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As in any down market, a psychological adjustment to a better balance between fear and greed is necessary. During the recent boom phase, there was no fear. Buyers stood in line to get their name on a lottery list to buy a home and complained if they weren’t one of the lucky ones! (They won’t let me buy a home!) Homeowners sold their existing home and used the equity to buy a half dozen others using highly leveraged financing. Investors (including short-term speculators, aka “flippers”) accounted for nearly a third of all residential transactions in Arizona markets. Realtors became order takers. Multiple full-price-plus offers were commonplace. During the frenzy, housing became seriously overbought with prices inflated well beyond economic fundamentals. No fear. All greed.
Then investors left, sensing that the easy money had been made. Within a few months, market psychology had done an about face. Fear was rediscovered and markets are still trying to rediscover the right balance. So where are we now in the “correction”?
Every Housing Down-Cycle Has Three Phases:
The first is denial, wherein sellers refuse to budge and hold on in hopes that they eventually will get their price. Buyers believe that prices will fall and therefore have no motivation to buy. It’s as if buyers read the newspapers but sellers do not. During this phase, inventories of resale homes soar as the market virtually ceases to function.
The second phase is acceptance. Owners of resale homes capitulate and lower their prices or simply move to the sidelines and decide to stay put. Unable to sell their existing homes, they cancel the contract on the new home they hoped to move into. Homebuilders aren’t in the business to hold spec properties so they move quickly to reduce swelling inventories through price reductions, free upgrades, cars, vacations, and other promotions that effectively reduce the price. This in turn reinforces downward pressure on prices in resale markets. During this phase, prices fall for both new and resale homes. Buyers feel vindicated and remain on the sidelines.
The third stage is consolidation. Finally, inflated price expectations are wrung out of the market and prices once again reflect economic fundamentals. Prices start to reflect the value of houses as shelter rather than as an investment. Buyers return to the market, inventories fall and prices stabilize. The market thereby returns to “normal” and the stage is finally set for a new expansion phase.
Sierra Vista and it’s surrounding communities housing markets are closer to the Third Stage listed above. We are starting to see buyers resurface and sellers understand that the market is very different than it was several years ago. Home sales are beginning to take root again.
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