Editor’s note: The population in the Phoenix metro area has exploded over the past decade, with waves of new construction spilling into formerly rural communities. This two-part series examines the cause of this desert bloom and its effect on local real estate markets. (See Part 1.)

New-home construction in the Phoenix area is analogous to the pink Energizer bunny’s incessant drumming.

“It never really has slowed down,” said Michael Chasse, a home builder specialist with the Land Advisors Organization, a land brokerage company. “Since 1992 every year has been an increase from the prior year. We have been on a constant run. There are some who think that perhaps the market may fall off a little bit. Others think it will continue to drive forward.”

Residential building activity is a major economic driver for the region and state. But home prices in the Phoenix metro area have been marching up at the fastest pace in the country, outpacing income growth and forcing affordability issues to the forefront.

And there are indications of cooling in the Arizona real estate market and in other major metro areas across the country as mortgage interest rates have crept up. Cooling can be a relative term though, given the mercurial rise of the Phoenix-area market over the past several years.

The National Association of Realtors reported this month that existing single-family home prices increased 55.2 percent to $268,000 in the Phoenix-Mesa-Scottsdale metro area in third-quarter 2005 when compared to third-quarter 2004, though existing-home prices were roughly flat in fourth-quarter 2005 when compared to third-quarter 2005, gaining about $400, or 0.15 percent, in that time. Single-family building permits, at about 54,000 in December 2005, dropped 5 percent in the Phoenix metro area compared to December 2004 permits, though this level of permits still ranks among the highest in the nation, the National Association of Home Builders reported.

“I really think things got overpriced for awhile, relative to the rest of the country,” said Shannon Hubbard, a Realtor and real estate investor for Great American Realty in Phoenix. “I think first-time buyers have been priced out of the market. There are not nearly as many investors as you had a year ago. Sales are down and inventories are up. We had a huge seller’s market here for awhile. And right now a lot of people are saying that it’s shifting back toward a buyer’s market. Things are coming back into balance as opposed to having the crazy market like we had for awhile.”

Hubbard, who also owns a home-inspection company, said the rental market is starting to get saturated. Builders seem more willing to offer co-broke commissions to real estate agents and offer incentives to buyers. “Days on market is up pretty much across the whole Phoenix metro area,” she said. “A lot of buyers were getting in with interest-only loans and adjustable-rate mortgages. It will be interesting to see how many of those go back on the market as rates go up.”

Chasse said that a slight cooling in the market can be a good thing. “If a bit of a plateau occurs … not only would it not kill the market — it actually is a healthy thing for the market. The market’s been burning so hot that we were starting to see other areas start to hemorrhage.”

For example, Chasse said that the supply of workers for the construction industry had been spread very thin because of the accelerated building activity, and that can lead to long build times. “The (building) trades can’t put enough crews out there to cover the bases.” This can degrade the quality of the labor force, he said.

Single-family building permits in Maricopa County, which includes Phoenix, Mesa, Tempe and such fast-growing suburbs as Gilbert and Surprise, reached an unprecedented 13,660 peak in third-quarter 2004 and are projected to maintain a level between 10,000 to 11,400 for the first three quarters of this year, according to statistics compiled by Real Estate Economics, a real estate information company. Ten years ago, single-family building permits in the county ranged from about 5,700 to 8,200 per quarter.

Single-family building permits in Pinal County, another active construction area in the Phoenix metro area, are projected to reach a record 3,000 for the third quarter of this year. In 1996, there were an average 246 building permits per quarter in Pinal County.

A Real Estate Economics report noted that the median price of new homes in the Phoenix metro area is expected to reach about $240,675 in the third-quarter of this year, up about 11.1 percent from third-quarter 2005.

“Price appreciation is expected to remain strong in the near-term but will begin to moderate … due to factors such as increasing price exclusion, forecast higher interest rates and increasing competitive supply,” according to the report.

Also, the company expects about 49,700 sales of new homes in the Phoenix metro area from third-quarter 2005 to third-quarter 2006, which compares to about 53,000 new-home sales from third-quarter 2004 to third-quarter 2005.

“Though stable new home sales will remain apparent over the next four quarters, select areas of the Phoenix (metro area) may experience slower sales per development – especially for product in the upper price ranges.

This is a direct result of the combined impact of forecast higher interest rates, increasing competitive supply and overstated new-home prices relative to market support,” the report states.

Home builders have become more sophisticated and in some cases are working collectively to address water and sewer, school and other issues in new development plans, Chasse noted, adding that the demographic trends among home buyers remain promising for construction in Arizona.

Builders are targeting retired and retiring people with so-called active-adult communities, he said.

The Phoenix metro area generally continues to build out rather than to build up, Chasse said, with the exception of some infill developments in city areas “where it makes perfect sense to go vertical.”

Investors seemed to enter the Arizona real estate market “in droves” in 2003-04. By mid-2005 property listings dwindled to about 5,000 in the valley area around Phoenix.

“The short supply and normal demand was affecting price. Some listings were on the market for literally hours. It just got a little crazy for awhile there. That seems to have settled down now,” he said. Since those days, the listings inventory has bumped up over 25,000 for the valley. “That’s about where it should be. It’s still a very healthy market.”

Land prices have roughly doubled in the past couple of years, Chasse said — from about $50,000 an acre to $100,000 an acre.

Grady Gammage Jr., a land-use lawyer and senior fellow at the Morrison Institute for Public Policy at Arizona State University, said residents are still grappling with rising house prices in the region. Housing has historically been very affordable in Arizona, he said, but the times are changing. “We still think of ourselves as affordable. We’re all just in shock at what housing prices are right now. We’ve never seen that before. Our sense is that it’s now stopped — housing prices have flattened and event dropped — the frenzy of speculation has stopped,” he said.

The Phoenix metro area ranked 113th in affordability on the National Association of Home Builders/Wells Fargo Housing Opportunity Index for fourth-quarter 2005. The Phoenix metro area received an index score of 33, which means an estimated 33 percent of all new and existing homes in fourth-quarter 2005 were affordable to median-income families. That’s a very different story from first-quarter 2004, when the area received an index rating of 73.4.

Home ownership was a statewide problem even before this run-up in prices. According to U.S. Census Bureau data, Arizona ranked 31st among states for the percentage of owner-occupied households in 2000.

Hubbard, a Realtor and real estate investor, said she isn’t rushing to sell the properties she owns now given the latest market conditions. “My husband and I — we’re holding what we have and just kind of waiting to see,” she said.

***

Send tips or a Letter to the Editor to glenn@inman.com or call (510) 658-9252, ext. 137.

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