June 26, 2006

The Great Mirage: People actually BELIEVED their homes were worth 50% more than they were a year ago


In Phoenix, where we saw 55% home price appreciation in 2005, people actually still think their homes are worth that much. They got to believe, so certainly, so strongly, that their homes were worth so much more than they were just a few months before

Demographics! Weather! No more land! Cheap versus California! The New Economy!

pa-lease.

It was all just a mirage. It was flippers descending into town and scooping everything up, driving down inventories while driving up prices. Then it was the locals becoming flippers themselves. Then the music ended. And the locals are holding the (overpriced) bag, while the flippers flee.

So now we get to go back to 2004 (or worse) price levels. In Phoenix, that means a 40%+ haircut. And it also means hundreds of thousands of people left unemployed, families destroyed, and an economy in shambles.

All because people believed their homes were worth 50% more than they were just a few months before.

33 comments:

Anonymous said...

the greater fool theory was proven in Phoenix. Not too hard to believe considering the town is full of uneducated / undereducated get rich quick fools

funny how the bubble was worst in the areas where people don't know the value of hard work and an education

Anonymous said...

What the heck does that mean? The bubble is going to be the worst in the West Valley and places like Queen Creek, the so-called desert communities. Just a gues here, but I am thinking that both the folks that live out there and the folks who invested out there know the value of a hard day of work and of education. Just because one does not have an education does not mean that they don't know its value. And I am fairly sure that a large amount of the investors have a college education. And speaking from my lofty perch here in Scottsdale, I can't think of one friend or colleague who doesn't have a college degree. Quit with the blanket comments about Phoenix. And also don't claim that the buble "was" worst in a particular area. The bubble has not yet popped. Can't use past tense for something that has yet to occur. No doubt it will happen in a giant way in the outlying suburbs, but if you think that Scotssdale prices will return to 2004 levels, you are the uneducated one. Housing in areas like Gainey, McCormick, Kierland, Arcadia, etc. will correct probably 20% and level off.

Anonymous said...

20% and level off - what a joke!. I sold several SFR's in Phoenix in 1993 for a doctor in San Diego and they went for $12,000 and $15,000 each at the bottom of that market. They were in below average areas, but Scottsdale got burned as well. You should study how high-end homes have historically fared in real estate downturns. It's worse than for entry-level homes. The argument that the rich will always be able to afford it is a joke, because most rich people have always been, and continue to be, disproportionately invested in real estate with liquid cash holdings that are always woefully less than they should be holding.

You obviously live in an area you are praying doesn't take a hit ; )

Anonymous said...

ugh - they just interviewed some high-level dweeb from ASU on NPR here in PHX - he says everything is fine. slower, but fine. back to normal. WTF.

he still stated that prices are up 25% from last year and that sellers are sticking to their price.

totally delusional with 50K listings in the MLS.

i hate these pricks. just delaying reality.

Anonymous said...

Hey folks, there are 50k unwanted, not needed, should never have been built crap boxes sitting empty in Phoenix/Scottsdale and surrounding areas, by the end of the year, you are looking at a Superfund Site, facts are facts!

Anonymous said...

So let's just take an example. 2,500 square foot house in McCormick Ranch. Not remodeled. Funnels into Chaparral High School, beautiful neighborhood with mature pal trees, grass, golf courses, country clubs, great restaurants and shopping and most of locals are younger professionals who are actually making money in Phoenix. Nice backyeard with inground pool - selling now for $550K. According to many of you, this house would sell for $330K in a year. This is just not going to happen. Yes, I agree that house will sell for $420K in a year, representing a nightmare for the fool who may have bought it at $550K. However, if you want to live in certain parts of Scottsdale, and many people do, the number of houses which fit that criteria are not many. I can certainly ebvision a 40-50% reduction in prices in many places, i.e., Queen Creek, Surprise, Buckeye, Apache Junction, Mesa, Anthem, New River, Glendale, Peoria - but I do think that Scottsdale and Biltmore/Arcadia will simply not see the horrific fall as other neighborhoods. Look at Arcadia for instance. That area starting growing at a rapid pace as early as 2002. When I was looking in Arcadia in 2003 I was already priced out as you couldn't touch anything for under $600K. Now a tear down costs $800K. There will always be people willing top ay for certain amenities you can only get in certain places - the desert communities offer NONE of these amenities. No good schools, no greenery, no infastructure, no proximity to downtown or shopping, etc. Again, this is just my two cents. And no, I am not in an area that I am praying will nto take a hit. I KNOW my neighborhood will take a hit, but I always considered my equity to be paper money anyway that I never really had. My house will correct and probably bring me to a point where it will still retain a much higher value than 2004, but a much lower value than in September of 2005. I am now just waiting for all the comments that rip on Phoenix, sure, summers suck - but I will take morning hiking on Camleback and an evening swim in my pool and dinner on the veranda over -20 windchill, shoveling snow and looking at gray skies for 6 months any day of the week.

