Research

Phoenix real estate: Busy spring follows slow start

The January numbers are out for the Phoenix real estate market and they’re not spectacular. But even when the market is normal, January is slow, says real estate expert Mike Orr. Activity during February and March is signaling growing strength in the market at last.

2015-03-19

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Research and Ideas: The January numbers are out for the Phoenix real estate market and they’re not spectacular. After an encouraging lift in December, single-family home prices floated down in January — although they’re still up compared to a year ago. On the supply side, listings were up six percent in January, but that’s a far cry from the 11 percent gain made a year ago. And demand, which showed signs of recovery in December, slowed in January.

But that’s January, says Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business. Even when the market is normal, January is slow. The bright note is that this January just may have been the last bleak weather before a major thaw in Phoenix real estate. Activity during February and March, which will be unpacked by Orr when the data is in, is signaling growing strength in the market at last.

Michael Orr: During February it became clear from watching contracting rates that the market was starting to take off.

Research: That alone is not unusual, said Orr. After the seasonal slump in January, the market typically begins to gain momentum in February and by March it reaches full speed. This spring it appears that the cycle has resumed.

Orr: So we’re now talking in the middle of March and the market, at least for the regular folks, is pretty hot. Now, a lot of people who aren’t active in the market won’t realize that yet.

Research: Orr explained that the media probably won’t take note until the contracts being written right now are executed, and the sales recorded. The uptick can’t really be considered a boom, however.

Orr: It’s not like we’re going crazy, but we’re going back to normal. And going back to normal is a big step when supply is low.

Research: And supply is indeed low — which will impact price if demand continues to increase.

Orr: If supply is 20 percent below normal, that’s enough of a mismatch to put the reigns firmly back in the hands of the sellers again.

Research: At this point the affordable section of the market is experiencing the effects of increased demand.

Orr: We’re starting to see that at the bottom end of the market. If you’ve got a home that you’re trying to sell below $200,000 and it’s in a reasonable area, you’re probably going to find a lot of activity. Once you get up to $600,000, it’s not going to be significantly different from last year at all. As a matter of fact it might even be quieter than last year.

Research: With more potential buyers entering the market you’d expect to see new construction picking up. But Orr says that may not be happening just yet.

Orr: Homebuilders are pretty cautious these days. They had no caution at all back in 2004, but now they are not only cautious — they have no means to ramp up dramatically.

Research: Those constraints include the cost of materials and the availability of labor.

Orr: It’s not like we’ve got a lot of people lying around waiting to do construction work. Those people who had those skills moved out of the area into different lines of work. So we’re trying to ramp up homebuilding to more than 25 percent higher than it currently is. It will be a big stretch.

Research: Eventually buyers are going to feel the effects in their pocketbooks.

Orr: I think we’ve underbuilt for seven years compared with the long-term average. And that’s true of the whole country. So, if people want to own a home of their own and stop sharing like they have been, we will be seriously undersupplied and prices will go up.

Research: In summary, Orr recommends looking at January for what it is, the perennially lackluster entrée to the true real estate season, which is looking pretty good.

Orr: I’m thinking this is going to be a better year, and the only question is ‘how much better than last year?’

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