“It is important to note that The S&P/Case-Shiller Home Price Indices are a trailing indicator, as they run approximately 18 months behind the market. They remain the most quoted statistics on home prices, and therefore continue to grab the headlines in the national press. The most recent release shows that home prices in its 20 City Composite Index fell further from 140.76 in January 2011 to 138.84 in April 2011 marking eight months of straight decline since July 2010 when the Index stood at 148.89.

The Index for April 2010 against April 2011 shows a year-on-year fall of 3.96%.  Analysts at Standard & Poor’s Ratings Services and headlines in the press stressed that both the 10 and 20 City Composite Indices showed a monthly increase even though both Indices were lower than a year ago. The indices for Phoenix show the previous up-tick was in May 2010 when it regained 111.00. In line with the City Composite Indices, the Phoenix April 2011 Index was marginally higher at 100.36 which gives an 8.81% year-on-year decline.

The authoritative Cromford Report (which covers the Phoenix area) contrasts the rising prices of the second half of 2005 when it was a widely held belief that home prices could only ever go up. This feverish optimism completely ignored an extraordinary rise in inventories which produced a huge glut of homes for sale. Real estate is known to have a very long delay in market timing and reaction but, in the end, supply and demand will always control the pricing structure.

The Report goes on to contrast that scenario with the current environment where sentiment is very negative, despite the fact that the numbers in Phoenix indicate increasing sales and decreasing inventories. Amongst buyers, competition for homes that are desirable and priced at-market or below has intensified and some sellers are seeing multiple bids. The lesson for sellers? If a home is priced realistically then it will sell fairly quickly.

This brings me to the question of shadow inventory. Shadow inventory is defined as real estate properties that are either in foreclosure but have not yet been sold, or homes where the asset manager is waiting for a price improvement before listing them on the market.

Mark Fleming, chief economist for CoreLogic, a California-based analytics provider, was quoted as saying “The shadow inventory has declined in large part due to a reduced flow of newly delinquent loans in recent months. However, it will probably take several years for the shadow inventory to be absorbed, given the long timelines in processing and completing foreclosures.” 

CoreLogic numbers for shadow inventory are calculated by determining the number of distressed properties not listed on Multiple Listing Services, where the mortgage is 90 days or more late, or is already in foreclosure, or is an REO on the books of a financial institution.

Corelogic’s analysts also point out (in addition to current shadow inventory) there are two million negative equity loans that are more than 50% or $150,000 “upside down.” These analysts comment that the current “underwater loans” have increased the risk of becoming shadow inventory if the owners’ ability to pay is hindered, which would make selling the home more difficult.

It is difficult to quantify how many more will default but in the current economic climate if you are upside-down by 50% or more the prospect of being rightside-up anytime soon may seem rather low.

There are other influences from farther afield, influences that might include the default of Greece or others within the Eurozone on its sovereign debt; Congressional failure to raise the debt ceiling; the conflicting views of national regulators trying to impose increased regulatory capital requirements to protect taxpayers from further bail-outs (Basle III); the potential for a commodity price shock; and, the possibility of tighter credit supply. Although nobody can predict how these matters will play out, they add to the general feeling of either optimism or pessimism that drives the markets.

In the mortgage market, the substantial settlement of Bank of America (relating to hundreds of billions of dollars worth of Countrywide issued mortgage backed securities) has not seemed to have brought much calm to relations between investors and the banks.

Adding to this unrest within the last six weeks, the New York Fed failed rather dramatically in its Maiden Lane 2 auction.

The official view of the Maiden Lane 2 auction failure was quoted through Bloomberg.  Jack Gutt, a New York Fed spokesman said in an e-mail, “The Federal Reserve Bank of New York is halting its sales of mortgage bonds acquired in the rescue of American International Group (AIG) Inc.  Given prevailing market conditions for residential mortgage-backed securities, we do not anticipate any sales of bonds in the near term or until such time as the New York Fed deems it will achieve value for the public.”  Despite a pretty strong stock market, it appears the New York Fed was unable to unwind from its books what amounts to less than 1% of its total asset holdings.

