Arizona's economy plods ahead in 2014
Arizona’s economic performance in 2014 is expected to continue to be less than robust, according to economists speaking at the 50th Annual Economic Forecast Luncheon, co-sponsored by the W. P. Carey School of Business Department of Economics and JPMorgan Chase.
Last year, the 49th Annual Economic Forecast Luncheon story was headlined “Experts’ Prescription for Arizona Economy in 2013: Patience and a Positive Attitude.” One year later, patience and positive attitudes may be waning, but the 2014 forecast is nonetheless basically more of the same.
At the 50th Annual Economic Forecast Luncheon, co-sponsored by the W. P. Carey School of Business' Department of Economics and JPMorgan Chase & Co., research professor Lee McPheters and economist Elliott D. Pollack agreed: 2014 will be a bit improved over 2013, and 2015 a bit improved on that. Slow but steady plods the state’s economy.
Missing growth drivers
In recoveries past, Arizona has outpaced the national economy. But job losses in the most recent recession were earlier, deeper and lasted longer in Arizona than in the national economy, says McPheters, director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business (see McPheters' slides). Since mid-2011, the pace of Arizona’s job growth — about 2 percent a year — has been just about in tandem with the U.S. overall. But because Arizona had a relatively larger hole to climb out of, the state is further behind in regaining jobs lost. Through October 2013, the U.S. has regained 83 percent of lost jobs, while Arizona has only regained 46 percent.
The fact that Arizona lags the national economy rather than leads it is due in large part to the housing crash that precipitated this recession. Housing is typically the sector that drives Arizona’s economic rebounds, but not so this time. “Most other recoveries have been paced by resurgence in construction,” explains McPheters. “Because this downturn was caused by overbuilding, it will take longer to correct. So that’s why every year of this recovery seems to look pretty much like the year before.”
The housing bust that precipitated the last recession has also dampened another factor that drove strong post-slump growth in the past: population inflows. In previous cycles, rapid population growth fueled an economic recovery in Arizona that outpaced the national recovery. Again, not this time. “In 2014, population growth is expected to continue to be below normal in Arizona,” McPheters says. “An important ingredient of growth is lacking.”
Tepid job growth
Population growth in Arizona has been slow in large part because job growth has been tepid. While Arizona’s 2 percent a year job growth rate ranks the state seventh in the nation, “in order to be an attractive place to relocate, Arizona has to be creating more jobs at a faster pace,” McPheters explains. “Not a lot of people are relocating because there’s still a lot of uncertainty. For most people, there’s not a lot of motivation to quit a job. And for those who aren’t employed, with just 2 percent job growth, Arizona might not be the place to go.”
What does 2 percent job growth equate to? In 2013, Arizona created an estimated 51,700 new jobs. The forecast for 2014 is 60,300 new jobs. “Every year of this recovery has been better than the previous, with more jobs added,” McPheters says, but it’s a road to regain the jobs lost during the recession. “Some 170,000 Arizona jobs are left to regain to get back to the prior peak,” explains McPheters. “Construction lost the greatest percentage of jobs (55 percent) and has only regained some 10,000 (or 7 percent) of the 135,000 jobs lost.”
McPheters expects to say the same thing this time next year. “Essentially this year’s is a growth projection that looks a whole lot like a year ago this time. And we’ll probably be saying the same thing for the next two to three years. As 2013 was better than 2012, so will 2014 be better than 2013 — but not by much.” Arizona, like the nation, is mired in what McPheters calls a “long-term sluggish economic environment.” It will remain so until the state sees greater population inflows and can participate in a booming national economy.
As goes the economy, so goes the housing market
Just as McPheters paints a clear picture of the interdependencies between Arizona’s economic growth, job growth, population inflows and the national economy, Elliott Pollack paints a picture of interdependencies in the housing market (see Pollack's slides). “The national recovery is slow, Arizona’s recovery is slow, and therefore housing recovery in Arizona and Greater Phoenix is slow,” explains Pollack, CEO of the economic and real estate consulting firm Elliott D. Pollack and Company. “But housing should continue to recover in 2014.”
Because the population flows that drive housing market growth are meager, Pollack explains, the pace of new single-family housing permits remains about half of what would be considered normal. “We expect to see 13,000-14,000 new single-family housing units in Greater Phoenix,” Pollack says. “In a normal market we’d see 30,000 units. We won’t be back to that level for a while.” (Still, he says, the 13,000 new units are more than double the number built in 2011.)
