DESERT LAW BLOG

RECORD 12% OF HOMEOWNERS WITH MORTGAGES DELINQUENT

From the NYTimes today...

A record 12 percent of homeowners with a mortgage are behind on their payments or in foreclosure as the housing crisis spreads to borrowers with good credit. And the wave of foreclosures isn't expected to crest until the end of next year, the Mortgage Bankers Association said Thursday.

The foreclosure rate on prime fixed-rate loans doubled in the last year, and now represents the largest share of new foreclosures. Nearly 6 percent of fixed-rate mortgages to borrowers with good credit were in the foreclosure process.

At the same time, almost half of all adjustable-rate loans made to borrowers with shaky credit were past due or in foreclosure.

The worst of the trouble continues to be centered in California, Nevada, Arizona and Florida, which accounted for 46 percent of new foreclosures in the country. There were no signs of improvement.

ARTICLES ABOUT THE NEW FORECLOSED HOMEBUYING "FRENZY" IN PHOENIX

Several articles over the weekend touched on the new buying frenzy that is happening at the very low end of the housing market in Phoenix - primarily at trustee sale auctions (foreclosures): 

The NYTimes highlights the increasing difficulty of winning bids at trustee sale auctions in Phoenix due to the growing number of investors now trying to turn foreclosed homes into rental properties.  The article notes that investor purchases are up 50% in the last year - nearly to the level during the top of the housing boom (4 in 10 homes are sold to investors).

The LA Times has a similar article highlighting the new housing "boom" in Phoenix.  The article notes that investors are now outbidding many first-time homebuyers who are looking at the housing bust as an opportunity to finally own an affordable home.

And the Christian Science Monitor writes about what all of these new investors should continue to worry about - the shadow inventory of foreclosed homes in Phoenix owned by banks that are still waiting to be dumped on the market.  The article mentions that only approximately 30% of the homes that have been foreclosed upon have been released onto the market by banks and that some wary realtors and investors are worried about a big dump of this inventory later in the year - further depressing prices.  Note this exact thing caused a double dip in housing prices in California during their real estate bust in the 90's.

This all adds up to very interesting times in Phoenix real estate for investors yet again.  The big issue we had during the boom was outside investors coming into Phoenix and buying residential properties several at a time.  They had no intention of hanging onto them for longer than a few months.  When prices started to drop, many of these investors walked away, leaving a huge amount of excess inventory on the market.

Now that our prices have fallen 50-60% in many areas, investors are coming back into the market.  At least this time, many of them have a longer term business plan - rent for a couple of years and then sell.  And they are often forced to buy with cash - making them more likely to hang onto the home.  This new buying (and subsequent decrease in inventory) leads many to think that Phoenix will hit a bottom in terms of housing price depreciation sometime before the end of the year.

Counteracting the new investor activity is the shadow inventory that may be dumped on the market by banks mentioned by the CS Monitor.  That will further depress prices.  And many of the new investors in these low end homes I talk to also want to sell within the next 3 to 5 years.  This combination may keep the level of inventory relatively high for the forseeable future and should keep housing prices depressed in Phoenix.  So we may hit a bottom in home prices, see a bit of recovery and then go back down again.  Either way, most people I talk to think we will see somewhat of an L shape to house pricing in Phoenix - where we bump along the bottom for several years while we wait for broader economic and job recovery.

Further complicating the pricing picture is that foreclosure activity has moved more and more to higher priced housing - as middle and upper income families lose jobs and default on their prime loans.  Or as they simply make the economic decision to walk away because they are so far underwater on their loans.  This will create more buying activity at auctions in the middle and higher priced range and should change the mix of home sales being used to calculated median sales prices.  So while median prices may stabilize and even rise, some of it may be attributable to more higher priced homes being auctioned at trustee sales.

