Fear Grips Phoenix Housing Market - May Drop Another 10%
"There's a psychological umbrella of fear in Phoenix's housing market now," said Tim Sullivan, a national housing analyst with San Diego-based Sullivan Group. "Buyers are uncertain."
Phoenix's housing market has some definite signs of trouble. New data that includes used and new houses shows Valley home prices are down as much as 20 percent from last year's high. Prices aren't down all over, but some areas are showing steady declines.
The median price of a used home in Pinal County fell to $211,500 in this year's first quarter. That's down from the $220,000 the typical existing home was selling for at the end of 2005.
Home builders began offering incentives early this year to try to sell their backlog of new houses in metropolitan Phoenix.
The deals keep getting better, signaling the market isn't.
Late last year, investors began walking away from deposits on new homes because they couldn't flip houses for quick profits as they did early in 2005. Regular buyers can't sell their houses to clear the way for them to close on new ones.
More than 64,000 new homes went up Valley-wide last year, but analysts say there weren't real buyers for that many. So far this year, new-home building is down 17 percent.
So builders are offering incentives worth as much as $100,000 to unload them.
Full article text after the jump...
How low will it go?
The Arizona Republic
Jun. 18, 2006 12:00 AM
Home prices may dip 10% as fear grips Valley market
Catherine Reagor
The Arizona Republic
Jun. 18, 2006 12:00 AM
Greed drove metropolitan Phoenix's home prices and sales to new records in 2005. Fear is driving the market this year.
Home buyers are worried about paying too much and are waiting to purchase. Concerned about dropping home values, some owners are trying to cash out. Builders, struggling to sell even deeply discounted new homes, are scaling back production and warning of lower profits. Each day more people, from contractors and mortgage firms to real estate agents, are losing jobs or money in the metropolitan Phoenix's rapidly slowing real estate market.
Until recently, the market's slowdown had been considered a necessary, short-term hardship to offset last year's wild run-up in prices. But now many analysts and economists say it looks as if the slide will continue for at least the next six months, possibly pulling down home values as much as 10 percent before it's done.
"There's a psychological umbrella of fear in Phoenix's housing market now," said Tim Sullivan, a national housing analyst with San Diego-based Sullivan Group. "Buyers are uncertain."
The big question is, how much more will the market slow? No one is calling for the Valley's housing market to crash as it did in 1990 because the rest of the area's economy is so strong now. Sixteen years ago, the real estate market and the economy bottomed out together. It was the last time Valley home prices fell, as builders overspeculated on growth. They failed, along with the banks and savings and loans. New owners who were able to hang on had to wait a few years before home values caught back up to purchase prices.
With the housing industry accounting for at least one of every three dollars generated in the Valley's economy, any slowdown will hurt. Consumers will be particularly vulnerable: Analysts say the demand for Valley homes and housing prices both were hyperinflated by 25 to 30 percent last year, mostly because of investors.
"An adjustment in the Phoenix-area real estate market will be painful," said national housing analyst Barbara Allen of Avondale Partners. "The good news is because of Phoenix's continued growth, the market won't need to go down that much more to adjust."
Those indicators have been suggesting trouble for months for the nation's housing market. Former Federal Reserve Chairman Alan Greenspan and his successor, Ben Bernanke, both have warned of a cooldown in the housing market.
In the Valley, where used-home sales are down 34 percent from last year's record pace and below 2004's more normal pace, the slowing is likely to be more acute.
"Phoenix's housing market had such a run-up in prices and so much new building, it's more vulnerable to a downturn," said Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University.
He doesn't expect the market to crash, nationally or in the Valley. But he does say that consumers will have to start looking at their houses just as homes, not as moneymakers.
New data that includes used and new houses shows Valley home prices are down as much as 20 percent from last year's high. Prices aren't down all over, but some areas are showing steady declines.
The median price of a used home in Pinal County fell to $211,500 in this year's first quarter. That's down from the $220,000 the typical existing home was selling for at the end of 2005.
The median price of an existing Valley home was pushed nearly $60,000 higher last year by investors, according to Jay Butler, director of the Arizona Real Estate Center at Arizona State University Polytechnic.
The median price of a used home peaked last year at $263,000 in September. If prices fall 10 percent this year, as analysts predict, the median price of an existing Valley home would dip to around $238,000.
"Valley home values will drop a little," Sullivan said. "Look at demand and supply. Buyers are held back by fear, so supply is going up. That always has a softening affect on prices."
