The general consensus is the Phoenix real estate market is in balance with little or no price movement – up or down – expected for homes.

But the number of homes selling is low by historic standards. Usually that weak demand would mean downward pressure on prices but not this time.

Right now in metro Phoenix real estate the weak demand is matched by weak supply.

Why aren’t more homes selling in Phoenix?

Underwater homes. They used to be a top real estate story but you haven’t heard much about homeowners being underwater in the last few years. Sure, there’s a ton fewer homeowners underwater – the problem is smaller now – but there still remains a ton of homes underwater in Arizona.

The big Phoenix real estate story in 2012 and 2013 was rapidly increasing home prices and the underwater homeowner story faded.

It’s certainly true that a zillion Phoenix homeowners who were underwater in 2009-2011 (they owed more on their homes than their homes were worth) got above water and sold.

The Backlog

In fact, a backlog of people who wanted to sell a few years ago but couldn’t without losing money or without doing a short sale were able to sell their homes without losing money after the 2012 and 2013 price increases.

So we quite naturally saw a burst of people listing their homes for sale in 2012, 2013 and 2014 taking advantage of the higher home prices. But that burst didn’t last forever.

If looks like we worked our way through that backlog of formerly-underwater home sellers last summer. Since then, the number of homes hitting the market has been unusually low.

19% of Arizona mortgages are still underwater

Corelogic estimates that 19% of Arizona homeowners with mortgages are still underwater and most homes have a mortgage, of course. Their estimate is a very gross estimate but I’ll assume 19% is in the right ballpark. Arizona is #3 in underwater homes, behind only Nevada and Florida, according to Corelogic.

Now, of course those people who are still underwater could theoretically sell their underwater homes but most people will do just about anything to avoid selling their home when the sale price isn’t enough to pay off their mortgage.

Those potential home sellers would have to pay money to sell their homes! Yeah, people don’t like that. It’s no big revelation that people hate to lose money and they’ll do a lot more to avoid losing a dollar than they’ll do to gain a dollar.

They may need a bigger home, a smaller home or a different home but people really, really, really, don’t like losing money and having to PAY money when they sell their homes. If they sell when they’re underwater, they lock in a loss.

They’re Not Going To Do a Short Sale

Of course, they could sell their underwater home via short sale but if they’re underwater now, they’ve probably been underwater since 2009 or before.

They’ve obviously been able to make their mortgage payments all these years despite their house being underwater and they’ve obviously chosen not do a short sale throughout the last 6 years so it’s very unlikely that now they’ll change their mind and decide to do a short sale (unless, of course, something has changed and they’ve recently lost their job or something).

Finally – The Point

And thus I finally circle back to the point of this post and explain why the supply of homes hitting the market in metro Phoenix is so low;

Having 19% of homes underwater is functionally equivalent to reducing the potential supply of homes for sale by 19%.

What It Means for Home Buyers and Sellers

Okay, this is a little anti-climatic but the low supply of homes for sale doesn’t mean much for Phoenix home buyers and Phoenix home sellers as long as demand also remains low.

For Phoenix home buyers, it means your selection of homes to chose from might be a bit lower than normal but you still have a huge selection of homes,

For Phoenix home sellers, it means you have a bit less competition from other home sellers but since it won’t translate into higher home prices (demand is also down), it’s not really that big of a deal for you.

What It Means for the Real Estate Industry

The people this low-supply/low-demand Phoenix real estate market impacts most are the people in the Phoenix real estate industry – the title companies, the lenders and loan officers, the home inspectors, the appraisers and the real estate agents – because the number of homes sold is a bit low.

It’s not a bad market for the Phoenix real estate industry, it’s just a slow market, a blah market, a boring market. And that’s not too bad.


Are you underwater on your home? Does this post sound right to you?

Let me know what you think and please leave a comment.

Thanks! John

Advertisements