December 23, 2015
AZ Journal Columnist
Owner, Cromford® Report
Director, W.P. Carey School of Business
After a strong six months from February 2015 through July 2015, the Greater Phoenix market has lost some momentum between August and November. It is tempting to write this off as seasonal, but it is a little more than that. It is not a dramatic slowdown as we saw in the second half of 2013. It is also not having much effect on the entry level market which is still chronically under supplied. However, there are three things taking some wind out of the sails:
- Supply is growing faster than demand above $400,000
- Demand has weakened substantially over $2 million
- Many financed closings have been slowed down by the introduction of TRID
In the ranges below $250,000 prices are being driven higher by weak supply and continuing demand from boomerang buyers and millennials entering the market for the first time. Annual appreciation tends to be in the 6% to 12% range for this price segment. Lending standards remain stubbornly high, but if this were to change we could see increased demand in this price range, which would further the supply problems.
From $250,000 to $400,000 we see healthier levels of supply that are almost keeping up with demand, so price increases for homes in the price range are expected to continue at the relatively modest level of 2% to 6% that we have seen in the past year.
Between $400,000 and $1 million demand has strengthened recently but there is plentiful supply and prices are therefore expected to move only gently upward. Lenders are competing with each other to issue jumbo financing to buyers with excellent credit.
For homes over $1 million the market has changed markedly since second quarter 2015, when sales volume was unusually strong. Demand is currently low and it gets increasingly weaker as we move higher up the price ranges. Supply is very plentiful and buyers can take the time to be very choosy above $2 million. The higher levels of the luxury market are very susceptible to the mood of the financial market, and this has been decidedly mixed since July. Luxury home prices have been relatively weak as a result.
In general, townhomes and condos are in higher demand than single family homes. They are usually closer to employment, restaurants and shopping and being smaller, remain more affordable. New homes have started to take a larger share of the overall market. This is part of an obvious trend in favor of modern designs. Older and less well maintained homes are likely to sit on the market for a long time unless priced to sell quickly. Price cuts are increasing in frequency and size for these homes. Refurbished and modernized homes continue to sell more swiftly, as do high end new custom builds.
Geographically, the areas likely to see prices rising fastest are those close to the center of the Valley where the vast majority of homes are under the median sales price of $225,000. This particularly applies to inner west Valley areas, including West Phoenix, Glendale, South Peoria, Avondale, Tolleson, El Mirage and Youngtown. It also applies to several older, less expensive parts of the Valley, including West Mesa and South Phoenix. Distant areas with lower prices have not experienced the same effect. For example the market is quite cool in Casa Grande, Florence, Coolidge and Eloy, as well as the furthest flung parts of the West Valley.
In-state buyers are creating most of the demand in 2015. The strong U.S. dollar is keeping most foreign buyers away from the Phoenix market. This particularly applies to Canadians who have traditionally been the largest source of out-of-country buyers. In 2015, more than twice as many homes have been sold rather than purchased by Canadians in Maricopa County. In the last 3 months that ratio has approached 3 to 1. While the dollar remains strong, and possibly gets stronger still if U.S. interest rates rise, demand from foreign buyers could fall further. In addition, we have not yet seen the significant influx of Chinese buyers that has affected the housing markets in many coastal areas. In fact, the Phoenix area is largely unknown to the majority of potential Chinese buyers.
A large number of entry-level homes continue to do service as long-term rentals. Much of the inventory of homes in this price range was snapped up by landlords during the great foreclosure wave of 2008-2013 and only a tiny number of these homes are being released into the market for sale. More significant releases are unlikely while occupancy remains high and rents continue to rise.
Although average prices are very likely to move in a positive direction over the next several months, this is almost all driven by entry level homes and the lower ranges of the move-up market up to $300,000. Much of the luxury market will probably tread water and several areas may decline in price until confidence returns to the stock market. The weakest luxury areas are likely to be those that depend most on out-of-state and second home buyers and those at the highest price points.
The market below $1 million looks well positioned to take small, gradual increases in mortgage interest rates in its stride. Population and job growth are still moving in positive directions. The momentum that builds from next February onwards will be largely determined by the willingness of mortgage lenders to normalize underwriting standards and increase participation by the millennial generation.
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