Why? “Historically, Arizona has had low unemployment and strong job creation, which acted like a vacuum to draw people to Arizona. Those factors are not present right now.” And that, Pollack says, is “just a function of what’s going on in the national economy that is affecting Arizona.” He says that the economy will continue to improve in 2014 and 2015, and that the housing market will continue to be a beneficiary of economic recovery. “As Arizona creates more jobs, more people will move here, increasing demand for housing.”
Pendulum swings
The resale market contrasts with the new home market. The market for existing homes went from a “huge oversupply” to “almost an undersupply.” Pollack explains, “The spread between the price of new homes (approximately $300,000) and existing homes ($184,000) was such that for many buyers, especially first-time buyers, it was more viable to buy an existing home.
At the same time, there were a lot of investors in the market, creating competition for buyers who wanted to pick up homes cheap. The dynamic pushed up prices and created an environment in which sellers were once again getting multiple offers. The frenzy subsided now. “Supply has increased and demand from investors has slowed, so the market is in more balance,” Pollack says. “But there’s still a long way to go. The market is not back to normal yet.”
After the shock of the real estate boom and bust, builders have changed the way they operate, says Pollack. “Homebuilders have decided that they're in the homebuilding business, not the land business. So instead of buying major tracts of land to develop over time, they’ll buy 50-200 lots and build them out, essentially just in time to meet demand.” Right now, Pollack says, “developing lots is not high on developers’ priority lists.”
But it will be by this time next year. “There was a huge inventory of lots, but the market has ground through most of those,” Pollack explains. “Unless new lots are developed by 2015, there will be no new lots, and that will push home prices up.” Pollack expects developers currently working off existing lot inventory to start developing new lots soon. “They’ll have to in order to meet demand.”
Apartments: Waiting for millennials
Recovery in the apartment market has been slow as well, though apartment vacancy rates, Pollack says, “should continue to come down both this year and next, as the number of units absorbed [rented] will continue to exceed the number of completions for 2014 and 2015.”
Slow growth in the apartment market is in part due to the same tepid population growth that has stymied the single-family housing market and in part due to another trend: failure to launch. Pollack explains, “The percent of people 18 to 34 years old living with their parents is at or near record levels. As these people find jobs, there will be a substantial increase in demand, especially for apartments.”
On the whole, Pollack is optimistic about the recovery of Arizona’s housing market — it’s just not going to happen fast. He says, “Single families, despite not meeting the expectations of homebuilders in 2013, should do better over the next several years.” And to the interdependencies: “When construction gets going it will have a positive influence on the economy.”
Says McPheters, “The economic outlook for Arizona is better than for many other states, but scattered clouds continue to darken the horizon.”
Bottom line
In recoveries past, Arizona has outpaced the national economy. But job losses in the most recent recession were earlier, deeper and lasted longer in Arizona than in the national economy, says McPheters, director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business (see McPheters' slides). Since mid-2011, the pace of Arizona’s job growth — about 2 percent a year — has been just about in tandem with the U.S. overall. But because Arizona had a relatively larger hole to climb out of, the state is further behind in regaining jobs lost. Through October 2013, the U.S. has regained 83 percent of lost jobs, while Arizona has only regained 46 percent.
The fact that Arizona lags the national economy rather than leads it is due in large part to the housing crash that precipitated this recession. Housing is typically the sector that drives Arizona’s economic rebounds, but not so this time. “Most other recoveries have been paced by resurgence in construction,” explains McPheters. “Because this downturn was caused by overbuilding, it will take longer to correct. So that’s why every year of this recovery seems to look pretty much like the year before.”
The housing bust that precipitated the last recession has also dampened another factor that drove strong post-slump growth in the past: population inflows. In previous cycles, rapid population growth fueled an economic recovery in Arizona that outpaced the national recovery. Again, not this time. “In 2014, population growth is expected to continue to be below normal in Arizona,” McPheters says. “An important ingredient of growth is lacking.”
Tepid job growth
Population growth in Arizona has been slow in large part because job growth has been tepid. While Arizona’s 2 percent a year job growth rate ranks the state seventh in the nation, “in order to be an attractive place to relocate, Arizona has to be creating more jobs at a faster pace,” McPheters explains. “Not a lot of people are relocating because there’s still a lot of uncertainty. For most people, there’s not a lot of motivation to quit a job. And for those who aren’t employed, with just 2 percent job growth, Arizona might not be the place to go.”
What does 2 percent job growth equate to? In 2013, Arizona created an estimated 51,700 new jobs. The forecast for 2014 is 60,300 new jobs. “Every year of this recovery has been better than the previous, with more jobs added,” McPheters says, but it’s a road to regain the jobs lost during the recession. “Some 170,000 Arizona jobs are left to regain to get back to the prior peak,” explains McPheters. “Construction lost the greatest percentage of jobs (55 percent) and has only regained some 10,000 (or 7 percent) of the 135,000 jobs lost.”
