The first method for estimating the intelligence of
a ruler is to look at the men he has around him.
Niccolo Machiavelli
By Chris Parker Thursday, Nov 7 2013 BY CHRIS PARKER
Real estate fortunes are looking up in the Valley of the Sun — where the economy is tied inextricably to the housing market.
The dramatic rise in housing prices during the past two years has lifted a millstone off the backs of many once-underwater homeowners and many who work in the industry. Sometimes they’re one and the same, like Lisa Brown, a branch manager at mortgage banker AmeriFirst Financial.
“[I] lost a significant amount of income,” says Brown, who appears on the Real Estate Showon KTAR (92.3 FM) as Lisa the Lender. Brown bought her Desert Ridge residence in 2004 and a rental in Scottsdale in 2005. She also took out cash to buy other homes. In the end, she had to short-sell one of them.
“I lost sleep. I didn’t come out of my house for a few months after I short-sold,” she says. “I’m supposed to have perfect credit and give people direction on what to do with their home finances, and here I am losing homes and not making any money, thinking I might have to dump the two homes I have now. The only reason I didn’t is because I had renters that hung in there.”
Thanks to prices that have risen in some areas by as much as 35 percent in just the past year, Brown now is above water and able to refinance. Even though interest rates also have risen over the past year (to 4.24 percent), they’re still historically low and much better than the 6.5 percent she got nine years ago. She’s seeing more of that lately.
“Most people have no idea how much their homes have gone up in value. They’re sitting there thinking it’s doomsday, and then they’ll get an estimate on the value and, all of a sudden, they’re refinancing or maybe they’ll sell the house and downsize,” she says.
The run-up in prices has been a double-edged sword. Though it’s helped lift many homeowners out of the red, it’s also conspired with a substandard supply of homes and more rigorous lending standards to squeeze a lot of first-time homebuyers out of the market.
“If you’re going to go $100,000 to $125,000, you haven’t got much choice, and what [homes are available] probably are in the wrong place,” says Michael Orr, a real estate expert at Arizona State University’s W.P. Carey School of Business. “You can get something if you’re willing to live inMaricopa or Outer Buckeye, but trying to find something in Phoenix is very hard unless you’re prepared to take a slum.”
Through the first half of 2013, demand for houses priced under $200,000 was fierce. Any reasonably priced house received multiple bids, produced fierce competition.Agent Michelle Minik recalls the lengths some homebuyers went to curry favor: “One agent sent me photos of the couple and a nice handwritten letter saying ‘Pick me.'”
Since housing prices hit bottom in September 2011, the acceleration has been steep, climbing 2 percent to 3 percent a month. It’s enough for some to wonder whether another bubble is starting. However, it’s worth noting that most of the dramatic gains came from liquidation of distressed and bank-owned stock at rock-bottom prices.
Notice that the places with the greatest appreciation are those hit hardest by the bust. That’s typically homes farthest out, like in Maricopa (up 37 percent over last year), San Tan Valley (32 percent), Youngtown(38), El Mirage (38), and Tonopah (33), based on average price per square foot.
Phoenix, Glendale, and Tolleson also have seen increases of more than 30 percent.
In the heart of the Phoenix area, price gains have moderated significantly, increasing by percentages in the low double digits. Fewer foreclosures flooded the market with available homes and depressed property values. So, in the past few years, fewer profiteers have been looking for bargains.
Neighborhoods in the interior have had a negligible number of new homes and foreclosures because they are filled in — their housing stock comes primarily from resales. Such homes have been slower to go on the market (many homeowners still are underwater) and have been slower to accelerate in price because they never fell as far as in outlying areas.
Now that the supply of cheap foreclosures is getting exhausted overall, the vast majority of homes left on the market are resales.
As of June, distressed home sales in Maricopa and Pinal counties were down 60 percent over last year. Arizona’s a non-judicial foreclosure state, which means houses avoid the courts and hit the market quickly. The average time to foreclosure is 229 days, versus a national average of 414.
This means there’s little backlog. Meanwhile, the economy’s recovery has reduced the number of foreclosures to a point unseen since 2002. Those that remain aren’t nearly the bargain they once were.
