Research

Luxury sector slumbers in second half 2015

The 2015 real estate market in Phoenix took off in the first week of February 2015, but quieted down beginning in July to finish the year on a less exciting, steady-as-you-go pace. That’s according to the Greater Phoenix Housing Market Report, issued monthly by Michael Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business.

2016-01-13

The 2015 real estate market in Phoenix took off in the first week of February, but quieted down beginning in July to finish on a less exciting, steady-as-you-go pace. That’s according to the Greater Phoenix Housing Market Report, issued monthly by Michael Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business.

The first half of the year, the gains were in the under $250,000 sector, where supply was tight, and in the mid-range, between $250,000 and $500,000, where inventory and demand were in healthy balance. The high end had an excellent first half, but lost momentum — especially for the most expensive homes — from August onward.

The November numbers showed pricing for single family homes edging higher, with the median sales price climbing 7 percent compared to the same month in 2014. While supply remains low, the number of sales was actually up, 15 percent over November 2014, which is a positive sign, Orr said.

That’s even more significant considering the fact that November is a short month, with only 18 working days, and because the new TRID rules had just gone into in effect. TRID is also known as the “Know Before You Owe” rule. It’s designed to assure that borrows understand the terms of their loans before they sign.

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The 2015 real estate market in Phoenix took off in the first week of February, but quieted down beginning in July to finish on a less exciting, steady-as-you-go pace. That’s according to the Greater Phoenix Housing Market Report, issued monthly by Michael Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business.

In the first half of the year, the gains were in the under $250,000 sector, where the supply was tight, and in the mid-range, between $250,000 and $500,000, where inventory and demand were in healthy balance. The high end had an excellent first half, but lost momentum — especially for the most expensive homes — from August onward.

The November numbers showed pricing for single family homes edging higher, with the median sales price climbing 7 percent compared to the same month in 2014. While supply remains low, the number of sales was actually up, 15 percent over November 2014, which is a positive sign, Orr said.

That’s even more significant considering the fact that November is a short month, with only 18 working days, and because the new TRID rules had just gone into in effect. TRID is also known as the “Know Before You Owe” rule. It’s designed to assure that borrows understand the terms of their loans before they sign.

Michael Orr: It’s basically when you borrow money for a home now, you’ve got far more disclosure of what the deal is. And you’ve got three days to back out if you don’t like what they’ve disclosed. Whereas before they used to disclose it to you just as you were signing, but now you’ve got this cooling off period. It means that it’s taking longer for transactions to close, not so much because of this waiting period, but because people aren’t used to all the new procedures and they forget to do things on time.

Research and Ideas: One of the trends that developed in 2015 was the increasing cache of the new home. Demand is up, reflected in the number of permits pulled in 2015: 16,500 compared with 12,000 in 2014. But even as the new homes grow in popularity, they are increasingly difficult to build.

Orr: There would probably be more new home sales if there were more laborers. And they’re very short of skilled tradespeople to work on homes.

Research: Although the size of new homes is coming down they are still large, which also becomes a factor.

Orr: The bigger they are the longer it’s taking to get them complete. There’s more manual work involved in bigger homes. If you’re dealing with a very small track home, where it’s very straightforward — they’re all the same design — then you can still build a home in three or four months.

Research: Another factor is the price of land.

Orr: It’s an interesting dynamic. I think the mood amongst developers is pretty strong because they feel like demand is good. They’re still worried about shortage of labor, and they’re worried about the cost of land in the places they really want to build. As far as they’re concerned, it’s gotten too high too quickly.

The cost of an acre of land in say, Gilbert, is back to the level it was at the heat of the market. Houses haven’t gotten back to that level, so why has land gone back to that level? And the landowners are saying ‘Well if you don’t want it, that’s alright with me, I’m not dropping my price.’ Because it will get back there eventually.

Research: Adding to the complexity is the mismatch between the land available at a price the developers are willing to pay, and the locations where buyers are interested in living.

Orr: I think the builders would like to move farther out of the valley into where land is cheaper: South Buckeye, Maricopa, Casa Grande, Florence and areas like that. But, the buyers aren’t necessarily that excited to follow at the moment.

Research: That’s because buyers have definitely changed their minds about what they want in a house. They are not very interested in houses on the fringe, even if they’re on golf courses with beautiful views. They want to be near shops and restaurants, and close to the airport — the city core. And they want homes that are fresh and contemporary, which puts owners of homes that are 15 or 20 years old in a bind.

Orr: 90 percent of the homes are like that. They are no longer right up to the trend.

Research: This would appear to be a perfect situation for people who buy homes and fix them up for a profit. But making this business model work is all about the purchase price.

Orr: To make money with flips, you’ve still got to buy at a reasonably low price. You can’t afford to just sort of put work in and charge them for what it cost you. You’ve got to make a decent profit, so the number of flips is limited by the distress on the market, and right now we don’t have a very large number of foreclosures. So, the hard work in flipping is buying well.

Research: Meantime, the luxury market, which in Phoenix starts at $1 million, has had a poor second half. Hardest hit is the top — homes starting at about $2 million.

Orr: The bottom end of the luxury market where people are just sort of moving into it, is not so volatile. But once you get into the above $2 or 3 million, it is very subject to the whims of the stock market.

Research: And the luxury sector is experiencing the same shift in taste as other parts of the market.

Orr: The other thing that I’m seeing amongst luxury homes is greater enthusiasm for ones that are closer in, where the entertainment and sport facilities are, and the shopping. It used to be that people wanted to be as far out as possible, with the golf course and the mountain view and it’s all quiet. But that’s no longer as fashionable as it was. That’s what the Canadians were looking for — they didn’t need to go to work or anything.

But the locals, when they want a luxury home, they probably want to be closer to the shopping and close to where they can watch sports, closer to the airport. Places like Arcadia, Paradise Valley, and central Scottsdale are much more popular than far north Scottsdale, Cave Creek and Fountain Hills. And you can see that trend quite clearly in the statistics.

Research: Looking ahead, Orr is not expecting much to change.

Orr: I always look to see whether we’re getting more listings than normal — to see if supply is strong and whether contract signings are out of line. I thought December was very good, so I’m sort of feeling optimistic about December. I would say January is not showing me any additional encouragement or any real discouragement. It’s just sort of wait and see.

Research: Orr says we won’t know until February how 2016 may play out. Some experts worry that rising interest rates might blunt the market, but Orr isn’t in that camp. However the millennials are still taking their time entering the market, and Orr doesn’t anticipated banking practices loosening up any time soon — both of which might accelerate the market. So 2016 remains unknown.

Orr: It’s pretty normal and stable at the moment. If anything changed it could get quite hectic. But there’s no evidence to say that’s going to happen, yet. But who knows? Sometimes the housing market can change in a single week.

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