New home prices nearing bottom in Phoenix

Posted By Mike Padgett

Stability in the prices of new homes in metro Phoenix is on the horizon, but resale prices will continue slipping, said R.L. Brown, publisher of the Phoenix Housing Market Letter.

He added that although investors remain active in the market, this time they’re likely using their own money, instead of lenders’, and they plan to hold the properties for a few years.

Brown, in his newest monthly report, counted 11,129 new-home sales in metro Phoenix for the first half of this year. That total is down nearly 43 percent from 19,437 sold in the first half of 2007.

Brown also reported that for the month of June:

  • New home closings totaled 1,901, down more than 36 percent from 2,988 closed in June 2007.
  • Resale home closings totaled 5,478, down 5.4 percent from 5,792 sold last year in June.

Through June 2008, 26,160 resale homes closed, down nearly 26 percent from 35,267 resales in the first half of 2007.

Brown calculates that from May to June, the median new home price in the metro area (which includes Pinal County) slipped from $218,861 to $217,309. That new median price is down 16 percent from a year ago.

Among resale homes, the median price in June was $200,000, which is a drop of 20 percent from June 2007.

Brown said the median new home price will settle at about $195,000 before rebounding.

“It’s clear from the statistics that we can call a bottom for the new house market,” Brown said. “I think the new house market will probably stay about where it is for the next several months. And it won’t improve greatly until the resale market has bottomed out and begun to improve.”

He said investors remain active players in the current depressed housing market. But unlike those investors and speculators blamed for helping boost the prices of new homes prior to the downturn in the market, the current crop of investors are focused on bank-owned properties, especially those in higher-end developments.

“We’re seeing more and more investors come into the marketplace because there are some strong values out there,” Brown said. “That will continue to attract investors, as it should.”

The major difference in this investment climate is the investors’ source of money. Brown said, “They’re certainly not getting the ‘wink-wink’ loans. And typically these investors would tend to be qualified as the long-term real estate investor as opposed to the flipper.”

The “flippers” bought new homes as investments during the run-up in prices, with a goal of selling (or flipping) them for a quick profit. What the investors didn’t anticipate was an inflated inventory of new homes forcing down prices before they could sell them.

“Anybody buying investment properties today of any type, at least in this part of the country, should be looking at a holding window of three to five years or more,” Brown said.

Homebuilders have said they were unable to prevent investors from buying their new homes, despite anti-investor language in their purchase agreements.

“What we found out was that we were building 30 to 40 percent more homes than we had buyers for,” the builder said. “What do you do if the buyer comes in and just out and out lies to you? How do you know? He signs and he says he’s going to live there, but the fact is he has no intention of living there.

“And that’s just new homes. Take all the existing homes that were bought by investors. So now you have tens of thousands of homes bought, not by people who really want to live there, but by investors.”

The homebuilder, who agreed to provide background, added that the investors “were given incredible terms on loans” they needed to buy the new homes.

“Now you look back and see what happened,” the builder said. “You can see why we’re struggling now. You had way more supply than you had demand for.”

The drop in prices, and the subsequent increase in foreclosed homes, “is strictly a market correction” that the homebuilder says will take care of itself.

Brown, in his report, concluded that the market is healthier than it was a few months ago. He said that’s because “the industry has adjusted to the reality of the times and most of us have come to realize that this ‘recession’ will not be what was called by some a ‘6-monther.'”

Brown concludes his monthly analysis by saying that if the metro population grows by the projected 184,000 during 2008-2009, those new arrivals will remove about 37,000 homes and apartments from the current inventory.

Jul 25th, 2008

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