We’ve seen many different opinions of where the real estate market is heading, and what effect the present government shutdown will have on it. So what is actually happening on the street, and why?

Let’s start with the shutdown.

Confidence is the #1 reason people decide to look for a home to buy, it usually goes hand in hand with demand. A government shutdown and a potential further battle over the debt ceiling are not exactly positive news. Our collective confidence is still fragile as we celebrate exactly two years since the official bottom of the market. The worst recession for generations is still a clear and painful memory.  The result is that the average buyer is holding back and waiting to see how this all works out.  But are they right to do so?

Lending is the main casualty of the shutdown, with some delays/inabilities in getting information and approvals from point “a” to point “b” in the system.  If you have any concerns on this, call your mortgage broker for an expert opinion on how the shut down is effecting your lending product.  Although one can’t rule it out completely, I’d be surprised if many deals fail in the short term due to these issues.  Sellers will probably understand, and in any case, they may need to listen a little more carefully to their buyers than they have been of late.

So how does the market look right now?

The local market has cooled in all but the $2m sector (not many of those in downtown), and specifically in the sub $500,000 market, which has slowed strongly in the last month.  This is the key market for downtown Phoenix.  There are great stats that explain this. It’s not bad news, we are simply heading back to balance and that’s healthy.

Downtown Phoenix offers a mix of historic homes and modern condos.
Photo by David Newcombe

Here’s what’s happened. The market has increased at a stunningly fast rate for the last couple of years with prices climbing quickly.  Buyers have outnumbered sellers, the result being that really great deals have dried up along with foreclosures and short sales.  We’ve actually done so well that according to Michael Orr (WP Carey School of Business/Cromford Report) we will probably hit the $130/sf long term trend line around about December of this year.  In other words, we are nearly back to exactly where we should be price wise if we hadn’t had the massive overheat of the pre-recession market.

This month’s report by Orr clearly outlines our trajectory.  We still have very low inventory in most sectors, but we also have low demand.  Additionally, investors have pulled back sharply from purchasing.  28.7% of homes a year ago were investor purchases compared to 19.9% of homes today.  Second family home purchases are also down from 18.3% to 12.5% year over year.  That’s a lot of buyers that are no longer in the market, and it’s great news for the majority of normal buyers, simply looking for a home to live in.

The big picture is bright.  Have confidence in Phoenix which is about to change it up yet again.  Developers are finalizing plans to bring some really exciting new townhome and condominium product to downtown in 2014.  Warren Buffet just bought a major national real estate company.  The smart professional money is clearly on real estate. Even if you don’t have confidence in government right now you probably should in Warren Buffet. He’s usually right.

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