Research

Is it spring in the Phoenix real estate market?

The Phoenix metro area has a history of rapid price increases and breath-taking drops, so to longtime observers the currently calm market may seem — well — dull. But experts at the “Phoenix Housing Market Explained III,” hosted by the W. P. Carey School of Business and The Arizona Republic on January 17, said the time for optimism is here.

2015-01-22

Mark Stapp's slides - January 17, 2015

Mike Orr's slides - January 17, 2015

The Phoenix metro area has a history of rapid price increases and breath-taking drops, so to longtime observers the currently calm market may seem — well — dull. But experts at the "Phoenix Housing Market Explained III," hosted by the W. P. Carey School of Business and The Arizona Republic on January 17, said the time for optimism is here.

"We’re remarkably stable. It’s almost unheard of for Phoenix to be that stable, and it’s kind of boring," commented Michael Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business.

Orr and other real estate experts presented the "Phoenix Housing Market Explained III," hosted by the W. P. Carey School of Business and The Arizona Republic on January 17.

Real estate Professor Mark Stapp, who is the executive director of W. P. Carey’s Master of Real Estate Development program, said the market has almost reached equilibrium — a weird thing for the Phoenix metropolitan area, he said.

"The level of demand is about matching the level of supply," Stapp said.

Orr agreed saying supply and demand are almost balanced but both are below normal. Supply is well below — 84 percent of normal — and demand is weak but growing at 83 percent of normal.

Home prices are flat or keeping pace with inflation, Orr said. The average home price in the Valley is $132 per square foot right now, which is a bit below where it might be, but not by much, he explained.

"We’ve achieved this homeostasis environment," Stapp said. "We’re marching along slowly."

Contributing factors

The experts point to several factors responsible for the dull market.

Investors are exiting the market, Stapp said, because houses aren’t as cheap and the bargains aren’t available. Investor purchases dropped 41 percent in 2014 from 2013, Orr said.

Other factors affecting the market include homeowners who are still "in the penalty box" because of a foreclosure or short sale and aren’t able to buy. Orr said one in four former owners is in that category.

Lending criteria are strict because lenders are still risk averse, Orr said. And income growth in Phoenix has been slow — only a 0.9 percent growth from 2011–2013 — which greatly affects the market.

Stapp agreed, saying job growth in the Valley has been good, but wages are flat, which affects affordability and sways the market. The Valley is projected to add about 40,000 new jobs this year, Stapp said — not enough to make up for the number of jobs lost in the recession.

Rays of light

Despite the dismal data, Stapp and Orr expect the market to improve somewhat.

Orr points to a bright spot in the data: home sales in the fourth quarter of 2014 were up slightly from the third quarter. "It’s the first sign of an improvement," he said. "It’s still not terribly impressive, but at least the trend has stopped deteriorating."

The rental market, however, is shining brightly. Orr said the demand for rental homes in the right price range — $900 to $1,200 per month — is strong and is pushing rental rates up.

"I really think it’s time for us to switch over from relief to optimism," Orr said. He expects activity will pick up, although not necessarily dramatically, he said.

Telltale trends

Catherine Reagor, senior real estate reporter for The Arizona Republic, told the crowd she’s "a little optimistic" the market will pick up this year.

Reagor said she’s watching the market and looking for trends. She’s waiting to see whether cutting Federal Housing Administration mortgage insurance rates in half — a move announced by President Barack Obama during his recent visit to Phoenix — will stimulate buying.

Stapp said he’s keeping an eye on a few key factors this year including what investors do with their supply of homes in the Valley. If they decide to sell, those homes will flood the market and increase supply. He’s also watching millennials, the group of people born between 1981 and 1997 approximately. Previous generations would have already purchased homes, but so far millennials have been delaying. If they decide to jump into the market, they will have significant impact, Stapp said.

The population in the Phoenix metro area is also expected to continue growing. The Valley added 63,800 people from 2013-2014, according to the Maricopa Association of Governments. By 2040, 2 million people are expected to move to the metro area — about as many as currently reside in the Denver metropolitan area, Stapp said. The added population equates to about 796,000 new housing units, he said.

"We’re at a really interesting point in the market right now. I don’t think a lot is going to change in the course of this year, but because of those factors, by the end of this year or the beginning of 2016 demand for new housing is probably going to pick up substantially," Stapp said.

Looking ahead

To see positive, long-term change, Stapp said, the Valley must attract and retain highly educated, higher-wage earning residents. Investment must be made in arts, education, culture and infrastructure. "Those are the things that will begin to influence the market over the next year, year and a half," he said.

Reasor added that the Phoenix housing market is still among the top 10 to 15 hot markets in the country. Even though growth has been slow and steady compared to the market’s extreme highs and lows of the past 10 years, "we’re still looked at as a hot housing market," she said.

Reagor is watching the pipeline of 8,000 new high-end apartment units being built this year, to see if they get leased or purchased, and by whom.

Another good sign is the below normal loan delinquency rate. New foreclosures are at their lowest level in 15 years and lending rules are starting to loosen, Orr said. Once renters are able to buy again, they’ll see that the rent-vs-buy analysis strongly favors buying, he said, and that will stir the market.

Orr expects supply and demand to grow — which grows faster will be interesting to watch, he said. Home prices may go up slightly. "There’s no reason to be worried about the housing market."

Arizona Real Estate Market Finance Real Estate