Arizona recession may ease as home prices hit bottom, economists say

Posted By Mike Padgett

Dec. 11, 2008

The recession that started 12 months ago in Arizona could last longer than the previous two 16-month recessions, with much of the blame going to the state’s housing market, analysts say.

“We are, in essence, paying the piper for the overbuilding of single-family housing that occurred between 2003 and 2006,” said Elliott Pollack, president of Elliott D. Pollack & Co., an economic and real estate consulting firm.

“In greater Phoenix, housing permits this year will be down approximately 75 percent from the peak in 2005,” Pollack said.

In 2005, there were 63,570 permits issued for new houses in the metro Phoenix market, according to the Phoenix Housing Market Letter, a monthly publication by noted housing analyst R. L. Brown.

Pollack and Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at Arizona State University, spoke Dec. 10 at the W. P. Carey School of Business/JPMorgan Chase Economic Forecast Luncheon at the Phoenix Convention Center.

McPheters also is editor of Economy@W. P. Carey, on online publication in which his and Pollack’s comments were published today. To read the complete story, entitled “Regional Economic Forecast: ‘It’s Going to Get Uglier Before It Gets Better,’” go to http://knowledge.wpcarey.asu.edu/.

The forecast quotes Pollack as saying, “Overall, the market is just plain ugly,” referring to the residential and commercial real estate markets.

Pollack said many homes sold in metro Phoenix over the past 12 months were sold at a loss. Of the local homes purchased over the past five years, he said about 42 percent are worth less than the debt owed on them. And of that total, about 25 percent of the buyers paid high down payments that have since been erased by the rapid decline in home values.

“This is by far the worst real estate downturn since the (Great) depression,” Pollack said.

Pollack echoed the predictions of Valley homebuilders, who have said the state’s real estate market could hit bottom in 2009, with the commercial real estate market hitting bottom a year or two later.

Pollack estimates that there are 40,000 to 50,000 excess houses in metro Phoenix. He predicts 5,000 will be absorbed in 2008, with maybe another 10,000 in 2009. That leaves another 30,000 excess units at the end of 2009. And if even half of those are rented, “the housing market does not face a speedy recovery,” he said.

“While the bottom might be 2009 in terms of (new housing) permits, there simply is no quick fix,” Pollack said. The people who are bound to be foreclosed upon must be foreclosed upon, and the foreclosed homes and excess inventory must be sold so the market clears. In the residential market, it’s really just wait and see until that happens.”

Much of Arizona’s economic loss in the past year is blamed on the freefall of the housing market. “Since home prices had gone up so much here, they fell faster and father, and had more profound effects,” McPheters said.

The 1973-75 and 1981-82 recessions were both 16 months long. McPheters said the current recession, which started in December 2007, likely will last longer.

McPheters added that the drop in housing prices is a silver lining in the state’s cloudy economy. That’s because the lower prices make housing more affordable. In 2006, only 27 percent of homes in metro Phoenix were affordable; this year, as home prices continued slipping, 72 percent of area homes became affordable to the area’s median income.

 

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Dec 11th, 2008

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