McPheters expects to say the same thing this time next year. “Essentially this year’s is a growth projection that looks a whole lot like a year ago this time. And we’ll probably be saying the same thing for the next two to three years. As 2013 was better than 2012, so will 2014 be better than 2013 — but not by much.” Arizona, like the nation, is mired in what McPheters calls a “long-term sluggish economic environment.” It will remain so until the state sees greater population inflows and can participate in a booming national economy.
As goes the economy, so goes the housing market
Just as McPheters paints a clear picture of the interdependencies between Arizona’s economic growth, job growth, population inflows and the national economy, Elliott Pollack paints a picture of interdependencies in the housing market (see Pollack's slides). “The national recovery is slow, Arizona’s recovery is slow, and therefore housing recovery in Arizona and Greater Phoenix is slow,” explains Pollack, CEO of the economic and real estate consulting firm Elliott D. Pollack and Company. “But housing should continue to recover in 2014.”
Because the population flows that drive housing market growth are meager, Pollack explains, the pace of new single-family housing permits remains about half of what would be considered normal. “We expect to see 13,000-14,000 new single-family housing units in Greater Phoenix,” Pollack says. “In a normal market we’d see 30,000 units. We won’t be back to that level for a while.” (Still, he says, the 13,000 new units are more than double the number built in 2011.)
Why? “Historically, Arizona has had low unemployment and strong job creation, which acted like a vacuum to draw people to Arizona. Those factors are not present right now.” And that, Pollack says, is “just a function of what’s going on in the national economy that is affecting Arizona.” He says that the economy will continue to improve in 2014 and 2015, and that the housing market will continue to be a beneficiary of economic recovery. “As Arizona creates more jobs, more people will move here, increasing demand for housing.”
Pendulum swings
The resale market contrasts with the new home market. The market for existing homes went from a “huge oversupply” to “almost an undersupply.” Pollack explains, “The spread between the price of new homes (approximately $300,000) and existing homes ($184,000) was such that for many buyers, especially first-time buyers, it was more viable to buy an existing home.
At the same time, there were a lot of investors in the market, creating competition for buyers who wanted to pick up homes cheap. The dynamic pushed up prices and created an environment in which sellers were once again getting multiple offers. The frenzy subsided now. “Supply has increased and demand from investors has slowed, so the market is in more balance,” Pollack says. “But there’s still a long way to go. The market is not back to normal yet.”
After the shock of the real estate boom and bust, builders have changed the way they operate, says Pollack. “Homebuilders have decided that they're in the homebuilding business, not the land business. So instead of buying major tracts of land to develop over time, they’ll buy 50-200 lots and build them out, essentially just in time to meet demand.” Right now, Pollack says, “developing lots is not high on developers’ priority lists.”
But it will be by this time next year. “There was a huge inventory of lots, but the market has ground through most of those,” Pollack explains. “Unless new lots are developed by 2015, there will be no new lots, and that will push home prices up.” Pollack expects developers currently working off existing lot inventory to start developing new lots soon. “They’ll have to in order to meet demand.”
Apartments: Waiting for millennials
Recovery in the apartment market has been slow as well, though apartment vacancy rates, Pollack says, “should continue to come down both this year and next, as the number of units absorbed [rented] will continue to exceed the number of completions for 2014 and 2015.”
Slow growth in the apartment market is in part due to the same tepid population growth that has stymied the single-family housing market and in part due to another trend: failure to launch. Pollack explains, “The percent of people 18 to 34 years old living with their parents is at or near record levels. As these people find jobs, there will be a substantial increase in demand, especially for apartments.”
On the whole, Pollack is optimistic about the recovery of Arizona’s housing market — it’s just not going to happen fast. He says, “Single families, despite not meeting the expectations of homebuilders in 2013, should do better over the next several years.” And to the interdependencies: “When construction gets going it will have a positive influence on the economy.”
Says McPheters, “The economic outlook for Arizona is better than for many other states, but scattered clouds continue to darken the horizon.”
Bottom line
- Research professor Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business: “Arizona’s economic performance in 2014 is expected to be weaker than in past recoveries. This is because the typical tailwinds from a robust national recovery are absent this time.”
- Elliott D. Pollack, CEO of Elliott D. Pollack & Company: “The number of single family permits is about what it should be given population growth (more people means more houses). We are moving in the right direction, but the days of 3.0-3.5 percent population growth will not soon return as long as the national economy continues to be mired in its present anemia.”
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