Housing Report

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A new report shows the Phoenix-area housing market is ending the year with a drop in demand and activity. The report also shows reluctance on the part of first-time home buyers, especially those under 30, to jump into the housing market. Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business, will talk about his report.

Ted Simons: Good evening and welcome to "Arizona Horizon." I'm Ted Simons. A new report shows that the Phoenix area housing market is ending the year with a drop in demand in activity. The report also shows reluctance on the part of first-time home buyers, especially those under 30, to jump into the housing market. Joining us now is the author of the report, Mike Orr, the director of the center for real estate theory and practice at the W.P. Carey School of Business. Good to see you again.

Mike Orr: And you, too.

Ted Simons: It sounds like the market is ending the year on a whimper.
Mike Orr: Well, prices have gone up dramatically in the past two years, and it's hard to believe that the median sales price has gone up by 71%. Since two years ago. And when the prices go up that much, eventually, sellers start to get overwhelmed. Ok, that's enough. So the demand has definitely been declining. In fact, it started declining in July. First, everyone said it was just the interest rates going up a bit, but now, we're seeing, sort of a general weakness in demand. And as you mentioned, it's very prominent in two particular sectors. The younger, first-time home buyers, and not really coming out in large numbers, and secondly, the, the investors that we had around for a long time, and then also, prices have gotten to the point that nothing is a bargain anymore, so, they are looking elsewhere.

Ted Simons: So, this is not necessarily a seasonal thing?

Mike Orr: No, seasonally, we always have, have less activity in the fourth quarter than we do in say the second quarter, but, normally, November, December, reasonably active, and definitely, about 20% quieter than I would normally expect.

Ted Simons: You mentioned those under 30, uninterested. What's going on out there?

Mike Orr: Well, the ones I have talked to, it just hasn't hit the radar. They are too busy living their lives, and finding jobs, and paying off student loans, and doing everything that, that 25 to 35-year-olds do, and buying a house, hasn't even occurred to a lot of them.

Ted Simons: What about qualifying for loans? Is that a problem?

Mike Orr: That would be if they even thought about it.

Ted Simons: They are not getting that far.

Mike Orr: Some of them, obviously, are doing that, but, it's very rare. And qualifying for a loan is quite tough if you don't have a long history, you know, you have got to have good credit history, and ideally have a job for some time, too. If you have only been in the job for two years, most lenders will turn you down straight away.

Ted Simons: And you mentioned price, entry level prices, increasing with everything else?

Mike Orr: Actually, entry level homes have gone up a greater percent than all others. So, they are more expensive. And there is not all that much around. In the areas that young people like to live. The intent to find the younger generation wants to live closer to downtown where the action is, not out in Buckeye or the valley. It's really, to them, the suburbs are not particularly attractive, and the house prices might be lower.

Ted Simons: It sounds as though, with these under 30s, not all that interested. Fewer households are forming. That's going to have a bit of an effect down the road, corrected?

Mike Orr: I think a lot of them, are leaving marriage later in life, so very often, the, finding a place to rent and sharing it amongst more people than ten years ago. So, you find a lot of young people sharing a house, coming and going and, and so, that works out a lot cheaper if you can divide the rent between lots of people.

Ted Simons: I know a lot of folks, entry level and otherwise, got into, into there because they had foreclosures, and what are foreclosures looking like and what does it start looking like?

Mike Orr: They are back down, below normal now, for the population size, and they are, they are about the level that we were in 2002, whereas the population is about 25% bigger than that. So, foreclosures, are no longer a big issue.

Ted Simons: Interesting.

Mike Orr: The ones that have already happened, because that damaged people's credit, so a lot of people who are renting, if they were to apply for loans, they would still, still probably get turned down because of the foreclosure on the record. They still have some time to serve before they get rid of that.

Ted Simons: And we mentioned the under 30s, but let's talk about those who did have problems when the housing crisis hit. Are they psychologically predisposed now to maybe say, well, I'm not so excited.

Mike Orr: Well, I think that, that up until 2006, there was a theory that home prices never went down, and we have now seen that that's not true. So, people are a lot more weary than they were, and particularly, the younger generation, they have only seen hard times, you know, if they are 25, the last seven years have not been that great. But the baby boomers, you know, if they bought their first home in 1975 or something, then they have seen a lot of appreciation, so, when they get out of the market and, and they are quick to get back in. So they can, they can unmass some wealth through future appreciation.

