Research

Good news for homebuyers: Builders are in the game again

Shrinking supply has been the story in the Phoenix real estate market for months, but relief could be here in the second half of the year — at least for some buyers. In the past two months the number of building permits issued in the $200,000 to $500,000 range has increased to a level not seen since 2007.

2015-07-08

Podcast transcript:

Shrinking supply has been the story in the Phoenix real estate market for months, but relief could be here in the second half of the year — at least for some buyers. In the past two months the number of building permits issued in the $200,000 to $500,000 range has increased, according to Michael Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business and author of the monthly Greater Phoenix Housing Market. But buyers will still face competition for homes at the affordable end of the market.

At the luxury level, where supply is still adequate, the number of homes for sale is expected to fall by the end of the second quarter. In May, however, tight supply still characterized most of the market. Orr reported that May virtually mirrored April, with demand back to normal and supply shrinking. “This is causing problems for buyers who are experiencing multiple bids in the range below $200,000,” he said.

Although data is not yet available for June, Orr expects it to come in as another strong month for sales. If the market behaves according to its historical pattern, activity should cool as the temperatures rise in July and August, and price hikes should take a break as well. But, “if the current supply shortage persists through the third quarter, we should expect upward price pressure to resume at the end of September.”

Highlights of the May 2015 report:

• The median sales price for single-family homes increased a solid 5.2 percent from April, but price per square foot rose just 0.3 percent. Year over year, the median price was up 11.5 percent (from $200,000 to $223,000) and the average price per square foot grew 7.2 percent (from $125.25 to $134.31).
• The median and per square foot prices for townhouses and condominiums were approximately flat between April and May. The big story is in the year-over-year. Compared to May 2014, the median price was up 11.9 percent (126,000 to $140,950) and the per square foot price was up 5.7 percent ($128.63 to $135.91).
• Active listings dropped 7 percent compared to April. On June 1 there were 21 percent fewer listings than June 2014.
• Demand held steady in May, sustaining a trend that started in March. Single-family home sales rose 1 percent over April and 7 percent over May 2014. Townhouses and condominiums slumped a little, however; sales dropped 5 percent since March but were up 11 percent from May 2014.

More Valley housing data is available by subscribing to Orr’s monthly reports. The premium site includes statistics, charts, graphs and the ability to focus in on specific aspects of the market.

Podcast transcript:

Research and Ideas: Mike Orr, director of the W. P. Carey School’s Center for Real Estate Theory and Practice, says the Phoenix market is the healthiest it has been in 10 years. The problems that have plagued the market for several years are disappearing, he said. Foreclosures continue to fall and are now well below normal, and loan delinquency is low, too. Former homeowners who have been closed out of the market because of foreclosure or short sale are beginning to regain their eligibility for mortgage borrowing. It’s time for homebuilders to shake off their reservations.

Michael Orr: (There’s) not that much to be scared of except our own fear — and a lot of people are still feeling fear because of what happened. But as that fear dissipates and the economy continues to improve, there’s opportunity for homes to grow in popularity.

Research: In the aftermath of the foreclosure wave, many people looked for rentals, which took a bite out of the demand for new homes.

Orr: We’ve seen homes for rent being all the rage and they’re still doing quite well. But there’s a few signs now that that’s coming off the boil a little bit — and a little bit more demand for homes to own, so the homebuilders don’t want to be caught flat footed on this.

Research: Orr says the number of building permits isn’t excessive, but it’s more than we’ve seen in this market since 2007.

Orr: We’re talking about $1,400, 1,500 a month. Whereas for the last few years we’ve barely broken the 1,000 mark, so percentage wise it’s up about 40 percent.

Research: Orr says this number is modest compared to the building boom times in the 1990s and early 2000s, but still it’s a significant trend.

Orr: The only thing that concerns me is that most of the permits are going to be for those homes, in what are called the ‘move up market’ rather than the entry-level market. Because that’s where builders can make the most money. Given the price of land, they’re going to try and build the most expensive home they can sell on any given piece of land. That leaves the entry-level buyer still in a bit of a difficult situation with not a lot of homes coming onto the market.

Research: One possible source of relief for the low end of the market might be the release of some of the rental housing stock for sale. In any case, Orr says he doesn’t see the supply situation getting worse, at least not for the next six months.

Orr: If it’s going to get worse, it’s going to be the first half of next year that’s probably going to see the strain. Because that’s when demand is at its strongest.

Research: These building permits are being pulled in the high growth cities you would expect — Gilbert and Peoria — but we’re seeing substantial numbers in Mesa, Surprise, Buckeye and Goodyear, too.

Orr: Gilbert is still dominant because there was so much land that was purchased, already subdivided and converted into lots, before the crash. And then there’s also quite a bit of farmland that is relatively easy to convert to housing in the Gilbert area.

Research: So the jump in permits does not translate to an increase in land sales. The new building is centered on land that builders banked, some time ago.

Orr: The land sales are still quite weak. A lot of the frenetic land buying activity occurred in 2013.

Research: Everyone expected new home sales to go up in 2014, Orr said, and when they did not, further land acquisition plummeted.

Orr: There’s enough land for a while, but not all homebuilders have a good land bank. We’ll probably see an increase in land purchasing activity in the not-too-distant future.

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