January 25, 2016
Arizona Journal Columnist
Owner, Cromford Report
Director, W.P. Carey School of Business
In 2015 the Greater Phoenix housing market gained strength from February through July with tight supply below $250,000 and healthy demand for the mid ranges between $250,000 and $500,000. The high end luxury market also had an excellent first half, but lost a lot of momentum in its upper ranges from August onwards, probably due to the economic worries that also impacted the stock market. The rest of the market hesitated for a few months during the late summer and early fall but at the end of the year the market looks like it is accelerating again. This is particularly true for new homes.
At first sight, November’s sales numbers did not look too impressive. However, November is always a short month. With only 18 working days and with the new TRID procedures to work through, the title companies did a great job in closing 13% more homes than 12 months earlier. This bodes well for the next few months.
In the ranges below $250,000 prices are still being driven higher by chronic 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, as we keep being told it will, we could see increased demand in this price range. Unfortunately for buyers, this would further exacerbate the supply problems and lead to more price rises.
From $250,000 to $500,000 we see healthier levels of supply that are largely keeping up with robust, though not exceptional, demand. Price increases for homes in the move-up price segments are expected to continue at the relatively modest level of 2% to 6%. The supply of new homes is growing which helps to moderate upward pricing pressure.
Between $500,000 and $2 million demand has strengthened a little 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 and this helps to keep the market moving.
For homes over $2 million the market has changed markedly since the second quarter, 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 $3 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 are relatively weak as a result. This is especially true of homes that are more than 20 years old and those in far flung areas of the valley.
Proximity to mountains and a golf course used to be bigger selling points than they are now. Golf has lost 17% of its participants since 2006 and the downward trend is accelerating due to the millennial generation taking a low interest in the sport. Although a beautiful view of water and/or green grass in the midst of the desert is still very popular with home buyers, several golf clubs are struggling to recover their annual running costs and some of those green vistas are likely to turn brown over the next decade. Non-golfing homeowners may be asked to contribute more to the increasing cost of keeping the desert abnormally green.
As we enter 2016, we are seeing stronger demand for new, convenient and modernized homes. Contemporary designs and brand new technology and appliances are getting very enthusiastic acceptance from buyers. In contrast, homes that are looking a little tired, old fashioned or in need of some major refurbishment are getting increasingly difficult to sell. This all adds up to opportunities for the fix and flip operator and we are seeing a resurgence of this type of activity as a percentage of the market. For homes that do not show well, price cuts are increasing in frequency and size.
Townhomes and condos are gaining popularity at the expense of single family homes. They are usually closer to employment, restaurants, shopping, entertainment, and sports facilities. Being smaller, they remain relatively affordable, though the price per sq. ft. for new condos is often relatively high. This makes them an attractive opportunity for the developer who can acquire a suitable piece of infill land. Perhaps surprisingly, this trend is not being fueled primarily by the younger generation. In fact it is mostly affluent baby boomers who are returning to the urban environment after their youngest children have left home.
In the short term, the areas likely to see prices rising fastest are those close to the center of the valley and 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, Laveen, Sun City, 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 still quite cool in Casa Grande, Florence, Coolidge and Eloy, as well as the furthest flung parts of the Northwest Valley.
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. Back in 2012 and 1013 there were significant fears that investors would dump these homes onto the market en masse. We wrote at the time that these fears were completely unjustified and it still seems unlikely that the situation will change in the near or medium term.
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 in outer districts that depend most on out-of-state and second home buyers. Those at the highest price points are the most vulnerable.
The market below $1 million looks well positioned to take the expected small, gradual increases in mortgage interest rates in its stride. Population and job growth are still moving in positive directions for Central Arizona. The momentum that builds from next February onwards will be largely determined by the willingness of mortgage lenders to normalize underwriting standards and thus increase participation by the millennial generation. A small increase in loan approval rates could have a major impact on releasing pent up demand from people under 35.
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