“[In 2010] when I was buying out [in] Queen Creek and San Tan Valley, we were picking up houses for $30,000 to $40,000, and now these same houses are going for $90,000 to $100,000 at auction,” says Doug Hopkins of Red Brick Realty, featured on the Discovery Channel‘s popular Property Wars.
“If we have a house under $200,000, it’s very rare,” he says. “In 2008, 2009, and into 2010 a bit, stuff was just hanging on the market. Everyone had to pay to [have their homes spruced up for presentation] and do every little trick in the book to get the houses sold.”
As the Valley’s real estate market goes, so goes the Valley.
Phoenix was the number one or two home-sales market from 1995 to 2005, and as in also-ran boomtown Las Vegas, a substantial percentage of the region’s economy is built around housing. (A study of Vegas during the bubble found a quarter of the population was involved in the industry.)
Housing’s driven by strong jobs growth and, by extension, population growth. Obviously, the weather and golf courses have made this a retirement mecca, but Phoenix-Mesa also has boasted some of the nation’s best jobs growth for more than two decades. Indeed, since 2012, the region’s ranked fifth or sixth in jobs growth among cities with at least a million residents.
One reason it may not feel like much of a jobs boomtown is that the Phoenix area fell so far.
While the country’s recovered more than three-quarters of jobs lost in the recession, greater Phoenix is only halfway there. Almost the entire remaining difference can be accounted for in the 120,000 construction jobs still un-recovered since the June 2006 peak of 244,300 jobs.
Because so much of the economy is based on housing, when the industry catches a cold, the entire Valley sneezes.
“We had a long period of negative feedback [about the local economy], which is very difficult to break,” says real estate consultant Jim Belfiore. “Now, we’re getting positive feedback. People are starting to see that there are more jobs being created. There’s more financial wherewithal. They spend more in the store. They can go out and purchase a home. They’re confident, and it all feeds upon itself.”
The decline in housing prices began to ebb in 2009, when institutional investors — such asBlackstone and American Residential Properties — joined local investors in scooping up the overflow of distressed single-family homes. By 2011, as prices started to rise, other investors stepped in, looking for values and buying houses by the score.
This helped trim the home supply and push prices higher.
Though these out-of-town companies’ strategies are subtly different, they generally hire local firms to manage their holdings as rentals, which they keep for several years as the housing market appreciates. Meanwhile, they’ve priced rents to keep vacancies low.
“They’re interested in buying where you get the best ratio between monthly rent and purchase price, [and that] seems to be West Phoenix, South Phoenix, Glendale, Laveen, Tolleson, parts of Mesa, and parts of Chandler,” says Orr, an Oxford-trained mathematician who worked at IBM before moving to Paradise Valley in 2001. “We’re talking about between 200,000 and 300,000 families [who lost their homes]. Somebody had to step up, buy these properties, and rent them back to these people.”
Orr is quick to note that institutional investors who came in the past two years bought 12,500 homes, a relatively small number (though still greater than the number of new-home permits issued last year). This represents just 5 percent of the single-family rental inventory in metro Phoenix.
The rest are owned by local individuals and “mom-and-pop” companies, Orr says.
Most institutional investors left early this year as prices rose and bargains dwindled. Apartment rents dropped during the boom and then bounced back when the housing market busted. But they’ve posted only a modest gain (in price per square foot) the past eight years. Property Wars‘ Hopkins reports getting “increases of $25 to $50 across the board.”
Hit hardest in the industry by the downturn were homebuilders, and they’ve been the slowest to recover.
In 2005, 62,617 new-home permits were issued in the Valley. This year, they’re expected to exceed 13,000 — and that’s nearly double the number issued in 2011.
New homes now make up less than 10 percent of housing sales, when they’d typically accounted for 25 percent to 30 percent. This is a third of the 30,000 to 35,000 homes per year needed to keep pace with population growth, expected to average nearly 100,000 people annually during the next several years.
A big culprit is the depth of the downturn.
