are you sitting down? You may want to get a paper bag to keep from hyperventilating. Okay, here goes.

In June, the price per square foot average for homes in greater-Phoenix dropped 4%. According to this month’s Arizona Regional Multiple Listing STAT Report, the median sale price declined by 2.8% to $141,000.

How can this be you ask?

After all, the ARMLS STAT report is full of good housing news – including June sales being up 8.1% from May. And the average days on market is just 75 days, a low not seen since 2006.

Michael Orr explains the June blip in his bi-monthly housing report:

The drop in pricing between May and June was due to a number of different factors:

1. A large increase in the percentage of short sales closed in June versus May. We currently show short sales taking a 34% market share in June versus 26% in May. This is a huge change for such a short time. It also drove the listing success rate for short sales to an all time record high of 82.6%.

2. A sharp fall in the number of Greater Phoenix high-end luxury homes closing in June versus May. We saw only 2 sales of homes listed over $3m during June, very different from the 15 we saw during May. However the price range between $1 and $3m did rather well in June with 98 sales versus 96 in May. Both totals were higher than in the corresponding months in 2011 and the low to mid luxury market is showing considerable improvement.

3. A reduction is average $/SF for all categories of closed sales. Normal sales retreated from $118.64 to $116.86 per sq. ft. a decline of 1.5%. Lender owned properties declined from $75.18 to $74.50 per sq. ft. down 0.9%. But the biggest price drop by far came with short sales, which fell from $77.90 to $72.91 per sq. ft. This decline of 6.4% was very sudden and coupled with the gain in market share for short sales was the largest reason for the overall price decline in the market. It seems lenders are keen enough to avoid foreclosures that they are now agreeing to short sale prices that are below what could be obtained for the home as an REO.

So there you have it. Nothing to see here – keep moving please. That isn’t blood you see in the street. Just some mangled up short sales that finally got put to bed.

Now, watch this video to see me get cooking, literally, on other important housing numbers for Phoenix:

The online world can be a treacherous place, where rude people operating under anonymous screen names lurk; ready and willing to launch vile epithets at unsuspecting bloggers like me.

Just this week I’ve been referred to as a troll and a fool. On my YouTube channel a viewer said my videos sucked worse than my blog posts. Ouch.

This begs the question – what makes it acceptable for some to be so rude in the online world when they would never behave that way in the offline world? I mean if you’re going to sling mud at least have the backbone to use your real name.

Fortunately, I have thick skin. Growing up as a slightly undersized kid with red hair I was called every name in the book – a boy named Mark Mackenzie called me carrot top, fireball, red. I also had a lot of freckles so I had to deal with those jokes too. One mean little girl once told me that I must have swallowed a dollar and pennies popped up all over my face. Seriously? How dumb. That could never happen.

Evidently, some people don’t like hearing the truth.

The truth I’d like to discuss this week is terms of sale. A few years ago Michael Orr of Cromford report began separating normal sales (sales where no bank approval is needed), short sales and REOs. Recently he added a fourth category, HUD home sales. Here’s the latest chart he released with a breakdown on a price per square foot basis:

Now, granted this chart offers us a 10,000 foot view of the situation. Individual houses in individual neighborhoods may not differ much at all. But, in some areas the differences are quite pronounced. As you can see, normal sales are selling for considerably more than short sales, REOs and HUD homes. Here are my reasons this is occurring in Phoenix:

1. Normal sellers usually respond more quickly to offers.
2. Normal sellers are usually willing to repair things that are broken.
3. Short sale, REO and HUD homes usually require more repairs.
4. The buyers of short sale, REO and HUD homes must accept them as-is.
5. Your 9 year-old child may be in college before your offer is accepted on a short sale or REO deal.

For example, I’m buying an REO in Milwaukee right now. We wrote the offer May 7th. The bank accepted it but we still haven’t closed yet. Short sales, while more efficient than they used to be, still take 3-6 months.

So if you disagree with anything I’ve said here today please be nice. No redhead jokes. Those still bother me, a little.

What are you going to do when the wave of foreclosures in Phoenix subsides? How will you survive?

I get questions like these a lot. The truth is no matter what the housing market or economy is doing there will always be people who can’t pay their bills. There will also be lots of people who don’t have the time, money or expertise to fix up their home if it falls into disrepair.

