The long-awaited recovery in demand

The February report on the Phoenix real estate market contains welcome news. Recovery is here. That's according to Mike Orr, director of the Center for Real Estate Theory and Practice and author of the monthly housing report.

The Phoenix real estate market surged in February, delivering the beginning of what is hoped to be a recovery in 2015. Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business, follows the market closely and issues a monthly report. Single family sales rose 19 percent in February compared to January, vacancy rates in the rental sector were the lowest in 15 years and new home sales increased 8 percent over last year.

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Michael Orr: Sales are, at last, starting to pick up. I think this is not the only month they’ll pick up — February is encouraging improvement over February of last year. [February’s] definitely better than January and is probably going to be overshadowed by March when get those numbers in. So, I think we’ve seen the long awaited recovery and demand that we were anticipating all last year and never occurred.

Research: Orr says that at this point we can say that demand is heading toward a normal level. But the question is: “where is this demand coming from and why now?”

Orr: My current feeling is [these buyers are] mostly people who have been in some financial difficulty due to foreclosure or short sale, and want to back get out of renting and owning again — they’ve served their time in the penalty box.

Research: But Orr believes that this new group of buyers still does not include millennials, who have shown a preference for renting. And the rental market continues to be strong. In fact, vacancy rates are the lowest they have been in 15 years.

Orr: The uptick in the demand for homes to buy is mostly in the mid-range, particularly between $300,000 and $600,000. That’s not usually what millennials are aiming at with their first home, unless they’re doing extremely well.

Research: The luxury market — which has been the most active sector over the last year — slowed its rate of increase in February. But Orr said that the high end of the market is experiencing a lot of sales activity right now, which could result in sales contracts and higher numbers in the next few months. He added that those shopping for a home priced at $3million and above, have plenty of choice as always. Supply in the other market segments is another story, however.

Orr: Supply is very weak at the bottom end and demand hasn’t fully recovered there. We’re okay with that low supply, but if we get another recovery at a normal level from first-time home buyers — I don’t know where they’re going to find homes, because there’s such low availability at the bottom end.

Research: In the middle range of the market, $200,000 to $500,000, where most of the buyers have been shopping, the supply is pretty tight as well.

Orr: It’s not ridiculous but it’s below normal and we are starting to see multiple offer situations, which is generally a precursor to higher prices getting recorded. We’re definitely seeing some upper price momentum, coupled with the possibility of interest rates rising, which means that by the end of the year homes might have got quite a bit more expensive.

Research: It’s yet to be seen what impact this will have on the market. Orr said that it could suppress demand or it may spur people to get in quick before prices rise even more. In the townhouse and condominium market, February saw less evidence of a developing shift towards attached homes — a shift that showed itself dramatically in December and January. That market is far from asleep, however.

Orr: We’ve got some interesting upscale developments going on. We haven’t had very much in the way of new ‘to purchase’ condos, but they are starting to appear now and people are selling them pretty fast and that’s encouraging other people to get in.

In many cases they’re sold out before they’ve even started construction. Very often they’re people who aren’t living here permanently but they want a base in the Scottsdale, Phoenix, Tempe area where they can live a few months of the year. And they’re coming mainly from the rest of the U.S.

Research: Sales of new homes increased in February, but not enough to make headlines. This could be a developing market, however, given the supply in the $200,000 to $600,000 category.

Orr: The price range where we’re seeing the increase in demand is ideal for new home developers. It’s where they’re building the product. So, I think they’re probably going to have a much better year than they had last year. We just don’t have the hard evidence of that yet. It’s probably going to take two or three months before we start seeing some significantly better new home sales numbers and revenues.

Research: The builders currently hold some inventory because sales last year were slower than expected. The outlook for the rest of this year, however — is bright, Orr said.

Orr: Well I think we’re set up for an optimistic year now. We had a steady and somewhat boring year in 2014. The question is, “how much better is it going to get?” It’s definitely going to be better, and unless there’s some major economic disaster, I think we’ll end the year with higher home price appreciation than the cost of living.

So, those people who own homes are pleased with that. We will still be left with a portion of people who’ve got mortgages that are bigger than the home, so they’re still underwater and it’s going to take some time for that to correct itself. But, at least it’s going in the right direction and there’s almost no chance of prices going down this year.