Many smaller local builders went bankrupt, while larger national ones had pockets deep enough to wait out the economic slide. Phoenix’s housing market is seeing significant appreciation ahead of much of the country — again, partly because of the depths to which it sank — and these out-of-town builders have been slow on the uptake. This has put them behind the curve of the local housing comeback. Now they’re madly making up for lost time.
“Builders are aggressively purchasing land and accepting that it’s safe now to go back to south Buckeye, Maricopa, and San Tan Valley. That’s a scary thought for some of them because they were burned really badly there,” real estate consultant Belfiore says.
Increased demand has sent prices spiraling. The average new home price was up 25 percent in the Phoenix metro area this summer over last summer to more than $300,000 — and that’s expected to go higher.
“They’re working really hard to [get back to normal homebuilding levels], but it’s something that can take a considerable amount of time,” Belfiore says. “Going from 7,400 [new homes] to 13,000 overnight, there are supply chains that need to be built up. There aren’t enough subcontractors here. And if you’re a land seller sitting on some lots, you recognize where supply and demand is — and where it’s heading — and you’re going to charge builders more.”
Like the distressed housing stock, finished lots in the most desirable areas already have been scooped up.
Any reasonably priced lot hitting the market receives multiple competitive offers. Pretty much all that’s left for developers is infill in places such as Gilbert and Chandler, as they increasingly resemble the Valley’s core.
Active subdivisions (those still under development or not built out) have dropped to 330 from 12,500 seven years ago. Of these, more than a quarter have fewer than 10 units left. This has made undeveloped land very valuable — the closer to the center of the metro area the better.
“Almost all of our construction costs have gone up dramatically over the last year and a half,” says Buddy Satterfield, president of Shea Homes. “Land prices have gone beyond where they were at the peak. You have construction prices back to where they were, but retail home prices aren’t where they were at the peak. So things are a bit out of whack.”
The desire for undeveloped land has made it a seller’s market, and in response, builders are dialing back their ambitions a notch. You won’t find them building starter homes, either. Most are concentrating on $300,000 houses.
“Three years ago, you could buy land in Gilbert and Chandler for about $60,000 to $80,000 an acre. Now that same land is selling for $225,000 to $300,000 an acre,” saysJeremy McArthur, who started McArthur Land Company 31/2 years ago after directing land acquisitions for Richmond American and Centex Homes.
“There aren’t enough lots to build homes on for the demand that’s out there. So [builders] are actually trying to sell fewer homes than they could to kind of slow down the pace,” he says. “They don’t want to eat through all their lots in six months and then be outbid out there. They need to even it out over time.”
Material shortages, such as lack of drywall, have developed as supply chains get stretched after years on the couch. This has driven prices higher and slowed building.
Ditto the lack of quality labor. Between tougher immigration laws driving off cheap undocumented Latino workers and the number of skilled tradesmen who went bankrupt or left the state during the recession, the shortage is acute enough that workers routinely get poached.
“There are guys who will just walk on a job site and ask, ‘Hey, I’ll give you $200 today to come work with me,'” says Brad Wermes of Alchemy Creations and Contracting, who worked his way up from grunt to building superintendent for a couple of local builders before striking out on his own five years ago.
“In 2006, jack-of-all-trades/master-of-a-few [workers] would make $18 to $20 an hour because there were so many of them around,” Wermes says. “Now, these guys are making $25 to $30. You [have trouble finding them], and when you do, you have to pay them well enough to keep them on tap.”
With severe shortages in new builds and the number of distressed/foreclosed homes, the only way for the stock of available homes to increase is for more people to put their houses on the market.
The increase in home values has helped significantly, and what was a limited supply has grown over the past three months.
Homebuying here slows for the summer until the heat drops below 100 degrees. So sellers are putting their homes on the market with renewed vigor as the number of listings has increased by a percentage in the double digits each of the past two months.
It’s taken the Valley from a 21/2-month supply of homes (based on historical buying levels) to a 41/2-month supply (just short of the 41/2- to six-month supply considered ideal for a balanced market). Active listings now are up 29 percent since the same time last year.
But the story isn’t so much about the increased supply as about the suddenly diminished demand, which has fallen 10 percent to 12 percent in consecutive months.
