Research

No early spring for Phoenix real estate

January usually claims the dubious distinction as the slowest month of the year, according to Michael Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School, but this year February isn’t much better. In a normal February, people are out shopping — and buying — homes, but this year that early spring burst of energy hasn’t materialized. The lack of activity is a shocking contrast to last spring.

2014-05-01

January usually claims the dubious distinction as the slowest month of the year, according to Michael Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School, but this year February isn’t much better. In a normal February, people are out shopping — and buying — homes, but this year that early spring burst of energy hasn’t materialized. The lack of activity is a shocking contrast to last spring. Listen: [podcast] Read: KnowWPCarey: January usually claims the dubious distinction as the slowest month of the year, according to Michael Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School, but this year February isn’t much better. In a normal February, people are out shopping — and buying — homes, but this year that early spring burst of energy hasn’t materialized. The lack of activity is a shocking contrast to last spring. Michael Orr: Seasonally January is always the weakest month. February usually starts to look a little more lively as people go shopping, but they’ve been late here. In many parts of the country, everyone’s blaming the weather. And the weather is beautiful here, so we can’t blame that. KnowWPCarey: It makes you wonder, where did all the buyers go? Orr: Now people tell me that there’s plenty of people out there shopping, but not many of them are showing much urgency and getting their pens out to write a contract. There are fewer offers: I’ve heard of homes getting 50 people come to see it before they actually get the first offer. This is demoralizing for sellers compared with last year when they used to get three offers on the first two days. KnowWPCarey: New homebuilders are also seeing shoppers yawn. Orr: Even the new home sales offices are saying that they’ve got plenty of traffic, but the traffic isn’t starting at the desk to write a contract. KnowWPCarey: This lack of action is counter-intuitive, considering that many still believe that house prices are rising. The question looms — why wouldn’t you buy if you thought the house was going to be more expensive next month? Orr: Well, there are a number of waves going on. First of all, there’s a wave of people preferring to rent. Particularly, single-family rentals, which never used to be a big part of the market, but we now have about 230,000 rental single-family homes which is almost a quarter of the entire single-family homes in Maricopa County. But we don’t have enough, we have only two or three weeks supply of single-family rentals. So everybody is wanting to rent instead of buying. You would expect at this stage in the economic recovery, more people would switch from rental to purchasing. KnowWPCarey: Orr said the part of the reason for high rental demand is young adults who are more mobile and are marrying and having children later. In fact, landlords are reporting astonishingly low vacancy rates: around two percent, where 5-8 percent would be more normal. Orr: So that means that the demand has shifted to later in life, so we have this sort of air pocket which we see across the country, not just here. KnowWPCarey: The National Association of Realtors is saying that about 26-29 percent of sales across the country are first-time homebuyers. Traditionally first-timers represent somewhere around 40 percent of the market. Another interesting development is a change in the fix and flip business, which has shifted from the low end to mid-range homes. In this business, the investor looks for a low price house, improves it then sells it for substantially more. But the supply of distressed homes in Phoenix is pretty depleted, so the fix-and-flippers have set their sights higher. Orr: There’s actually plenty of opportunity in the move-up homes, because many of those have been neglected for the last decade and have a sort of deferred maintenance. So as they come onto the market, quite a few of them have outdated kitchens or particularly if it’s an older person they’ve kind of put off the repairs that need doing. The economy has not really given a lot of spare cash to people to do remodeling, so there’s plenty of older homes that need to be modernized. And you can take a home for maybe 225, modernize it and then maybe sell it for 350. So there’s plenty of scope for profit if you’ve got a good source of supplies and labor to do that remodeling. KnowWPCarey: We’ve got a market that’s very subdued, Orr said, but it’s stopped getting worse and it may even be getting a little better. Orr: I think prices in March will be a little higher, because the mix of homes that are selling has moved more into the luxury end of things. We’re certainly seeing very strong sales volume in the super-luxury end over two million. We’ve seen more homes sell this year than last year in that price range, which is different from every other price range. So I’m expecting April and May to be strong months, they usually are, relative to February at least. Maybe not relative to last year. KnowWPCarey: As we approach summer, Orr expects the usual seasonal slowdown when prices will probably dip again, but overall, he doesn’t foresee any significant price movement right now. That may be tough for people to understand, however. People are still reading headlines that say ‘prices are up 15 percent since last year.’ But most of that gain was made last spring and it stopped in the summer. Orr: When we get to the summer this year, we’ll be looking back to last summer saying ‘well prices haven’t really moved very much at all,’ which is normal. Inflation is low, so why should prices of homes go up, especially when demand is weak and supply is back to normal. KnowWPCarey: To see the data, go to wpcarey.asu.edu/realtyreports.

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