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Rise in Phoenix Housing Shows Path for Other Cities
ECONOMY Updated March 12, 2012, 9:57 p.m. ET
By NICK TIMIRAOS
PHOENIX—As home prices continue to drop in most cities, a nascent real-estate rebound here holds lessons for
the rest of the country.
This sprawling desert metropolis was one of the hardest hit housing markets during the bust. Phoenix home
prices declined 55% from 2006 through the end of 2011, and Arizona's foreclosure rate jumped to No. 3 in the
nation in 2009. Hundreds of thousands of homeowners are underwater, meaning they owe more than their
homes are worth.
Now real-estate economists across the country are studying an early
but surprisingly broad Phoenix turnaround. The sharp drop in home
prices has brought new buyers into the market. Unlike other markets
where housing recoveries have been snuffed out by big overhangs of
homes for sale and foreclosed properties, inventories are lean here.
"Phoenix has hit a bottom," says Thomas Lawler, an independent
housing economist who was one of the first to warn six years ago that
prices in overbuilt metros were poised to fall.
The nation's hard-hit housing markets face a tough act: engineering a
housing recovery without traditional trade-up buyers, many of whom
are either unwilling or unable to sell because of huge price declines.
Phoenix has found a viable formula. Low prices are igniting demand
from first-time buyers and investors who are converting the homes to
rentals. The local economy is on the upswing with several big
employers like Amazon.com Inc. and Intel Corp. hiring again, which is
further increasing demand for housing. And the region is benefiting
from a surge of buyers from Canada who are using their favorable
exchange rate to scoop up bargains in the desert.
Local mom-and-pop investors are also playing key roles in soaking up supply. "I'm running my Realtor ragged
looking at properties," said Robert Gerundo, who last month stood inside a two-bedroom condominium,
scribbling his signature on an offer to buy the unit for $50,200, slightly above the listing price set by the bank,
which recently foreclosed on the unit.
Mr. Gerundo has bought 13 properties in Phoenix in the past two
years and rents them out for as little as $950 a month. The 49-
year-old, who drives around in a Jaguar with a Rutgers sticker
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2. Rise in Phoenix Housing Shows Path for Other Cities - WSJ.com#printMode Page 2 of 4
on it, says he is making so much money as a landlord that he quit
his job last year in New Jersey as a banker.
Nationally, housing demand still remains weak and bank-owned
sales are expected to rise this year, putting more pressure on
prices. Many economists say they expect home prices nationally
could fall by another 3% or so this year before hitting a bottom
next year. Most expect that prices will rise little for several years.
U.S. home prices fell another 2% in the fourth quarter on a
seasonally adjusted basis, according to the Standard &
Bloomberg News
Mike Jones flips real-estate signs for a Realtor, David
Rod, as they are printed. Investors are buying many Poor's/Case-Shiller index tracking 20 cities. But prices rose by
2% in Phoenix, the biggest increase of any metro area in the
Phoenix properties and renting them out.
country. Over the past year, prices in Phoenix are down by 1.2%,
the smallest drop since its prices started falling in 2006.
Other markets are showing signs of life, too, as the spring buying season gets under way. Recent job gains for
Detroit's auto sector have helped rev up sales in recent months. Home prices in Washington, D.C., have fared
better than in much of the country thanks to better employment prospects from government-related hiring.
Big price drops, like those in Phoenix, are another key. In Detroit, prices are down by 46% over the past six years
and have fallen to levels last seen in 1994. Sales have picked up in Miami, where prices are down by 51% over the
past five years.
But low prices alone haven't been enough to so stabilize other epicenters of the housing bust where job growth
still lags. In Las Vegas, where prices have tumbled 62% since 2006, including 8.9% over the past year, the local
economy is heavily dependent on tourism and gambling, both industries that haven't recovered. "A lot of markets
in the country have hit a bottom, but I just don't see them coming back the way Phoenix has," says John Burns, a
homebuilding consultant in Irvine, Calif.
The improving housing market in Phoenix isn't much comfort to
anybody who bought a home there a few years ago. More than
52% of mortgage borrowers owe more than their homes are
worth, according to CoreLogic, a real-estate data company. And
not everyone in Phoenix is convinced that the improvements will
last, especially if the economy falters or oil prices soar.
Phoenix saw a small run-up in prices three years ago when
federal tax credits spurred a buying frenzy, but prices dropped
again once the credits expired. Others worry that banks have
delayed foreclosures and will begin to saturate the market with
more properties in the coming year. "It feels like a temporary
bottom," says Brett Barry, a real-estate agent who lists properties for Fannie Mae.
Such concerns haven't discouraged buyers like Lloyd Sheiner from taking advantage of low prices to build an
inventory of 143 homes, which he rents out to families that haven't been able to hold on to their homes.
"The panic is over," says Mr. Sheiner, an apartment and commercial real-estate investor who lives in Montreal
and began buying 18 months ago after he concluded prices were too low.