“Since July, each month has gotten softer. So we’re now in a position where we’re heading back to a balanced market,” says ASU’s Orr. “If it carries on like this next month, we’ll reach balance, and if it carries on past that, we’ll have a market that favors buyers instead of sellers.
“Prices still [are] rising,” he continues, “but the upward pressure disappears once we get to a balanced market.”
No one’s really sure exactly what happened.
Orr thinks homebuyers might be spooked by the rapid rise in interest rates (the 30-year fixed rate mortgage is up nearly a full percent in less than six months) and increased home prices. He notes that there’s been a steep fall-off in consumer confidence exacerbated by events in Washington.
And it’s not only us. California reported its second straight month of falling housing demand after a long stretch of growth.
It could be that sellers are trying to push the market too much, and buyers are reacting by holding fast to their wallets. It’s also natural for buyers to become choosier as their choices increase. Suddenly, they aren’t competing against multiple other buyers and can make their decisions more leisurely.
Or maybe sales have slowed because owner-occupants newly on the market are waiting to see what they can get for their houses before they commit to buying their next homes.
“It could also have something to do with the wealth gap. The middle class has kind of disappeared,” Orr says. “So the number of people buying midrange homes is fewer.”
Or maybe it’s nothing more than a momentary breather.
Orr recalls 2010, when there was a boost in buying after the government offered tax credits for new homebuyers. When the credit disappeared, so did the buyers.
“There was a huge air pocket in demand from June to November [of that year],” he recalls. “Suddenly, in November, the whole market turned around again, and the buyers came back. Prices didn’t go up for a while, but the activity was dramatically better in the spring. And it set the foundation for the recovery that happened nine to 10 months later.”
The luxury-home market was one of the last to recover, and it’s going strong.
Indeed, while the number of home sales decreased overall in August compared to last year, the total dollar value of overall sales was up 11 percent.
The reason is that many of the homes were priced at a half-million dollars and up.
The luxury market works on a different clock from the production-home market, responding more to the dictates of the stock market (setting record highs recently) because many potential owners of luxury homes don’t live here yet.
Scottsdale and Paradise Valley have seen steady increases of 1 percent a month recently. Banks also have begun loosening the reins on jumbo loans used to finance many luxury-home purchases.
“The production-home market began its recovery before [the luxury market], and so we’re definitely seeing upward pressure on prices. They’re definitely inching up, but not at the same rate,” says Walt Danley, who’s seen a lot in his 36 years in the real estate business.
He credits a new breed of the savviest buyers ever with driving up prices for luxury homes.
“The luxury market hit bottom at the end of the summer of last year. So all those people who were sitting on the fence started seeing prices go up and said, ‘I’d better pull the trigger now,'” he says. “The swing in the market wasn’t that fast or that great, but it is indicative of how tuned into the market buyers have been.”
Townhomes and condos also were late risers, but they’ve made it up.
The median sales price of a townhome or condo has increased 31 percent over the past year. Still, sales fell by 6 percent.
Prices began perking up six months to a year ago, according to Hopkins: “[This market] kind of lagged behind single-family homes because a lot of the [institutional buyers] weren’t buying condos and townhomes.”
Home prices are predicted to climb, at least over the next 18 months.
Between first-time homebuyers squeezed out of the market for years, underwater homeowners finally surfacing, boomerang buyers returning to the market after a foreclosure or short sale, and the regular stream of new transplants to the area, there’s simply too much pent-up demand for prices to stagnate for long.
Many would be happy to see price increases moderate and settle into the 4.5 percent range, the average annual increase from 1994 to 2003. Nobody really expects the 20 percent to 30 percent metrowide gains of the past two years to persist.
This kind of appreciation only leads to a bubble.
Most of the brokers and industry veterans interviewed for this article think the current lull in demand is more a temporary thing as prices shift into a lower gear. The feeling is that home prices should rise 8 percent to 12 percent next year and start to stabilize at an increase of about 5 percent per year by 2015.
Land prices, too, must moderate if homebuilding is to return to a range of 35,000 sales annually. It will take time for new developments to take shape around the Valley because builders were so long in hibernation. As with the resale market, supply and demand will need to come into better balance.