Taking numbers from the Sedona Verde Valley Association of Realtors Multiple Listing Service for the twelve months ending June 30, 2011 (for Residential homes in the whole of Sedona) there were 50 Short Sales and 119 REO properties that closed escrow, out of a total of 401 closed sales. Distressed properties therefore remain about 42% of Residential home sales. On a marginally better note, Distressed listings (as of July 1, 2011) fell against the previous month. With sales remaining fairly constant, the Absorption Rate for these properties has further improved and now stands at about two months. In order to shift inventory, it appears that Asset managers are becoming more aggressive with their pricing strategy with some examples of under-pricing homes and receiving multiple offers within 24 hours.

The Absorption Rate for the whole of the Sedona Residential market has been behaving rather well. Generally speaking, anything less than six months is a Buyers’ Market and anything over ten months is a Sellers’ market. Smoothing the Absorption Rate by dividing the number of Active listings on July 1, 2011 by the average monthly sales for the last six months indicates 9.6 months of supply. This indicator has been close to either side of the 10 month level for well over a year now and, in some ways, reflects the more stable conditions we have.

Again, as “Economics 101” tells us–the lower the price the more buying interest. For properties below $400,000, the Absorption rate is approximately five months and for all properties up to $1 million, the rate stands at eight months. The picture to have in one’s mind is of a pyramid–at the base (lowest price) everyone wants to buy the property and at the peak (highest price) only one person is interested. The recommended strategy for sellers is to price at a level where a reasonable number of buyers would be interested.

As for values, I continue to use Median Prices, taking all “closed sale” activity included in the preceding six month period in an attempt to avoid sudden changes or misleading information due to one month’s numbers: From January 2011 to June 2011, the median price for “closed Residential sales” only (in all of Sedona) remained between $328,500 and $339,250 appearing to give further encouragement that the current period is one of stability. Using six month bands, June 2010 showed a median price of $385,000 while June 2011 showed $330,000, a decline of 14.3% on the year.

Just taking the Quarterly numbers (i.e. not using data from activity within six month bands, just taking each quarter as it comes) for the whole of the Sedona area for “closed sales of Residential properties” only, here are the median prices:  Again, the numbers are taken from the Sedona Verde Valley Association of Realtors Multiple Listing Service.

On average, the Second quarter seems to be the most active period of the year for Sedona real estate and, although the fall in the median sales price would appear to be less encouraging, the volume of transactions seems to be remaining relatively constant.

Taking the local Absorption Rate and local values, we continue to see evidence of a return to a more stable market environment especially among the more affordable homes.

Those with a negative viewpoint will say it is merely a plateau before we descend once more. However, politicians are never elected for perpetuating a miserable economic climate. (A cynic might suggest that the politicians will try rather harder to turn things around over the next period in order to gain favor before the elections in 2012.)

Trying to pick the absolute bottom in real estate is never advisable, and the purchase of a home is normally a long term project. Buyers should carefully consider how long the current value opportunities will remain if they are to own a home in Sedona for at least five years.”

More about Sean Baguley: Sean is an Associate Broker with Russ Lyon Sotheby’s International Realty, 1370 Hwy 89A, Sedona, Arizona. Reach Sean directly at 928.399.4700 or by email to  sean.baguley@sothebysrealty.com. He brings a world of financial and executive skill to the table. Sean’s earlier career spanned over 30 years in the international financial markets mainly in Bonds and Derivatives based in London.  He has dealt with institutional and corporate clients structuring complex transactions. With well-honed negotiating skills that make any move simplified and streamlined, Sean’s background enables him to see the bigger picture. Clients count on him to weigh their long-term real estate goals, and bring their dreams into reality. Astute about the Sedona property market, having moved to Sedona from New York City in October 2001, he helps buyers and sellers make the most of the area whether investing in a retirement home, moving up, or searching for the perfect desert sanctuary. When buying or selling a home in Sedona, it’s essential to work with an agent whose depth of skill spans finance, business, management and marketing. Sean Baguley brings all this, and a unique compassion for people and their needs, to each and every client. Follow his annual quarterly real estate reports column, an exclusive and in-depth market analysis, on the Sedona Eye by subscribing today.

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