But it could be for some homeowners.
"The only people who will really be affected are those who purchased last year, when there was fluff in the market," said Elliott Pollack, an Arizona economist and real estate investor. "But they will be OK if they stay in their homes for a little while."
Some may not be able to afford that. With mortgage rates climbing, the adjustable-rate loans that people took out in the past few years are about to jump higher, pushing monthly payments up hundreds of dollars.
Owners who used adjustable loans just to afford a house may be unable to pay the higher mortgage.
If they can't sell in the slowing market, where the number of homes for sale climbs to a new high each month, they could wind up in foreclosure.
Many other homeowners who tapped the equity that last year's run-up brought also will be vulnerable.
Home foreclosures have already started climbing in other parts of the country, and economists are concerned the same will happen in Arizona. Rising foreclosure rates are another indicator of a slowing market.
"The housing market got too pumped up last year; now it has to unwind," said Marshall Vest, an economist and director with the Economic and Business Research Center at the University of Arizona's Eller College of Management in Tucson.
"What we are all watching and wondering now is whether it slows down to the normal levels of a few years ago or more."
The deals keep getting better, signaling the market isn't.
Late last year, investors began walking away from deposits on new homes because they couldn't flip houses for quick profits as they did early in 2005. Regular buyers can't sell their houses to clear the way for them to close on new ones.
More than 64,000 new homes went up Valley-wide last year, but analysts say there weren't real buyers for that many. So far this year, new-home building is down 17 percent.
So builders are offering incentives worth as much as $100,000 to unload them. Recently, a few started offering to buy existing homes from buyers as a way to free them up to close on their new houses. That hasn't happened since the market crashed in 1990.
Because buyers aren't biting, builders are downgrading their sales forecasts, laying employees off, backing out of some Valley land deals and seeing their stock prices plummet.
A recent study from Hanley Wood Market Intelligence showed metro Phoenix ranked in the top five U.S. markets for new-home cancellation rates.
Sacramento, Las Vegas and Denver had higher rates of buyers walking away from new house deals. Some Valley builders are reporting cancellations as high as 40 percent.
"There was never the demand for more than 45,000 to 50,000 new homes in Phoenix last year," Pollack said. "It could take six to 18 months before the market absorbs the extra homes and gets back to normal."
Metro Phoenix led the nation for new-home building in 2004 but slipped to No. 4 last year. Housing analyst Allen, who is based in Scottsdale, said home builders are calling the Valley a "good long-term market," which she says means "they're worried right now."
The Valley also has a glut of condominiums, with at least 8,000 units planned and under way. Some apartment complexes that were converted to condos last year are being "reapartmented," or turned back into rental units because buyers don't want them.
The number of homes and condos for sale in the Valley recently hit a record 43,400. That's quadruple where the market was a year ago. Homes now take at least two weeks longer to sell than last year, but they have returned to a period that is considered normal. Some analysts, though, expect the length of time houses sit on the market to continue to rise.
"Phoenix's housing market drew a lot of speculators last year," said Paul Kasriel, an economist with Chicago-based Northern Trust Co. "The supply of homes for sale is high compared to sales now. The market is now very vulnerable."
Metro Phoenix has just one: overbuilding.
The Valley has one of the most robust economies in the country, with an unemployment rate below the national average. So it can likely weather the housing market's downturn, economists say.
"Phoenix's local economy should remain fairly healthy. It will help support the housing market and home valuations," said Frank Nothaft, chief economist with mortgage firm Freddie Mac.
He said markets with high unemployment are much more susceptible to price declines.
This year, Valley employers are expected to add 100,000 jobs. The region also is expected to draw 135,000 new residents.
And while the number of homes for sale is at an all-time high, there are more houses - given all the building - than there were even a year ago.
Now, home listings equal 3.6 percent of all houses in the Valley, according to Arizona State University's Real Estate Center.
The ratio plummeted with listings in 2004 and 2005, but in 2003 it was 3.2 percent.
The drop-off in home building hasn't hurt construction jobs.
"A few months ago, there were expectations that, as building activity peaked, construction jobs soon would dry up, pulling down the rest of the economy," said Lee McPheters, economics professor at ASU's W.P. Carey School of Business.
During the first quarter of the year, there was an average of 231,000 construction jobs in Arizona. That's an all-time high and 13.5 percent more than the same period in 2005.
But big new commercial and public works projects are offsetting some of the losses of construction jobs in housing.