“Areas that already have escalated in prices for land are going to slow down, and areas that have a pent-up demand that haven’t been really noticed yet — like Buckeye, Maricopa, andPinal County — are where we’ll find these huge price gains in the future,” Jeremy McArthur says. “Could be a year from now, two or three years. It depends on when you get through the finished lots located in those areas.”
Every real estate broker interviewed thought it was a good time to buy — or sell.
And though it’s their job to say this, they can point to interest rates at historically low levels and what’s suddenly become a pretty good stock of homes overall. And, as mentioned, prices are predicted to go higher. Whether that’s 4 percent or 20 percent, nobody’s willing to play Nostradamus.
Those above the water line certainly can wait. While the price of a house a homeowner intends to buy may be cheaper now than later, the price he’ll get for his home may not have reached its maximum.
Still, East Valley real estate agent Shawn Rogers says it might make sense to many to go ahead and sell.
“Say they bought their house for X and can now sell it and put $50,000 in their pocket,” Rogers says. “The house they want, they can put down $20,000, and they’ll realize a $30,000 gain.”
There’s certainly not much reason to say next year won’t be just as frenzied as earlier this year — when prices were shooting up 2 percent a month. While there’s a traditional window in the Valley in October and November when temperatures drop and people start looking at houses, many will wait until well after the holidays.
High house-buying season doesn’t really begin until February, when spring is in the air here. Which means the best indication of where the local market is truly headed may be how much consumers spend over the holidays — a key indicator of confidence in the national economy. Especially after the disruption in Washington, which had a side effect of slowing mortgage-loan approvals.
“Anything that’s uncertain makes a lot of people hesitate,” Orr says. “People tend to buy homes when they’re feeling pretty comfortable.”
If the current lull in demand surprises some experts and results in a slower rate of ascent for housing prices, it will be a relief for others.
Count Brett Barry as someone who’s had enough boom-bust cycles. He’s been doing realty in Phoenix for 17 years so he remembers normalcy. Indeed, he longs for those days.
“I’m waiting for real estate to become boring again,” Barry says. “When nobody’s reporting on it. When it’s not the subject of cocktail conversation. I really don’t want to talk about it anymore, and I’m a broker. But, in Phoenix, we love our real estate.”
a little about me and my expertise – video
LAND SPECIALIST – LAND EXPERT – INVESTMENT BROKER – ARIZONA
https://www.youtube.com/watch?v=PPs3kpKR4nY
http://en.wikipedia.org/wiki/Timeline_of_Phoenix,_Arizona_history
http://en.wikipedia.org/wiki/Phoenix,_Arizona
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Facts of Arizona – year 1848 to 2013
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Walter Unger CCIM, CCSS, CCLS
I am a successful Commercial Investment Real Estate Broker in Arizona now for 15 years and I worked with banks and their commercial REO properties for 3 years. I am also a commercial landspecialist in Phoenix and a Landspecialist in Arizona.
WHETHER YOU LEASE OR OWN
NOW IS THE TIME FOR YOU TO EXPAND, UPGRADE OR INVEST.
we are at on the a rise of the cycle in Commercial Real Estate. so there is only one way and it’s called we are going up and now is the time for you to expand, upgrade or invest in Commercial Properties in Phoenix. The prices on deals I may get you will not be around forever.
WAITING TO SELL YOUR LAND ? TIMES CHANGE / IT’S TIME
We barely could give land away the last few years, but times are changing. Even in those meager years, I sold more land across the state than most other brokers. Before the real estate crash I was a land specialist in Arizona with millions of dollars of transactions, but then I had to change and also sell other commercial investment properties, which was fun, but I am a Commercial Landspecialist in Arizonal, a Commercial Land Specialist in Phoenix and love to sell land, one acre to thousands of acres.
If you have any questions about Commercial Investment Properties in Phoenix or Commercial Investment Properties in Arizona, I will gladly sit down with you and share my expertise and my professional opinion in Commercial Properties in Phoenix or Commercial Properties in Arizona with you.Obviously I am also in this to make money, but it could be a win-win situation for all of us.
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Walter
Walter Unger CCIM
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