In a city the size of greater-Phoenix, with over 1.1 million single-family homes, you can bet opportunities for fix and flip investors will always exist. Take a look at this graph from Michael Orr’s Cromford Report. For 5 years, from 2000-2004 (the time period leading up to the housing bubble), there was an average of 1,100 trustee sale notices recorded.

Now check out this next chart. You can see new notice of trustee’s sales have been steadily declining from their peak of 10,500 in March 2009 to 2,500 last month. While we’re still a ways off the 5-year average of 2000-2004 new notices are definitely trending downwards.

And who’s to say 2,500 new trustee sale notices a month isn’t the new normal? There are considerably more houses in the Phoenix market than there were in 2004. This means there will probably be more foreclosures too.

In June 2006, the statistical high point of the Phoenix housing market, I bought 13 houses for around .70 cents on the dollar from homeowners in foreclosure. There were 1,255 trustee sale notices filed that month. So please, don’t worry about me. I will survive.

To find out why the Phoenix housing market may be finally growing up and other statistics check out my video:

And just for fun, here’s a chart with a breakdown of terms of sale (i.e normal sales vs. short sale vs. REO vs. HUD). Enjoy.

“Most of the smart money has already left Phoenix. Lots of dumb money here now.”

That’s what a prominent local real estate attorney said to me last month at a meeting in his uptown office.

According to Michael Orr’s June 2^nd market summary for greater-Phoenix:

“The average price per sq. ft. across all areas & types in ARMLS has moved from $87.53 on March 2 to $101.23 on June 2 – that’s an increase of 15.6% in 3 months which is every bit as fast as prices were rising in the summer of 2005. It also implies an annual appreciation rate of 62.4% if we were to keep it up for another 9 months. That is not impossible but it is very unlikely. The fastest we saw during the bubble years was about 45% per annum.”

The cat is out of the bag in Phoenix. When popular news outlets like the Wall Street Journal and the USA Today are reporting on the turnaround here the dumb money is sure to follow. Let’s face it – most investors are like sheep.

The real estate market has bottomed and is rebounding quickly. Almost too quickly. Michael Orr went on to say:

“As prices continue to rise, demand will weaken and more sellers will be motivated to enter the market. What we don’t yet know is how far they will have to rise before balance can be restored between supply and demand.”

As a fix and flip investor I welcome some relief from rapid appreciation. I’m also hopeful the smart money has left the Phoenix housing market. It’s much easier to compete against dumb money. With the smart money gone and the dumb money quickly drying up I can get back to buying houses at the auction and on the MLS for steep discounts again.

To find out who I think the dumb money investors are, more greater-Phoenix housing market numbers, and a moral about a fox and a rabbit, be sure to watch this video:

As a local housing market geek I was in my glory the past 5 days. Both the S&P/Case-Shiller Home Price Index and Greater Phoenix-Housing Market Report by Michael Orr of Arizona State University were released.

Let’s get to the S&P/Case-Shiller Home Price Index first. Here’s their chart of the top 20 real estate markets in the United States.

You’ll notice that Phoenix leads all markets with a 6.1% year over year increase in pricing.

Michael Orr uses information from the past 30 days (S&P/Case-Shiller data is three months old by the time it’s released) and had these stats in his May report:

• Median sales price up 25% in the past 12 months
• Average price per square foot up 16.5% in last 12 months
• Overall supply down 54% in the last 12 months

Which begs the question – in the age of Twitter, Facebook and LinkedIn, why does anyone care about the S&P/Case-Shiller data? When I hear the news report their findings all I can think about are those cell phone commercials (that was so 90 days ago).

Equally puzzling to me is when the news media types declare that while the greater-Phoenix housing market is rebounding quite nicely we’re far from reaching our peak median price point in 2006.

Well, duh. Of course we are.

Prices were artificially inflated in 2006 because of short supply and loose credit standards. As a result, the market here crashed and prices artificially deflated. Neither phenomenon was sustainable. What I expect we’ll see in the next 12 months is continued appreciation, probably around 20-25%, just like Michael Orr predicts – followed by a plateau.

When the dust settles we’ll see prices 10-15% below the peak in 2006 – which is exactly where we would have been without sub-prime loans from 2004-2006 and housing tax credits from 2009-2010.