Metro Phoenix’s New Home Market Bottoming Out; Resale Homes Uncertain

Posted By Mike Padgett

March 27, 2009

PHOENIX, Ariz. – The new homes market in metro Phoenix has reached bottom, but the same can’t yet be said for resale homes, said R.L. Brown, economist and publisher of the Phoenix Housing Market Letter.

Brown offered his thoughts about the Phoenix market – and its future filled with many changes – during a two-hour presentation Thursday evening in north Peoria. His audience was about 100 residents of Trilogy, the upscale community in Vistancia. His host was the Trilogy division of Shea Homes, the community’s developer.

Brown said he believes that the new homes category of the region’s residential real estate market has bottomed out. He went on to say “that we could see an improvement in the new-house side of this marketplace throughout the rest of the first half of this year, and growing in the second half.”

But among resale housing in this market, “I haven’t seen those same signs yet.”

Brown was invited to make his presentation at Trilogy because of his reputation as a residential real estate economist. Brown has been a consultant for homebuilders across the Southwest for about 15 years.

“We brought him out here to explain what’s really going on, from an unbiased point of view, not from somebody who belongs to the real estate world,” said Lonnie Zinder, associate marketing manager for Trilogy’s Arizona division.

Brown told his audience one reason he believes the new home market has hit bottom is because homebuilders have almost exhausted their inventory of new homes. He added that the bottom of the resale market won’t arrive until after homes in foreclosure have been resold and removed from that part of the market.

Housing prices across metro Phoenix began peaking in 2004 and 2005, then started dropping quickly, leading to an oversupply in 2007 and 2008, Brown said, when “we had a huge supply of houses” for sale.

He said about 67,000 resale houses were listed for sale at that time. He added that there were many new homes for sale, but those numbers are unavailable “because no builder will ever admit how many specs (speculative houses) he had.”

“Not only did he have spec houses, but he also had cancellations ranging in the 50 to 60 percent range, so he never knew when he built a house under contract whether it would ever close,” Brown said. “So our supply side was huge, and it overpowered the demand side.”

Brown pointed out that the market’s shifts, triggering foreclosures, fraud, and the government bailout and other interventions, are sparking changes to more than housing prices.

“The impact over the next five years or so will be even greater, but in a different way, than what you saw in 2003 to 2007,” he said.

Those changes, he said, will have a lasting impact because they involve changes in jobs, social patterns, the amount of tax incomes to governments, future development standards, growth patterns, personal opportunities and consumer spending patterns. 

“Our unemployment right now is over 8 percent in metro Phoenix, and my guesstimate is that we’ll see 10 percent unemployment, maybe even more, before we’re through with that cycle,” he said.

“The impact on future growth patterns is something that casually we don’t think about,” he said. “I can tell you that the growth pattern that we were in during the 2003 and 2005 period – that’s the ‘edge city’ growth – is going to be different beginning in 2009.”

Changes in growth patterns often lead to changes in transportation requirements and in the design and installation of infrastructures, such as sewer and water systems and other utilities, he said. 

Another major change involves lenders, proposed changes in their loan requirements, and the size of future loans sought by developers. Brown predicted that it could be several years before the region will see another master-planned community like Vistancia.

“I don’t think we’re going to see builders do these kinds of master-planned communities for some period of time,” he said. “The developers are not going to be able to finance the up-front infrastructure that allowed Vistancia and other communities like it to be developed the way that we have become accustomed.”

The cost of loans and new qualifications and regulations will force changes to lending practices that were in place when Vistancia’s infrastructure was funded, Brown continued.

“So it will change the way we live, it’ll change the way communities are developed,” he said. “That change will probably last for five or 10 years.”

But of all the changes taking place in the local and national marketplaces, the most important involves consumer confidence, he said. 

“The loss in confidence is probably the biggest single negative thing that has happened in our country and in real estate and in investing in general,” he said. 

When consumers lose confidence in the marketplace, they reduce their spending, which means fewer purchases of a wide variety of goods and services. That behavior translates into a reduction of sales by manufacturers and their outlets, which leads to cutbacks in employment. All of which can lead to homeowners falling behind in their mortgages and other bills.

“It is something that is going to take much time to reverse,” Brown said. “It may be decades, really. It could even be generational, if you think about it.”

The real estate market’s current struggle has been sparked partly by the subprime mortgage market, in which many homeowners were approved for mortgages, despite limited or unsubstantiated documentation about their income or other qualifications.

But as dramatic as the events of the past year or two have been in the housing market, Brown said the worst is expected in the coming year or two. Between 2010 and 2012, more financial pain could show up during the form of the resetting of large numbers of various adjustable-rate and other non-traditional mortgages.

“Those (mortgage holders) are the people we’re most worried about in a housing economy that’s suffering,” he said. “One of the challenges that we have as an economy and as a government is to undo this kind of situation. And that’s part of the argument or the discussions that are going on in Washington today.”

Regarding foreclosures, Brown said his records show that eight foreclosed houses in Vistancia were sold in February. They ranged in price from about $170,000 to about $350,000. At those prices, he told the audience, those homes “sold for less money than the new houses that you purchased.”

He said lower prices paid for foreclosed houses have a negative impact on the market because they are factored into the prices set for surrounding houses as they are put up for sale.

Exactly when the metro Phoenix market returns to positive territory “is the 64 zillion-dollar question,” he continued.

But when it does, “I think it’ll go up and recover pretty rapidly, once we have the supply and demand equation back into some sense of balance,” he said.

Brown ended his presentation with upbeat comments. He said that despite its real estate struggles, Arizona remains a popular destination among families, employers and retirees.

“Don’t lose sight of the fact that Arizona remains one of the best housing and business opportunity markets in the nation,” he said.


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Mar 27th, 2009

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