Valley Housing Market Update

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Prices are rising, inventory is shrinking, and new home builders are back in business. Mike Orr, Director of the Real Estate Center for ASU’s W.P. Care School of Business, provides an update on the Valley’s housing market.

Ted Simons: Good evening. Welcome to "Arizona Horizon." I'm Ted Simons. The valley's real estate market is setting up so much a growing number of new homebuilders are getting back in the game. Here with more is Mike Orr, director of the airlines center at the W.P. Carey School of business. I'm reading the Phoenix area is considered a bellwether for the national real estate recovery. Is that true?

Mike Orr: I think we're in the vanguard. We're ahead of the curve in terms of our recovery. As a state and in particular in Phoenix we took it on the chin in 2007 and 2008 as the market collapsed. We went through a lot of foreclosures which caused prices to collapse. In other parts of the country it's been a little more gentle. It's still been painful but we took it really hard. As a result we're probably going to come out of there a little bit faster and probably show the way in which it can be done.

Ted Simons: Home prices keep rising, the median at 147?

Mike Orr: In May it was 147,000, a big change.

Ted Simons: 32% year to year. 7% month to month. What's going on?

Mike Orr: May was a crazy month. I don't think we'll see June or July's numbers quite as dramatic a change month to month as that. There's a lot of factors that sort of combine here. First we're rung out of the foreclosed homes owned by banks. We don't have anything like as many as 12 months ago. They were always the cheapest on the market. So if they are not for sale, those cheap prices don't go into the median. We had a really good month for luxury homes too. There were 15 homes priced over $3 million that sold, the best month in about five years. So that had an impact. And as people are starting to realize, we're well pasted bottom, which was back in September. More ordinary homeowners are saying maybe shy start thinking about getting that home I always wanted.

Ted Simons: Ordinary homeowners, are they actually getting back into the market or again, and we have talked about this before, is this mostly investor driven?

Mike Orr: Well, it's very busy with investors. So if you are out there trying to buy an affordable or medium priced home you'll be competing with investors. Virtually nothing escapes the notice of investors now. The problem for ordinary owner pock piers is they are very stiff competitors. They are looking for a bargain but they have a pile of cash. When the seller is interested in getting his house sold they tend to prefer cash offers to those that are financed. Makes ordinary people -- their bidding at a disadvantage.

Ted Simons: 30% of homes are renter occupied where the normal rate would be 10%. Is that a concern?

Mike Orr: That really represents the amount of successful purchases by investors, 30%. On the other hand it means 70% are being purchased by ordinary people still. But that would have been 90 to 92% in normal times.

Ted Simons: The bottom line, though, is there too much investors activity right now?

Mike Orr: I think if we haven't had the investor activity in 2009-2010, the market would have collapsed even worse. It was good they were buying homes when nobody else want them. Now that everybody wants them maybe we wish they would go away, move down to Tucson.

Ted Simons: Isn't it true that so many of these investors are bringing with cash. They are not likely to move down to Tucson any time soon. It's not like in the past where a bunch of folks tried to get the quickest loan and easiest down payment all of a sudden became a landlord. This is serious business.

Mike Orr: Very serious. They are putting their own money into it. They will stop buying whether prices have gone up enough that it no longer looks like a bargain to them. A lot of them are buying to become landlords. The equation to what they pay for the property and what they can get in rent. Rents are stable but the prices have gone way down. Now there coming back up. If they continue to go up then investors will lose some of their enthusiasm and find somewhere else where prices are still very cheap.

Ted Simons: You mentioned the inventory of homes going down. I can remember not long ago the major concern in the housing market in the Phoenix area was too much inventory. What happened?

Mike Orr: Well, in 2008-2009 we had about 58,000 homes listed on the ML S. Far too many. Something like 32, 33,000 would be normal. Now we're down to below 20,000. That's including a lot of homes that actually have a contract but are being left on the market by banks who are doing short sales. We have unusually low inventory. That's just adding to the stress on buyers trying to compete.

Ted Simons: We hear that Maricopa, places in the far west valley, there were tons of new homes just sitting there. The inventory was huge. Are people now living in those homes, and are they renters or are they owners?

Mike Orr: Well, both. Those homes are now occupied. A lot of them have been bought by investors, turned into rentals. Those places that used to be virtually no rentals now would go up as much as 50% of the homes on a particular street may be rentals. That's because a lot of people have been foreclosed Orr had to do a short sale and you have to do a time in the penalty box to get your credit back into a shape where you can get a loan and get back into the housing market. But people are starting to go through that now. We have seen people do short sales or foreclosures and go back in and buy a home again.

Ted Simons: Building permits, new homebuilders are seeing this, sounds like permits are up. New home sales are up. New home prices are up. Things on the upswing there?

Mike Orr: Definitely. We have had a very quiet period, almost four years' worth of very little happening in new home building. The builders are now very optimistic as they see people frustrated but they can't successfully buy a resale because there's so much competition. It's much easier to buy a new home and there's still pretty good value for money because they have been competing with the rest of the sales for a long time, so they look amazingly attractive compared to 2006.

Ted Simons: Where are they building these new homes?

Mike Orr: Probably the favorite area is Gilbert, but also Goodyear, Peoria, Chandler. A number of places. Still small quantities by what we used to get back in 2004. We did about 700 in May. There were months back in 2005 and 2006 when we did more than 4,000 in a single month.

Ted Simons: Are some of the homes being built on lots that are now inexpensive or the lots themselves maybe went through a foreclosure?

Mike Orr: Yes. Many of those lands that were subdivisions that basically ran out of customers got foreclosed, changed hands, maybe a couple three times. The builder is now building on that land but they are starting to run short of that cheap land and are starting to look around. Have to buy more land at today's prices, which have actually gone up quite significantly in the last six months or so.

Ted Simons: Would you be more comfortable if things weren't as white hot -- we all lived through the white hot. We know what happens when the white hot turns away. Would you rather see things more calm here or business is business?

Mike Orr: It would be better for everybody if it was a little calmer. We have had a very frenetic, stressful spring. I think the summer will see a little bit because prices are up, demand will cool a little built, prices going up brings a little more supply on as well. So we'll get a little more in balance and it won't be so stressful. Having said that you need this imbalance to really push prices back to where we want them to be for a nice, balanced market.

Ted Simons: great information. Thanks for joining us.

Mike Orr: Thanks very much, Ted.

Mike Orr:Director, ASU Real Estate Center for W.P. Care School of Business;

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