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Phoenix housing market explained

Making sense of the Phoenix real estate market requires an understanding of sales data, demographics and trends. On January 25, 2013, the W. P. Carey School of Business and The Arizona Republic assembled a panel of experts, each with depth knowledge of a different facet of the market.

2014-01-29

The Phoenix housing market has seen its share of extremes, but today the market is regaining balance. “We’ve been through one of the biggest booms and one of the biggest busts,” said Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business. Orr said the supply of homes available for sale is going up and prices of those homes are stabilizing and in some cases, coming down. The market is trying to correct itself and reach equilibrium, he said. But balance doesn’t necessarily mean a good market, or bad one for that matter. “It’s not particularly a bad time or a good time to buy, it’s so-so,” Orr said. Orr and other experts explained how to make sense of the housing market during “Phoenix Housing Market Explained II,” an event hosted by the W. P. Carey School of Business and The Arizona Republic on January 25. “Don’t trust your emotions when trying to read the market, trust numbers” he advised the crowd. Orr’s analysis is based on data: active homes listed for sale, pending sales and homes sold in the Phoenix metropolitan area. One barometer of the health of the market is home prices. Price The rise in home prices in 2013 is not a sure indication that prices will continue to go up, Orr said. The market is “springing back to normal after a depression.” New homes prices have reached what he termed normal: what prices would have been had they increased gradually over time with the Consumer Price Index rather than spiking and crashing with the recession. Current resale home prices in Phoenix are reasonable, Orr said: neither too low nor high. And compared to the rest of the country, Phoenix is still extremely affordable, he said. “Prices have no reason to go higher from where they are now and in some areas they could come down,” he said. Supply is a key factor in price. After the economy turned down in 2007, a long period followed of oversupply due to foreclosure and short sale homes on the market which kept prices low, Orr said. In 2012, after the bulk of distressed properties had moved through the system, supply began to drop, bringing prices up. Today the supply of available homes is 16 percent below normal, but is rising rapidly and could surpass the average in a matter of weeks, he said. “Right now it’s heading up like a rocket,” Orr said. A greater supply of homes will not only stabilize home prices, he said, it will also help to balance the market. Orr said an interesting clue to how well the market will do in the year ahead is when the supply of homes for sale peaks. If it peaks in January, it usually means the year will be good, the later it peaks the worse the market will do that year, he explained. When looking at supply, demand also has to be considered. Both supply and demand are low but increasing, however Orr said the supply of homes for sale is growing faster than the demand to buy those homes. “Demand is actually quite weak compared to normal,” he said. Part of the reason is the investor exodus. Once home prices went up, investors moved on, Orr said. And, few home buyers are interested in the small supply of new homes available. Orr said the new home market hasn’t seen a real recovery yet. Some experts blame the rising interest rate for the low demand, but Orr doesn’t agree. Today’s interest rate is about 4 or 4.5 percent, he said — still relatively cheap compared to rates historically. Millennials change the landscape One of the reasons for low demand is changing population demographics, he said: “The millennial generation is the main cause of low demand,” Orr said. The millennials, or Generation Y, are the group of people born in the early 1980s to the early 2000s. They are 13 to 31 years old today, children of the Baby Boomers — the group that is now 48-67 years old. The 87 million millennials are making a major impact on every part of the market today, said Mark Stapp, director of the Master of Real Estate Development program at the W. P. Carey School of Business. Millennials are waiting longer to get married and have children, meaning household formation is slower, Stapp said, which affects the housing market. They have also been greatly impacted by the recession which impacts demand. This group of people isn’t interested in home ownership or the suburban lifestyle, he said. They like the flexibility of renting and may have seen their parents struggle and maybe even go through a foreclosure during the housing crash, leaving them disenchanted with home ownership. Millennials want to live in infill locations, close to restaurants and public transportation like the light rail, Stapp said. This gives them social connectivity, a motivating factor for millennials, he said. The downtown neighborhoods in Phoenix and Tempe appeal to this group and other cities are reinventing their downtowns in the hope of attracting this young demographic. Stapp points to downtown Chandler and downtown Gilbert as examples. He calls it the “urbanization of our suburbs.” By 2016 Millennials will make up 80 percent of the workforce, Stapp said. Understanding the lifestyle and values of this influential generation is an important part of reading the market, he said. Catherine Reagor, senior real estate reporter for The Arizona Republic, is carefully watching the buying behavior of this group. Reagor, who has been covering real estate in the Valley for 17 years, assembles a twice-yearly report on the Phoenix housing market. Michael Orr's Slides Mark Stapp's Slides The Arizona Republic: Millennials' choices important to Phoenix housing market

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