Ted Simons: So, I'm guessing the supply of homes out there is increasing, is increasing a lot?

Mike Orr: Not really. It's increased but it's increasing just because of the slight demand. Homes that were listed stay around longer before they go into contract. And if you cannot have the new listings, which gives you ideas of the raw supply, they are lower now than they have been in the 13 years I've been measuring them. So, we're not getting a flood of new listings, but what we have got is enough to supply the weak demand. Basically, it's a subdued market.

Ted Simons: What about, what about, let's talk, talk homes, 150 thousand dollars, and less.

Mike Orr: Right.

Ted Simons: That hit the hardest right now?

Mike Orr: In terms of the demand falling off? It's, it's -- the demand is weak but the supply is very low, too. And, and you will not -- you would have to hunt quite a bit to find an attractive home, in a nice area, that sort of price. Where the supply is growing most is in the mid range from about 200 to about 400 thousand if you are buying in that range, you have got a lot more choice, probably as much as three times as many homes to choose from as you had in April.

Ted Simons: Interesting.

Mike Orr: And fewer people shopping, so you are going to get, to get a much nicer time, treat you with respect, and they will read the contract, and you will probably be able to get concessions.

Ted Simons: What about luxury homes? Five to eight hundred thousand?

Mike Orr: Above 500 thousand and the market is in good shape. And, and it's not like we have a, a, a low number of homes for sale, but the buyers are very, very willing to pay. We always see this when the stock market does well, and we have had a pretty good year for the stock market, and luxury homes tend to, to be one of the first things that, that people who have done well in the stock market, think of spending that money on.

Ted Simons: And what about the availability of jumbo loans? A little easier than in the past?

Mike Orr: A lot easier. I mean, last year, jumbo loans were very scarce, and everybody, all the lenders. They wanted to write loans that they could sell to the Government, and that meant, loans below four hundred and seventeen thousand. And this year, that's going to add a fashion, and now they want to write big loans to people, who are likely to pay them back. And that means wealthy people, so, loans of 800 thousand, or so, really, really are very much in vogue for many lenders.

Ted Simons: And townhouse, condo market, and any changes there, and anything of note?

Mike Orr: It's a similar sort of patent. The one thing that, that still is, is not, is not coming up is, is sort of new condo construction. Downtown. And I mean, I think that would be very popular if we had some, some low, low, small, small, affordable condos down in the center of Tempe, the center of Phoenix and Scottsdale. And some of them are being built but we are seeing, well, the total number of condos sold each month new, is only about 50 or 60, whereas ten years ago, we were getting 7 or 8 hundred.

Ted Simons: And again, as you mentioned earlier, especially folks under 30 or the first-time buyers, they want to be in that urban environment. As long as they are priced accordingly, they might go.

Mike Orr: They don't need 2,500 square feet, you know, maybe 1,000 would be fine. And they don't have children yet. And if it's close to the lightrail, it's going to sell well, I think.

Ted Simons: So what is all of this doing to the rental market?

Mike Orr: The rental market is stable. We have got plenty of new rentals, basically, coming out of the foreclosure crisis. A lot of people lost their homes, and they became rentals. And, and, and renters and the supply of rentals have been, have been, actually, fairly in balance for sometime. The rents, across the valley, about 70 cents per square foot per month is average. You will pay a lot more than that, in a luxury area, but that's the average, and it's been the same, really, for the last five or six years without much change.

Ted Simons: So, it sounds like we're cooling things down here, and sounds like we're going to be cooling things down on into next year, and is this, is this a healthy, is this, is this a, in the long run, a good thing?

Mike Orr: Well, it's cooling down, but it's cooling back to normal, really. We've been at a boiling point for a long time, and we're just coming off that and back to normal. There is no need to panic, just the usual level of supply. We have now four and a half months of supply, in April, we had two and a half months, and that feels like a very low amount of supply when you are trying to buy. Four and a half feels good. Four and a half to six is the, is the typical range for a natural, normal market. We have not had a normal market for a long time so people have gotten what it feels like, and this is what it feels like.

Ted Simons: Is there such a thing as a normal market.

Mike Orr: Back in, the first quarter of 2003, I was trying to sell my house at the time. And I got frustrated but it took a while to sell.

Ted Simons: Normal hits every ten years, all right. Mike, good to have you here. And thanks for joining us.

Mike Orr:Director, Center for Real Estate Theory and Practice at the W. P. Carey School of Business;


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