2009 seen as pivotal year for Arizona’s stalled housing industry

Posted By Mike Padgett

Dec. 5, 2008

The look of Arizona’s housing industry is at the brink of major change. Future designs of residential developments in central Arizona are expected to be different from the blueprints that helped fuel the region’s economy through the 1990s and into the 21st Century.

So say two of the region’s leading homebuilding figures – upscale condominium builder Eric Brown, principal of Artisan Real Estate Group, and RL Brown, publisher of the monthly Phoenix Housing Market Letter. The Browns are unrelated.

Eric Brown says he’s been called a maverick in his industry. While many homebuilders were leapfrogging out to the metro region’s fringes with new homes in the 1990s, Brown was racing in the other direction. He began offering upscale condominium residences in four central Phoenix locations, starting in the late 1990s. He shelved at least one more similar proposal when the market went soft.

Eric Brown’s success with his condo developments caught the attention of the national homebuilding industry. At least one major builder considered a high-density residential development in central Phoenix. When the local housing market started decelerating, that builder’s proposal was canceled, as were several others for upscale, high-rise residential buildings in central Phoenix.

During a recent flight back to Phoenix, Eric Brown looked out his window and caught a glimpse of Arizona’s future. “I was looking at all the graded lots sitting out there vacant, and all the weeds that were growing on them,” he says.

Work on the housing lots had stalled because of the current market slowdown. The inventory of new houses was too high. Foreclosures were up, as were the numbers of new and resale homes for sale.

Looking down on those thousands of partially completed lots across central Arizona, Eric Brown knew they represented substantial investments by developers, and probably a long line of lenders stretching to Wall Street. The longer those lots remain unfinished, the more they deteriorate. Erosion fills in trenches and undermines sidewalks and streets.

Eric Brown and I met for lunch recently to discuss his thoughts about the future of Arizona’s housing industry. We enjoyed our sandwiches at a corner table in Brittlebush Bar & Grill at the Westin Kierland in northeast Phoenix.

The future of the metro Phoenix housing industry, he begins, will include larger numbers of homes on smaller lots and high-density residences, such as condominiums in mid-rise configurations closer to employment centers, shopping and office buildings.

Eric Brown believes the large homes in the suburbs are losing popularity because of rising costs of fuel and increases in traffic congestion. Longer commutes mean less time with family, and high fuel prices erode the family budget.

Those factors were worsened in recent years with the arrival of unethical sales practices and exotic mortgages that placed borrowers in homes they could not afford. The bundling of those voodoo mortgages into financial packages were sliced and diced by Wall Street and sold to investors. In turn, lenders were hit with record numbers of foreclosures that became like weights on a drowning swimmer.

Buyers facing foreclosure now are turning to lenders for help, but lenders have been reluctant to reconfigure the loans because the mortgages are part of financial packages sold to investors. Investor groups now are threatening lawsuits against lenders who rework the mortgages.

Rebound in 2009?

RL Brown, reviewing the Arizona housing numbers he crunches into readable reports, sees 2009 as a pivotal year. In a special newsletter to subscribers this month, he expressed optimism that the coming year in Arizona will be a good one for homebuilding.

“By the end of the first quarter of 2009, we will see massive impact from hundreds of billions of dollars in bailouts, subsidies, assistance and stimulus,” he writes. “By the middle of 2009, confidence should begin to improve, and an improvement in confidence is as important as any bailout yet proposed.”

He believes the federal government has little choice but to rescue the economy. “Foreclosures will be dramatically slowed, prices will stabilize, housing affordability will be at the highest level in probably six or seven years. Housing inventories will begin to balance versus housing demand. Underwriting will remain tough but government will mandate lending by banks and others that have received support from government.”

Eric Brown and RL Brown agree that the homebuilding industry will begin creating new product. In his newsletter, RL Brown writes: “Phoenix will be one of the major housing markets in the nation in the next several years. It will be dominated by a group of homebuilders that are re-inventing themselves right now, positioning for both the demographic center and for niches in tomorrow’s (housing) market.”

Eric Brown says Arizona homebuilders are expected to reconfigure their design and sales formulas to match the preferences of future buyers, like the swimmer shedding weights to stay afloat. In the past, the housing market targeted the baby boomers, those born between 1946 and 1964. But the times – and buyers – are changing.

The oldest of the boomers turned 62 this year and began retiring. The boomers were followed by Generation X, born between 1965 and 1981; and Generation Y, born between 1982 and 1995, according to a list of work force characteristics prepared by Deloitte.

Future buyers oppose long commutes

Tomorrow’s buyers, Eric Brown says, include first-time buyers who favor living in the central city or in self-contained communities in the suburbs, as well as current homeowners who want to reduce the time and money it takes to commute, or who simply want to be closer to museums, theaters, and other downtown amenities.

“The drive times are at the point where they’re driving people crazy,” Brown says. “And like I said, the Gen Y buyer is not going to be willing to do that drive.”

Brown sees new high-density developments with a wide variety of uses that includes homes as well as retail, office and industrial centers. He says the mixed-use design will encourage the creation of local jobs, which in turn will help reduce commuting as well as air pollution.

The preferences of the Gen X and Gen Y buyers will spark significant changes in the design of future residential communities. While boomers and prior generations willingly tolerated long commutes to their homes in the suburbs, the new waves of buyers are interested in downtown living as well as in locations that offer shorter commutes to work and with locations closer to entertainment, restaurants and shopping.

Such a residential design, Eric Brown says, likely will include densities of about 20 units to the acre. His developments, which have similar densities, include:

• Artisan Lofts, 910 E. Osborn Road, with 40 units.

• Artisan Parkview, at the northeast corner of Seventh and Washington streets, with 35 units.

• Artisan Village, at the northwest corner of Seventh and Roosevelt streets, with 105 units.

• Artisan Lofts on Central, 1326 N. Central Ave., with 40 units.

Other residential developments predicted in metro Phoenix’s future will feature mixed-use town centers with a community center, grocery stores, restaurants and other retailers that will be within walking distance of many homes.

“Most of our master plans today made you drive outside the master-planned communities to go do anything, to shop,” Eric Brown says. “And I think that finally is going to change.”

As for the current housing market in Arizona, Eric Brown expects prices to hit bottom in late 2009. He says many adjustable mortgages have another year before they start adjusting upward, causing financial pain for borrowers.

“The peak of the resets of those (higher) interest rates is not until next November or December of 2009,” he says. “My guess is, we’re going to be at the bottom probably towards the end of next year, with no more than a 10 percent drop from where we are now. And then we’ll come back.”

RL Brown says the federal government leaders “have indeed come to recognize that stemming the tide of foreclosures is fundamental to any economic recovery as well as to the restarting of the housing market. From anecdotal evidence right here in Phoenix we know that folks who were told ‘forget it’ a month ago now are being scheduled for workout conferences with HUD.”

“These conferences and the growing political feedback to the Fed will shortly force reluctant lenders and servicers to change their current attitudes, reduce the abject foot-dragging by banks and move the process forward,” RL Brown writes.

Eric Brown adds that if the rebound begins in 2009, it could take the metro Phoenix market four to eight years “to get back to where we were” before prices peaked in 2006. That would be anywhere from 2013 to 2017.

“Remember, Phoenix was such an affordable market,” Eric Brown says. “That’s what fueled our growth. People would come here because they could get so much more home than in another place.”

Artisan Real Estate Group: 602-307-5920

RL Brown Reports: 623-523-0188

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Dec 5th, 2008

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