His average renter, he says, is a family of four with parents who have jobs. "They've been sitting around their
kitchen table with a $350,000 mortgage on a house worth $140,000," he says. "And they're saying to themselves,
'Geez, what are we going to do? Do we spend the next 20 years of our life paying this down or do we start over?' "
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3. Rise in Phoenix Housing Shows Path for Other Cities - WSJ.com#printMode Page 3 of 4
His company, Living Well Homes, has built its own property-management infrastructure that allows tenants to
submit work orders online and automatically deducts rent from their checking account. "We don't go running
around the valley banging on the door collecting rent," he says.
Out-of-state buyers accounted for one-quarter of all purchases last month. One in every 25 sales went to a buyer
that listed a Canadian address when registering the sale, according to the Cromford Report, a local real-estate
publication. Many are flush with cash from a real-estate boom of their own in Canada and an exchange rate that
has given Canadians unusual buying power.
Dean Selvey, a real-estate agent and investor who has built his business around marketing to Canadian
snowbirds, last month set up a big booth at a two-day trade show in nearby Mesa called "Canadian Snowbird
Extravaganza Celebration" that drew 5,000 attendees. "It's chase the Canadians—that's our market," he says.
A few days later, Jon Mirmelli, a local real-estate agent who has bought nearly a dozen foreclosures as rentals,
knocked on the door of a homeowner whose home was slated for a bank foreclosure auction. After introducing
himself and informing the occupant about the imminent foreclosure sale, he popped the question: "If you're not
able to keep your house, would you be interested in renting it?"
From the porch, Mr. Mirmelli's business partner sized up the condition of the three-bedroom house, which the
current owner bought for $150,000 in a short sale two years ago. At courthouse auctions, homes are sold as is,
meaning the buyers may have to evict the former owner.
Nearly 29% of homes sold last month went to buyers who indicated they planned to rent out the properties,
according to the Cromford Report. That figure has been on the rise over the past two years. In mid-2010, the
share stood near 15%.
Competition from investors is frustrating for aspiring first-time buyers like Adam Brenner. "This does not feel
like a buyer's market at all," says Mr. Brenner, a pharmacist who estimates that he has looked at 60 houses since
last fall. "You hear and read about how there are so many homes for sale, but once you start looking, it's a pretty
big shock."
Many real-estate agents have reported more bidding wars in recent weeks, and some buyers are agreeing to
escalation clauses, a bubble-era provision where they agree to pay a certain price above the highest offer.
Arizona makes it easier for banks to take back properties through foreclosure without going to court. The state
saw the largest decline in the share of loans that were seriously delinquent or in foreclosure during 2011,
according to Lender Processing Services. So-called judicial states such as Florida, where banks must process
foreclosures by going through court, have seen growing backlogs, which some fear could eventually drag down
Florida markets again in the future.
Now prices are firming up because fewer homes are selling out of foreclosure. Foreclosed properties accounted
for 36% of all home resales in January, down from 55% one year ago and a peak of 66% in March 2009, according
to DataQuick, a real-estate data firm. Those declines have fallen, in part, because banks are also becoming more
efficient at approving short sales, where it allows a sale for less than the mortgage debt owed.
Mike Orr, founder of the Cromford Report, says concerns that banks will begin to dump more foreclosures on the
market are overblown, at least in Phoenix. "People think there's a glut of homes the banks are hiding somewhere,
and that may be the case in other markets, but not here," he says.
Still, a market recovery on paper means little to hundreds of thousands of underwater homeowners. Consider the
case of Gil Monti. In just two days, he received five offers for this home—four above his asking price.
But that offers little comfort: He has been forced to sell the home, which he built 34 years ago and where he
raised all three of his children, in a short sale for $275,000.
Mr. Monti was one of many people who refinanced his home repeatedly during the boom, pulling out cash along
the way to fund home improvements and his kids' college educations. He paid $100,000 in construction and land
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4. Rise in Phoenix Housing Shows Path for Other Cities - WSJ.com#printMode Page 4 of 4
costs in 1978, and the home was valued at nearly $600,000 in 2006. He sold the property last month in a short
sale because his "interest only" $473,000 mortgage reset last year, requiring full interest and principal payments.
He realized the depth of his troubles last year when a neighbor sold a home for just $199,000, a third of what Mr.
Monti's home was worth at the peak.
Mr. Monti isn't alone. "The recovery that gives people like Gil the freedom to sell their property is not going to
happen, possibly ever, for a lot of people here," says Greg Markov, his real-estate agent.
Mr. Markov also represents Mr. Gerundo, the investor who bought 13 properties as rentals. "That recovery is
already here" for Mr. Gerundo, Mr. Markov says. "His investment is not going down in value."
Write to Nick Timiraos at nick.timiraos@wsj.com
A version of this article appeared Mar. 13, 2012, on page A1 in some U.S. editions of The Wall Street Journal,
with the headline: Rise in Phoenix Housing Shows Path for Other Cities.
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