When Will the Flagstaff Real Estate Market Turn?

Reading tea leaves. I’ve never quite known what that phrase means, but I’m beginning to understand as clients and prospects ask me where I think the Flagstaff real estate market is going. Like every one else, I’m unable to predict the future with certainty, but I can apply some education and research to the advice I give about the Flagstaff market. The National Association of Realtors^® quarterly metro home price reports are the most meaningful long-term series available on price performance because NAR looks at all of the available transactions in a given area.  Unlike other home price data sources that are based on county records and mortgage securities and are collected well after actual transaction dates, NAR has the timeliest information because it comes directly from multiple-listing-services.
 
Last week’s NAR 3d Quarter report on price changes and sales for the 3d Quarter in major metropolitan areas throughout the country gave some hints about the future of the real estate market in Flagstaff.  Most (93 out of 150) metropolitan statistical areas show increases in median existing single-family home prices from a year earlier, including six areas with double-digit annual gains and another 21 metros showing increases of 6 percent or more; 54 had price declines, and three were unchanged. Unfortunately, the Phoenix real estate market was not among those experiencing price increases. Here is the NAR data for Phoenix single family units (median prices are in $100,000s): 

MetroArea	2004	2005	2006	2006 III	2006 IV	2007 I	2007 II r	2007 III p	%Change 3d Q 2006/2007
Phoenix	169.4	247.4	268.2	266.5	262.2	262.5	264.8	255.5	-4.1%

 The Phoenix market began to drop in August 2006. Flagstaff home prices held steady until August 2007. Phoenix was the hottest market in the country in 2005, experiencing an over 42% median price increase in just one year. Flagstaff’s hottest year was around 30%, also in 2005. Like Phoenix, Flagstaff’s prices are still above 2005 prices, though they are lower than 2006. And like Phoenix, the Flagstaff price drop in comparing third-quarter statistics for 2007 vs. 2006 was about 4%.

The factors that affect the Phoenix and Flagstaff markets are indeed different; however, one of the factors impacting the Flagstaff market is the state of the Phoenix market. There are at least two reasons for this. First, we’re at least to a large degree part of the same regional economy. Arizona’s population growth drives both economies. Arizona’s tax and education system have substantially the same impact on the Phoenix and Flagstaff markets. Second, because around 25% of Flagstaff’s housing stock is second homes if homeowners in Phoenix are not feeling wealthy and cannot draw home equity loans from their primary residences, fewer homes in Flagstaff are going to sell. 

Indeed, inventory of homes for sale in Flagstaff is quite high, as I wrote in a post on November 4. In other words, prices are holding in part because owners of the homes on the market are willing to wait – what economists call “price stickiness.” The number of homes sold in Arizona in the third quarter of 2007 vs. the third quarter of 2006 fell 30%. This is an astounding number, second only to Florida among the 50-states, according to the NAR report. Buyers and sellers are just not seeing eye-to-eye on price and as a result, transactions are DOWN. 

So, where is the Flagstaff market going? Until Phoenix starts to see a price increase, Flagstaff will not. Until some of that large inventory is worked off – either by sales or homes for sale being withdrawn from the market, prices cannot rise again according to the fundamental law of economics – supply and demand. Prices may fall some more – some sellers will have to sell, and there are some foreclosed homes where the investors will want to cash out, even if at a loss. (Foreclosures, so far, in Flagstaff are low -- the reasons for that can be a separate post!) The fact that many other areas of the country are starting to come back with price increases may mean that Phoenix and Flagstaff will soon “bottom out” and start back up. The trouble with trying to time your purchase at the bottom is that no one will know we’ve started back up until after it has actually happened – price trend reporting simply cannot be instantaneous.

When? When, you are asking! My best, educated guess is Spring or early Summer of 2009. Here’s why: (1) we lagged Phoenix by nine months to a year in the price downturn. It’s likely to be close to that much lag on the upturn. (Confidence that the Phoenix market indeed is improving has to transfer here.) And Phoenix has not started to improve yet. (2) If Phoenix were to improve this winter, instead of next Fall (2008), as is more likely, the lag would be longer because our winter market (2008-2009) is generally slower with an up-tick in April. (“Slower” does not mean non-existent. Homes still sell in the winter in Flagstaff.)

We hear so much in the media about how the housing market has impacted the overall economy, but it works the other way around at least as much. The economy is on a tightrope right now between recession and inflation and is likely to stay that way, at best, for several more months. Where the economy goes will affect the housing market, and where particular parts of the economy go will affect Flagstaff home sales. But that’s another topic for yet another post.

If you are struggling with the question of whether to buy or sell Flagstaff real estate, I’m happy to talk with you. Part of my job is to advise you as to whether this is the right time considering your overall personal and financial situation. The state of the real estate market is often not the most important factor. With a trusted mortgage specialist, we can help you reach the right decision, and I’m patient – I can wait until it’s the right time for you. We’ll be here, whenever you want to talk, and whenever you’re ready to buy or sell.