Anonymous said...

Grand Junction, CO -- the RE people are publishing happy-talk in the paper about prices rising more slowly this year than the 25% annual appreciation since '01. They claim it's different this time because we have some oil companies drilling wells up north of town. No downturns here, just can't happen...

keith said...

nobody said this will take 1 year. I think it'll follow the japan model and take up to a decade

however, the biggest drop will happen in the next year

fish said...

Keith,

Dude....its spelled "puh leaze"!

Cheers

PS: Sean Hannity Sucks

Anonymous said...

RE: Prices not going lower than 2004 prices...

This guy is a victim of "anchoring" in which he justifies his 2004 purchase as the floor price. This is a common psychological issue that trips up many an investor, including myself. You learn it the hard way once you take a few hits...

Mark in San Diego said...

Japan bubble took years to burst. . .

I believe it went from high in 1989 to low in about 2002. I am always amazed at the staying power of the US consumer, and I do think it will be "one decision at a time" and a slow grind down of housing prices (with a few exceptions). It is of interest to note that although gold prices have tanked (sorry Keith) oil prices remain at around $70 because of demand. Yesterday I drove up to Riverside County to a rail museum, and passed all those fast growing towns that are 50 miles from ANY gainfull employment. . .I realized that those people are locked into $3 gas for a long long time, and it will bleed them dry. Only then will they be forced to sell their distant home at a loss, and rent someplace closer to work. . .I think most of them DO still believe that their homes are worth 50% more!

AZgolfer said...

I have a friend in Cave Creek. This is a very good area of North Scottsdale. She bought a Toll Bros condo and has to sell her SFH. 1700 sq ft, small lot. Started at 419K has reduced numerous times to 364K. Open houses every weekend. Still no offers.

Anonymous said...

>>PS: Sean Hannity Sucks from Fish

Hey DB, I did not see any mention of Sean Hannity in any posting here, so why do you have to vent your anger this way? Do you spam around the internet based on some Moveon.org rally?

I can see your a clueless clouded liberal who hates the truth being told. Why do you hate just Sean Hannity? I can think of plenty of other conservitives who are getting the message out enough to piss off people like you? Does he make you feel inadequate in some way?

Anonymous said...

As I said, YES - there will be significant reductions even in Scottsdale, Cave Creek, FOuntain Hills. A house on the market for 500K will probably ultimately sell for 400K, but I don't think buying a nice house in a good area will be such a bad long term move. Moreover, I don't get how many of you say that there are no real jobs in Phoenix and no real professionals. I am a lawyer and many of my friends are doctors, lawyers, traders, financial analysts, entrepreneurs, business owners, restaurant owners, etc. I know many who have invested in real estate - but very few who are actually real estate professionals. Yes, they are out there, but Phoenix is still a city of almost 5million people which has developed a sustainable economy and a corporate infastructure similar to other growing major cities. Sure, it lacks oil like Houston and the Latin influence of Miami, but it is becoming a hotbed for tech comapanies, law firms are opening new offices, investment houses are developing offices, and if you ever go to the Airpark you will see the economy in Scottsdale is not exactly struggling. That being said, again - I see real problems in the outlying desert communities. The further you get from downtown, the harder the hit is going to be. $400K for a house in Buckeye is almost laughable. Yes, I see a 50% reduction out there. I would also guess that a large amount of the record inventory in PHX is actually in those suburbs. I am not sure that that Scottsdale, Chandler, Tempe, PV will suffer to the same extent. If you tell me PV will ever be a bargain, I will really have to question your sanity. There are certain places in any major city, (Scottsdale in Phoenix, Lincoln Park in Chicago, Santa Monica in LA, Highland Park in Dallas, Sugarland in Houston, Boca in Miami, Carmel in Indianapolis, SHaker Heights in Cleveland) where the money consistently wants to live and buyers will pay a premium for the benefit and prestige of those areas. Not to say they are totally immune from a market correction, but I do believe they are immune from a 50% reduction. Say there are 50 new doctors moving to Phoenix per month, chances are 40 of them will want to live in Scottsdale. Chances are they are not fazed by a $700K house. The economic reality of Scottsdale and PV can keep housing prices at a fairly normal level more line with 2004. Buckeye, Surprise, Queen Creek do not have that same benefit.