If buyers continue to sit on the fence, waiting for sellers to cut prices, sales will continue to fall. If investors get scared and slash prices, home values will decline. Rising mortgage rates will hurt everyone.
The next few months are the prime buying season and will give everyone an idea of where the housing market is headed.
"My sense is the worst is behind us, and the housing market will have stabilized with smaller jumps in listings and more steady sales by October," said John Foltz, president of Realty Executives.
Home buyers are worried about paying too much and are waiting to purchase. Concerned about dropping home values, some owners are trying to cash out. Builders, struggling to sell even deeply discounted new homes, are scaling back production and warning of lower profits. Each day more people, from contractors and mortgage firms to real estate agents, are losing jobs or money in the metropolitan Phoenix's rapidly slowing real estate market.
Until recently, the market's slowdown had been considered a necessary, short-term hardship to offset last year's wild run-up in prices. But now many analysts and economists say it looks as if the slide will continue for at least the next six months, possibly pulling down home values as much as 10 percent before it's done.
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"There's a psychological umbrella of fear in Phoenix's housing market now," said Tim Sullivan, a national housing analyst with San Diego-based Sullivan Group. "Buyers are uncertain."
The big question is, how much more will the market slow? No one is calling for the Valley's housing market to crash as it did in 1990 because the rest of the area's economy is so strong now. Sixteen years ago, the real estate market and the economy bottomed out together. It was the last time Valley home prices fell, as builders overspeculated on growth. They failed, along with the banks and savings and loans. New owners who were able to hang on had to wait a few years before home values caught back up to purchase prices.
With the housing industry accounting for at least one of every three dollars generated in the Valley's economy, any slowdown will hurt. Consumers will be particularly vulnerable: Analysts say the demand for Valley homes and housing prices both were hyperinflated by 25 to 30 percent last year, mostly because of investors.
"An adjustment in the Phoenix-area real estate market will be painful," said national housing analyst Barbara Allen of Avondale Partners. "The good news is because of Phoenix's continued growth, the market won't need to go down that much more to adjust."
Signs of trouble
Economists and analysts study a handful of indicators to gauge the health of a housing market: Home prices. Number of houses for sale. The length of time it takes a house to sell. Recorded sales. Investor activity. Mortgage rates. Foreclosures. Job growth.Those indicators have been suggesting trouble for months for the nation's housing market. Former Federal Reserve Chairman Alan Greenspan and his successor, Ben Bernanke, both have warned of a cooldown in the housing market.
In the Valley, where used-home sales are down 34 percent from last year's record pace and below 2004's more normal pace, the slowing is likely to be more acute.
"Phoenix's housing market had such a run-up in prices and so much new building, it's more vulnerable to a downturn," said Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University.
He doesn't expect the market to crash, nationally or in the Valley. But he does say that consumers will have to start looking at their houses just as homes, not as moneymakers.
New data that includes used and new houses shows Valley home prices are down as much as 20 percent from last year's high. Prices aren't down all over, but some areas are showing steady declines.
The median price of a used home in Pinal County fell to $211,500 in this year's first quarter. That's down from the $220,000 the typical existing home was selling for at the end of 2005.
The median price of an existing Valley home was pushed nearly $60,000 higher last year by investors, according to Jay Butler, director of the Arizona Real Estate Center at Arizona State University Polytechnic.
The median price of a used home peaked last year at $263,000 in September. If prices fall 10 percent this year, as analysts predict, the median price of an existing Valley home would dip to around $238,000.
"Valley home values will drop a little," Sullivan said. "Look at demand and supply. Buyers are held back by fear, so supply is going up. That always has a softening affect on prices."
Some owners at risk
A drop in home prices alone won't be a crushing blow to the Valley's housing market.But it could be for some homeowners.
"The only people who will really be affected are those who purchased last year, when there was fluff in the market," said Elliott Pollack, an Arizona economist and real estate investor. "But they will be OK if they stay in their homes for a little while."
Some may not be able to afford that. With mortgage rates climbing, the adjustable-rate loans that people took out in the past few years are about to jump higher, pushing monthly payments up hundreds of dollars.
Owners who used adjustable loans just to afford a house may be unable to pay the higher mortgage.
If they can't sell in the slowing market, where the number of homes for sale climbs to a new high each month, they could wind up in foreclosure.
Many other homeowners who tapped the equity that last year's run-up brought also will be vulnerable.