In short, the lower end housing market may be closer to hitting bottom than the rest of the market because investors have figured out they can turn those properties into income producing properties and they are now in higher demand.  Higher priced homes may still have further to fall before investors (or regular homebuyers) decide that it is time to purchase these properties - whether it be from the bank or regular market purchase.  The data over the next year for housing prices in Phoenix will be messy because of this.

CASE-SHILLER NUMBERS (SLIGHTLY) IMPROVED FOR MARCH

Housing price numbers for March 2009 from Case-Shiller came out this morning.  They showed another steep year-over-year decline, but not quite as steep a decline as in February or January.  Year over year decline for March 09 was 18.6% for the 10-city index and 18.7% for the 20-city index. 

As usual, Phoenix led the way in year-over-year declines - down 36% from March 2008.  That compares to down 35.2% from February 08 to February 09.

Full press release with charts and graphs is here (pdf).

APS ANNOUNCES ANOTHER LARGE SOLAR POWER PLANT IN ARIZONA

APS announced today plans by Lockheed Martin and private equity firm Starwood Energy Group to build another solar power generating plant in the west valley, this one just slightly larger than the Abengoa "Solana" power plant that is planned near Gila Bend.  If both power plants are successfully built, APS will have more than doubled the timeline required for purchasing solar power imposed by the Arizona Corporation Commission - getting approximately 9% of its energy from solar.

The Solana plant (which has received ACC approval) is currently stalled while the developers seek financing.  Starwood indicates that financing will not be a problem for them (no word on where it is all coming from).  The "Starwood Solar I" plant will be built on 3 square miles of land about 75 miles west of Phoenix and still needs to be approved by the Arizona Corporation Commission.

Full details from the Republic are here.

PHOENIX LIGHT RAIL WEEKEND HOURS EXTENDED PAST CLOSING TIME

Many have complained that one of the original visions for the light rail had not been realized when Metro decided to only run light rail trains until 11 pm - that of decreasing drunken driving.  Fortunately, Metro has now decided to remedy that decision and extend light rail hours on Friday and Saturday night past 2 am (the typical bar closing time in Arizona).  This change will begin on July 1st.

This move puts Phoenix out in front of many other cities that discontinue service before closing time.  With the toughest DUI laws in the nation, it is good to see Arizona starting to figure out ways to mitigate drunk driving, as opposed to just trying to capitalize on it as a revenue source.

WIGWAM RESORT FINDS A PROPERTY MANAGER TO REPLACE STARWOOD

The Business Journal reports today that Destination Hotels and Resorts will take over from Starwood at the end of May as the property manager for the Wigwam Resort - which is in receivership waiting to be auctioned in June to a new owner.   Starwood declined to renew its management contract which was expiring at the end of May.  According to their website, Destination is the fifth largest independent management company in the U.S. and currently manages the Royal Palms in Phoenix and the Tempe Mission Palms in Tempe.

No word in the article on the status of employees at the Wigwam, but presumably a fair number of them will be retained by Destination to provide continuity to the operations of the Wigwam.

PHOENIX LIGHT RAIL RIDERSHIP UP IN APRIL

Numbers are in for April for Light Rail ridership (the fourth full month of operations).  After a slight drop-off in March, ridership hit one million riders for the month for the first time in April and weekday average ridership increased from 34,376 in March to 37,386 in April.  That's the highest yet.

NEW PLAN FROM TREASURY TO SPUR SHORT SALES (FINALLY)

As if they are doing everything backwards, Treasury has finally decided to try to incentivize banks to provide one of the best (and earliest) solutions for distressed homeowners - short sales.   Short sales were the first fix that many distressed homeowners looked to in order to be able to sell their underwater home - starting back in 2007.   Unfortunately, for a myriad of reasons, banks have been less than cooperative in approving them.  It often took 4 months or more to get a short sale approval.  By that point, the potential buyer has walked.  Banks have since tried to streamline the process a bit, but many still take months to get approvals through.