InfidelSix said...

The first poster should note that EVERY TOWN is full of uneducated/ undereducated get rich quick fools.

Why all the elitism? Don't point fingers but be afraid to look in a mirror.

Anonymous said...

What of the continuing, incessant propaganda about "The Ownership Society"?

That you were a chump if you tried to just work for a living, no you needed to be your own capitalist and Own Something To Make Real Money In This New Economic Era. If you Don't Agree, You Are a Fucking Libtard Communist.

The Powers That Rule are making sure that the one side of the equation is certainly true: if you work for a living, you're a chump.

But what can the Little People own? Residential property, of course.

The Romans gave their masses Bread and Circuses. Now we have capitalist fantasies for everybody with emotional propaganda insinuating that you are unworthy if you don't get with this plan, and start questioning the entire principles.

Remember Spartacus? He was executed.

re analyst said...

I'm really starting to see the early stages of panic set in here in San Diego, right on time with my predictions. People have moved past denial and realize that we are in a downmarket and that the peak was mid-late 2005. Yet I still hear them try to soothe themselves, with "It's just flat and won't sell right now, not unless I reduce and take a loss, but I can wait." They are starting to squirm in their seats, it makes them uncomfortable to talk about, they want to change the subject and hope that it just goes away. As summer ends and as so do the hopes of those who have had their homes on the market, panic will be in full bloom. Panic's ugly cousin Desperation will follow not long after.

Mark in San Diego said...

Re analyst = San Diego

I would agree that denial is over. . .the panic-button is the fact that we have gone to 22,600 homes on the market which was about 3 weeks ahead of projection, which means the rate of new listings is rising faster than ever, and sales are about dead. The kicker is that the "selling season" is ending soon. Parents want to be moved into the new house/school district by about August 15 or so, which means they should be closing this week and move in mid-July-August. . .BUT, they can't sell. Nokia also may lay off 1000 workers in a joint effort with Qualcom it was reported last week. . .THAT will shake confidence.

re analyst said...

Mark,

You're right on target.The rental market seems to have been unusually strong as well. Although I only have anecdotal evidence to prove it, the # of rental listings has diminished as well as the quality of what is available and prices seem to have spiked some; an indicator of people's avoidance of for-sale properties.

Anonymous said...

poor "melissa even" - and her little shitbox in coronado.

MLS # 2448580 in ziprealty.com.

she bought during the craze for 220K, tried to flip for 289K, now on the market now for 165 days, reduced several times now down to 239K.

sorry, but she is an idiot. the place is only 854 square feet, in a shitty area. even if she is lucky and gets her 220K back, she'll lose in the commission and closing costs.

lisa, time to become a landlord and pray for cooler weather.

LOL.

Anonymous said...

Yes, one buddy still believes he is 200k richer.

Another buddy who bought in October 2005 believes he is richer too and doesn't understand why I won't buy.

No bust yet in Scottsdale.

venetiancafe said...

The price reduction in Scottsdale and elsewhere depends on the depth and length of the next recession. If this means less blood-sucking BMW-driving dirtbag attorneys blasting around Scottsdale, then I long for a depression.

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Anonymous said...

The bubble in Phoenix can be thought of as an inverted wedding cake. In the prime areas - PV, Biltmore, north Scottsdale, the bubble appreciation was probably about half of the total appreciation. And the total 2004-2006 appreciation was maybe 50% in those areas, meaning about 25% of that was bubble. So a house purchased for a reasonable 400k in 2004 in a good area may be worth 500k now.

As you move farther out - Glendale, Queen Creek, Maricopa, the bubble becomes close to 100% of the total appreciation, which was also probably 100%. So those houses are really worth no more than they were in 2004. They did not double in value in two years - they did not increase in price at all. A house purchased for 160K in 2004 is worth 160K now.

Despite the heavily building related economy, Phoenix is diversifying quickly and building a sustainable high-salary core. Intel is builidng a $3 Billion dollar fab. The unemployement rate in the "valley" is 3%.