Research

Strong Phoenix real estate recovery takes a breather

More than two years of rising prices in the Phoenix real estate market appear to be coming to an end, says Michael Orr, director of the Center for Real Estate Theory and practice and author of the monthly housing report. The December data shows that although the median single-family-home price rose 25 percent compared to December 2012, sales during that period dropped 16 percent, reflecting what Orr says is a cooling market.

2014-02-26

More than two years of rising prices in the Phoenix real estate market appear to be coming to an end, says Michael Orr, director of the Center for Real Estate Theory and Practice and author of the monthly housing report. The December data shows that although the median single-family-home price rose 25 percent compared to December 2012, sales during that period dropped 16 percent, reflecting what Orr says is a cooling market. Analysis and data   Listen: [podcast] Read: Michael Orr: The signs I’m seeing suggest that the decline in demand is not just a short-term effect and it’s actually spreading, getting more severe. Today there was a report from Southern California saying they’re seeing sales down significantly year over year in all of the counties down there. KnowWPCarey: Perception, however, is lagging reality. People want to believe that recovery is going to continue, Orr says, despite the numbers. Orr: I think we’ve had a very, very strong recovery from 2011 through the end of 2013, but I think we’ve reached a point where the recovery has basically finished its first phase and is now going to take a breather for a while. And we may see 2014 be quite a disappointing year for many people. WPCarey: To the contrary, many people, including some respected experts, believe that history is repeating itself in Phoenix. Some have even warned of a bubble, or a mini bubble. It’s just not accurate, Orr says. Orr: Oh yes, there’s been quite a lot of comments including from Mr. Shiller himself of the Case-Shiller index, who’s been saying that Phoenix’s market looks a little bit like a bubble to him. And I don’t think that’s accurate. I think bubbles are characterized by huge optimism, prices reaching heights they’ve never reached before, whereas we’ve still got maybe 50 percent or so to get back to where we were. A true bubble only happens very rarely, once or twice a century. But we’ve just had one, so it’s very fresh in people’s memory and that was a genuine bubble. WPCarey: That fresh memory — it’s a scar really — keeps some people from buying a home. As Orr explains, about 250,000 families in the Arizona market went through foreclosure, and they are leery of jumping in again, even if buying a home may save money. Orr: With the current level of interest rates and house prices, it’s usually cheaper to own a home than to rent the equivalent sized home. But the thing about renting is you can change your mind very quickly, and you can go and get a job somewhere else without having to worry about having to sell your house. And selling and buying a home is relatively expensive compared with signing a lease. WPCarey: As for new homes, December’s sales included a high percentage of active adult homes, which tend to sell at a higher price because of their community facilities. This sector is responsible for the advance in overall pricing between November and December. But don’t look for the same in January; in fact Orr expects the new construction market to be quiet. Orr: There’s a lot of competition from resale homes now. We used to have a lot of competition from the distressed inventory, but now we’ve got a lot more ordinary listings. They’re coming on at higher prices because sellers are now quite optimistic, but even so, the new homes have a big increase in their pricing over the last year or so. I don’t think they can afford to keep up those price increases at the rate that we’ve been seeing; otherwise buyers will be turning away. WPCarey: Orr estimates that the number of buyers in the market as a whole is about 20 to 25 percent below normal. Those who are in the market are finding that they are in a very favorable position to ask for concessions from sellers. Orr: A year ago they would have said ‘Well, if you’re not that interested, I won’t bother talking to you.’ Now the buyers tend to be the only people working on the property and the sellers need to start thinking seriously about concessions. And then when things get even beyond that, then you tend to see acceptance of prices that are more noticeably less than the asking price. Something like a 3 percent or 2 percent discount would be quite normal, but 5-to-10 percent, unless you’re talking about a very expensive house, that means more of a serious concession and the buyer was holding the good cards in the negotiation. WPCarey: These stories are not making their way into the public mind, however, as brokers can attest. Orr: Most of the headlines that have been out in the last six months have been about how much prices have gone up and how much recovery is taking place. So, most people selling their home have this in their head. Essentially a great market, they’re going to get lots of people interested and the realtors, at the moment, are having a hard time because they’re trying to explain. They’re working with transactions all the time. Now, the market isn’t the way that you think and the first reaction of most sellers is ‘You’re telling me a lie, this isn’t what I’m reading in the paper!’ WPCarey: But Orr agrees with the realtors, that sellers are dealing with a much cooler market and will need more marketing and more patience during the process. Orr: I’m seeing a lot longer list of home tours because everyone isn’t getting contracts out right away, therefore they want people to come and look at the house. So many of the home tours have filled up and you have to wait a long time before you can get your home on the home tour. People are spending more money on nice brochures, expensive photographs to make it look its best. All those sort of things are coming back into fashion, where for the last two years, nobody bothered because you could sell a house without having to break a sweat. WPCarey: Michael Orr, whose next analysis is due in mid-March, isn’t projecting when that recovery will pick up again. For the complete report, including data, please see wpcarey.asu.edu/realtyreports  

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