Studies have shown that banks lose over 100% more by going through traditional foreclosures than they do in a short sale.  The market value of a home also ends up much lower in a foreclosure - hurting the values of surrounding homes and jeopardizing whole neighborhoods.  So everyone loses in a foreclosure.  But banks often have their hands tied because they don't own the loans (investors often do), or they want to delay realizing a loss on the mortgage for as long as possible due to their capitalization requirements.  Completing a foreclosure takes two to three times as long as approving a short sale - thus prolonging the inflated value of the mortgage on the bank's books.

Another issue is that many of the second lienholders on homes are covered by private mortgage insurance and need to get the insurer to agree to cover at least a portion of their loss if they approve a short sale (which they would have received if the property was instead foreclosed upon).

Now, finally after two years, someone has gotten through to Treasury with the idea that short sales need to be completed more efficiently in order to help homeowners.  Their solution - announced yesterday - is to provide a $1,000 incentive payment to lenders that approve short sales and additional incentive payments to junior lienholders who approve the short sale.  This will hopefully give banks and investors even more reason to speed up the short sale approval process and make more homeowners eligible - thus helping stem the tide of price depreciation in places like Arizona.

PHOENIX MAKES LIST OF MARKETS WITH MOST HOMES UNDERWATER

CNBC.com has a slideshow of cities with the highest percentage of homes with negative equity - or "underwater" (according to Zillow).  Not surprisingly, metro areas in California, Florida, Arizona and Nevada dominate the list.  The two largest metro areas to make the top 16 are Las Vegas metro - with 67.2% of homes underwater (coming in at #1 on the list), and Phoenix metro - with 41.7% of homes underwater (tied for 9th on the list).

Unfortunately, underwater homes create more walk-aways by borrowers, which further depresses home prices in neighborhoods, which creates even more underwater homes.  An ugly cycle that Phoenix and Las Vegas are attempting to break at this point.

FUNDING FOR START-UPS STILL A STRUGGLE IN ARIZONA

The Business Journal has a good article today documenting some of the issues facing start-up companies in Arizona due to the weak economic environment... 

Part of the issue is the nature of startup investing. Venture capital firms, often one of the first stops for late-stage startups, have hunkered down and are investing only in their own portfolios — if at all. According to the MoneyTree report compiled by PriceWaterhouseCoopers, the first quarter was anemic for deals in the Southwest, with only $40 million of the $3 billion invested nationwide going to Arizona, Utah and New Mexico companies.

Of that, about $12.2 million went to three Arizona businesses. Southwest Windpower in Flagstaff nabbed the bulk, about $10 million. FiREapps Inc. in the Valley received $1.2 million, and Salutaris Medical Devices Inc. got $2 million.

Those numbers, of course, are not pretty for Arizona. 

For earlier-stage Arizona companies there is still some hope for finding local money through angel investor networks.  I attended the TiE event last week and had the opportunity to listen to an excellent panel of angel investors.  Their general consensus is that angels are still looking for investment opportunities in Arizona start-up companies - only that the size of the investments will be smaller, the valuations will be lower and the scrutiny of the company's viability will be greater.

Not an easy time to be an entrepreneur, but I often remind people that during the last dry spell in funding, some great companies were founded and thrived.  I think a more difficult funding environment weeds out some of the companies that should not normally receive funding, and makes people who do have great ideas work even harder to polish those plans and to figure out the correct business model for bringing those ideas to the market - thus improving their chances for success.

W HOTEL SCOTTSDALE TRUSTEE SALE POSTPONED

The trustee sale of the W Hotel Scottsdale has been postponed to May 14th, the Republic noted today.  The sale was originally scheduled for April 15, 2009.  The hotel is being foreclosed by lender HSH Nordbank.  It is expected to keep operating under its management agreement with Starwood Hotels.

No word on the reason for the sale being postponed.  Perhaps a deal is in the works between the parties, or a third party has stepped into the equation.  The foreclosure comes amid a flurry of lawsuits between the developer, Triyar, and the contractor that built the hotel, Hunt Construction.

Previous posts about the foreclosure can be read here.