Market Summary
March 28, 2016
Michael Orr
Journal Columnist
Founder and Owner, Cromford® Report
During 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. The rest of the market hesitated for a few months during the late summer and early fall but at the end of the year was regaining momentum again. This was particularly true for new homes which had their best month since 2008.
As 2016 starts, the market is in much better shape than it was at the start of 2015. Every measure is looking better for sellers than it was in January 2015, except for the appreciation rate. This has eased slightly but remains about ten times higher than the overall economy’s official rate of inflation, the Consumer Price Index.
The one serious problem that remains is that supply continues to be very poorly matched to demand.
In the ranges below $250,000 prices are still being driven higher by chronic weak supply and continuing demand from investors, boomerang buyers and millennials entering the market for the first time. Annual appreciation tends to be in the 6 percent to 12 percent 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. A few builders, notably D R Horton & LGI Homes, have started to offer more homes in this price range but so far it has not made a big contribution to expanding the supply. To keep the price competitive many of these homes are a long way from the center of the valley. Not every buyer is willing to drive until they qualify.
From $250,000 to $500,000 we see much healthier levels of supply that are largely keeping up with robust, though not exceptional, demand. We have seen price increases for homes in the move-up price segments at the relatively modest level of 2 percent to 6 percent per year. The supply of new homes is increasing which helps to moderate upward pricing pressure, especially as overall demand remains constrained by financing issues. Buyers are increasingly being selective given their wider choice. Less attractive or competitively priced listings risk being left behind. This is generating more frequent price cuts.
Above $500,000 there is plentiful supply in most areas, with prices showing little upward movement except in the most fashionable locations. Those fashionable locations include Central Scottsdale (especially 85251 and 85250), Arcadia and a few of the newer communities in 85255. Jumbo financing to buyers with excellent credit is still very attractively priced and this helps to keep the market moving. However, we are just not seeing enough buyers to keep the supply from growing now that out-of-state demand is weakening. This is especially true of homes that are more than 20 years old and those in far flung areas of the valley.
New home closings were surprisingly strong in December and reinforce the theme that buyers are especially attracted to modern designs these days. The huge increase in permits that we saw in 2015 suggests that developers expect to grab market share away from re-sales.
Urban living is gaining popularity, but there are precious, few opportunities to buy new townhomes and condos in the most fashionable locations. New construction is still focused on providing apartments for rent. In time, we will see that wave receding and more construction of urban homes for purchase.
The West Valley had a stand-out year in 2015 but we anticipate that the Southeast Valley may be the area to watch in 2016. This especially applies to those areas close to the 101, 202 and 60 freeways and the major shopping areas like Tempe Marketplace and Mesa Riverview. South Scottsdale is also a promising spot, as is both Downtown and Uptown Phoenix.
We anticipate only small increases in pricing during the first quarter of 2016 with increases at the low end being offset by weakness at the high end. The mid-range is likely to see little movement unless there is a surge in demand.
Population and job growth are still moving in positive directions for Central Arizona, but there are ominous developments in the global economy that have the potential to disrupt the U.S. housing market to a limited extent. Luckily Arizona (unlike many of the central states) is no longer very dependent on energy products or commodities like cotton, citrus, copper and cattle. As long as the climate and economy continues to attract people from all over the country, the consequent increases in population are likely to keep the local housing market in a healthy state.