Housing market up slightly, but outlook for 2010 murky

Phoenix Business Journal - by Jan Buchholz Friday, January 1, 2010
A year ago, Phoenix snagged unwanted attention for leading the nation in home value depreciation.

That was the assessment of the S&P/Case Shiller Home Price Indices in December 2008. Then in early summer 2009, the Arizona State University-Repeat Sales Index showed that the median price for a home in the Phoenix metro area had dropped to $115,000 in May, placing prices in the range they were more than a decade ago.

Prospects didn’t look good for a housing recovery, and yet the Phoenix housing market rebounded — a little. Strong investor activity on foreclosures plus an uptick in new home sales, driven by first-time homebuyers taking advantage of a temporary $8,000 tax credit, spurred a marked increase in transactions and also drove up the median home price to $135,000 by November 2009.

Despite several months of small improvements — including increased transactions, higher prices and declining foreclosure sales — local experts disagree as to whether the new year bodes well for residential real estate in Phoenix.

At December’s 2010 Metro Phoenix Land and Housing Forecast event sponsored by Scottsdale land brokerage firm Land Advisors Organization, the mood among several hundred attendees was distinctly upbeat.

“I’m very optimistic about where we are and where we’re going ... next year will be a heck of a lot less painful,” said presenter Jim Belfiore, founder of Phoenix-based Belfiore Real Estate Consulting.

While Frank Owens, principal of Scottsdale-based Frank Owens Ltd., agrees there have been market improvements and other data is encouraging, he’s not convinced the extended and expanded homebuyers’ tax credit passed by Congress will maintain what momentum had been achieved.

“I’m not sure there is going to be any great increase in activity in the first quarter,” Owens said.

Ongoing high unemployment and dubious consumer confidence may limit the stimulus potential of the tax credit, he said.

Steve Hilton, chairman and CEO of Scottsdale-based Meritage Homes Corp., sees some light at the end of the tunnel. Unlike many home builders locally and nationally, Meritage has been able to weather the storm and strengthen its bottom line. While Meritage posted a loss of $17.8 million in the third quarter, that’s a sizable improvement from the same period in 2008 when losses were $144 million. Its stock price, after dropping to a 52-week low of $8.40, is hovering around $19, and at one point last year reached $24.35 per share.

By dramatically trimming overhead, Meritage has increased cash flow by $247 million during the past 15 months, leading some stock analysts to pick it as the best buy among public home builders. In recent weeks, Citigroup, Goldman Sachs and Morningstar have given Meritage a cautious thumbs up.

“I think 2010 will be a little better than 2009. I’m not all that excited, but we do expect to make money,” Hilton said.

Through fourth-quarter 2008 and all of 2009, Meritage purchased about 4,000 finished lots in Maricopa and Pinal counties at sharply discounted prices after banks took back the land from troubled builders.

Many publicly held home builders have the financial wherewithal to take advantage of the misfortunes of smaller, less capitalized builders. But Hilton says Meritage has been very strategic about where to buy lots and for what purpose. The company, which has built its business model around move-up, more upscale homes, is not afraid to reinvent itself to survive.

“We’re more focused on the East Valley,” Hilton said. “We’re building more homes under $200,000 because that’s where the strongest market will be for the next several years.”

Survival has been on the mind of John Vatistas, co-owner of Russ Lyon Sotheby’s International Realty, one of the largest residential brokerages in the state. That company, which was created by the May 2008 merger of Equitable Sotheby’s International Realty and Russ Lyon Realty Co., built its brand around the luxury-home market. Some market research indicates that it could take between five and seven years for the inventory of luxury homes in the northeast Valley alone to be absorbed.

Though Vatistas isn’t about to change the company’s focus despite the lagging luxury market, he has made dramatic changes elsewhere.

“When we bought Russ Lyon, we immediately took a guillotine to every single expense line item in the company. We were incredibly disciplined. Nothing was sacred,” Vatistas said.

Aside from cutting overhead, Vatistas cut some agents, a move that he grants is not popular.

“With us it’s all about quality agents not quantity. There are many agents who simply don’t fit the Sotheby’s mold. If they figure it out, they leave. If we figure it out, we politely ask them to leave,” Vatistas said.

For now, wealthy foreign buyers are taking advantage of lower prices in the million-dollar home market.

“Canadians are an especially big source of buyers for Russ Lyon. Furthermore, our Canadian clients aren’t just buying homes, but large, failed projects and notes in distress from both local and out-of-state banks,” Vatistas said.

Get Connected
Frank Owens Ltd.: www.frankowensltd.com
Russ Lyon Sotheby’s International Realty: www.russlyon.com
Meritage Home Corp.: www.meritagehomes.com
Belfiore Real Estate Consulting: www.belfioreconsulting.com

Trends to Watch
1) Extended and expanded homebuyers’ tax credits passed by Congress may not maintain the momentum that had been achieved
2) Publicly held home builders will have the financial wherewithal to take advantage of the misfortunes of smaller, less capitalized builders
3) Look for wealthy foreign buyers to take advantage of much lower prices in the million-dollar home market