Home foreclosures have already started climbing in other parts of the country, and economists are concerned the same will happen in Arizona. Rising foreclosure rates are another indicator of a slowing market.
"The housing market got too pumped up last year; now it has to unwind," said Marshall Vest, an economist and director with the Economic and Business Research Center at the University of Arizona's Eller College of Management in Tucson.
"What we are all watching and wondering now is whether it slows down to the normal levels of a few years ago or more."
Sure signs of slowing
Home builders began offering incentives early this year to try to sell their backlog of new houses in metropolitan Phoenix.The deals keep getting better, signaling the market isn't.
Late last year, investors began walking away from deposits on new homes because they couldn't flip houses for quick profits as they did early in 2005. Regular buyers can't sell their houses to clear the way for them to close on new ones.
More than 64,000 new homes went up Valley-wide last year, but analysts say there weren't real buyers for that many. So far this year, new-home building is down 17 percent.
So builders are offering incentives worth as much as $100,000 to unload them. Recently, a few started offering to buy existing homes from buyers as a way to free them up to close on their new houses. That hasn't happened since the market crashed in 1990.
Because buyers aren't biting, builders are downgrading their sales forecasts, laying employees off, backing out of some Valley land deals and seeing their stock prices plummet.
A recent study from Hanley Wood Market Intelligence showed metro Phoenix ranked in the top five U.S. markets for new-home cancellation rates.
Sacramento, Las Vegas and Denver had higher rates of buyers walking away from new house deals. Some Valley builders are reporting cancellations as high as 40 percent.
"There was never the demand for more than 45,000 to 50,000 new homes in Phoenix last year," Pollack said. "It could take six to 18 months before the market absorbs the extra homes and gets back to normal."
Metro Phoenix led the nation for new-home building in 2004 but slipped to No. 4 last year. Housing analyst Allen, who is based in Scottsdale, said home builders are calling the Valley a "good long-term market," which she says means "they're worried right now."
The Valley also has a glut of condominiums, with at least 8,000 units planned and under way. Some apartment complexes that were converted to condos last year are being "reapartmented," or turned back into rental units because buyers don't want them.
The number of homes and condos for sale in the Valley recently hit a record 43,400. That's quadruple where the market was a year ago. Homes now take at least two weeks longer to sell than last year, but they have returned to a period that is considered normal. Some analysts, though, expect the length of time houses sit on the market to continue to rise.
"Phoenix's housing market drew a lot of speculators last year," said Paul Kasriel, an economist with Chicago-based Northern Trust Co. "The supply of homes for sale is high compared to sales now. The market is now very vulnerable."
Economy is saving grace
The combination of two ingredients makes housing markets go bust: overbuilding and job losses.Metro Phoenix has just one: overbuilding.
The Valley has one of the most robust economies in the country, with an unemployment rate below the national average. So it can likely weather the housing market's downturn, economists say.
"Phoenix's local economy should remain fairly healthy. It will help support the housing market and home valuations," said Frank Nothaft, chief economist with mortgage firm Freddie Mac.
He said markets with high unemployment are much more susceptible to price declines.
This year, Valley employers are expected to add 100,000 jobs. The region also is expected to draw 135,000 new residents.
And while the number of homes for sale is at an all-time high, there are more houses - given all the building - than there were even a year ago.
Now, home listings equal 3.6 percent of all houses in the Valley, according to Arizona State University's Real Estate Center.
The ratio plummeted with listings in 2004 and 2005, but in 2003 it was 3.2 percent.
The drop-off in home building hasn't hurt construction jobs.
"A few months ago, there were expectations that, as building activity peaked, construction jobs soon would dry up, pulling down the rest of the economy," said Lee McPheters, economics professor at ASU's W.P. Carey School of Business.
During the first quarter of the year, there was an average of 231,000 construction jobs in Arizona. That's an all-time high and 13.5 percent more than the same period in 2005.
But big new commercial and public works projects are offsetting some of the losses of construction jobs in housing.
Watching and waiting
Metro Phoenix's job growth is robust, but it won't keep the economy totally immune from a bigger downturn in the housing market.If buyers continue to sit on the fence, waiting for sellers to cut prices, sales will continue to fall. If investors get scared and slash prices, home values will decline. Rising mortgage rates will hurt everyone.
The next few months are the prime buying season and will give everyone an idea of where the housing market is headed.
"My sense is the worst is behind us, and the housing market will have stabilized with smaller jumps in listings and more steady sales by October," said John Foltz, president of Realty Executives.
