Housing Shortage

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A new Arizona State University report indicates a housing shortage could be coming in the Phoenix area. Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business, will discuss his new research.

Ted Simons: A new ASU report indicates that the Phoenix area could soon be facing a shortage of homes for sale. Mike Orr, director of the Center for Real Estate Theory and Practice for the W.P. Carey School of Business conducted the research. Always good to see you, housing shortage in the valley? What's going on here?

Mike Orr: Well we've has a while where um buyers were lacking enthusiasm and now I'm seeing a period where sellers are joining in, they are not particularly enthusiastic either. So we've actually got fewer homes being listed than I've seen in the last 14 years.

Ted Simons: So basically the lack of demand is hiding a shortage even now.

Mike Orr: Exactly. We know what a shortage felt like because we had that in 2011 and 2012, and the first half of 2013. And unless we start to see a lot more listings come along, when the demand goes back to normal, we could be back into a period of very short supply again.

Ted Simons: Any idea when that could happen?

Mike Orr: No that's the difficult bit.

Ted Simons: Yeah.

Mike Orr: I don't think it's going to be very soon, because there's not much sign of demand perking up just yet.

Ted Simons: Why is that? Why is the market so quiet right now?

Mike Orr: Um I think there's two major reasons, one if it is we've still got a lot of people who were foreclosed, remember 2008 through 2012, 5 years of very heavy foreclosures, and many of those people still can't qualify for a loan because Fannie May, Freddie Mac, their rules are foreclosure means a seven-year wait, that's seven years added on 2008, it's 2015 so the bulk of those aren't really going to come around until next year. So I think demand will grow next year. And then the other big collection of people who are not really buying homes the way they normally would would be the younger generation, the people in their 20's and early 30's. And a whole lot of reasons but definitely not participating as first-time home buyers like their previous generations did.

Ted Simons: And we talked about that in the past. Not the least of those reasons is maybe they have been scarred by seeing what happened to the market here in the last --

Mike Orr: I think that's a large part of it. I mean when I was in my 20's home prices were going up very fast and everybody was desperate to get out and buy one before they got out of reach. If you've watched your parents go through foreclosure or other relatives go through a short sale, it's a bit off putting that those nasty things can happen to you if you buy a home. So I think they are probably making a mistake, you know that sort of cycle we've went through is generally the sort of thing that only happens once every hundred years or so, not likely to repeat itself.

Ted Simons: Investors not picking up the slack?

Mike Orr: No investors are actually even fewer in number now than they were a few months ago. We have very few bargains available now. If you want to be an investor here, you've got to do a lot of foot slogging and hard work to find, go and find out a place that you can get below market price.

Ted Simons: But they are not buying, but how come they are not selling then?

Mike Orr: Well because they are renting them very successfully. We have very low demand for homes to buy but very high demand for homes to rent. Cause if the millennials are not buying homes, they're renting them. And therefore being a landlord is proving to be a very successful trade.

Ted Simons: I would imagine then demand, rental demand, is up, prices up accordingly?

Mike Orr: Yes, rents are definitely moving up much faster than I've seen for the last 10 years.

Ted Simons: Interesting.

Mike Orr: So that could encourage people next year to think about buying instead of renting.

Ted Simons: Again, as far as picking up the slack, what about the move-up buyer, the second home buyer, where are they?

Mike Orr: Again, move-up buyers not terribly enthusiastic. Many of them after all of the comings and goings of the last 10 years don't have a huge amount of equity. And the idea of trading without having a big down payment to put on the new home is not that exciting. So even if they've got to a positive equity point of view, it's not great unless you've got a nice substantial equity position to move up.

Ted Simons: You've mentioned to folks that had foreclosure problems and maybe waiting for that seven-year period to end, what else will increase demand besides from those folks maybe getting their feet back in the water?

Mike Orr: Easier financing. I mean that's one of the most critical factors in demand. It's how frequently a lender will say yes to an application. We've been through a period in 2003, to 2005, lenders said yes to almost every application. And then between 2011-2013 they said no to almost every application and everybody was buying with cash. It's starting to go back towards normal but it's still much harder to get approved than average over the last hundred years. So as lenders start to accept more and more applications, demand for homes will increase.

Ted Simons: Are we still seeing unusually high numbers of cash buyers out there?

Mike Orr: Yeah. It's not as high as it was but it's well above normal.

Ted Simons: So basically, when that demand picks up -- and again, that's the tricky part is figuring that out -- supply shortage is possible?

Mike Orr: It's possible; I'm not saying it will happen. Because we might see sellers come out of the woodwork, as well. But what we're not seeing is a lot of new single-family home construction. It's still very low compared with even the second half of the 1990's.

Ted Simons: Does that construction increase once that demand picks up? Or is that market forever changed?

Mike Orr: I think it will increase but it can't increase as fast as the demand can increase. You just don't have enough people working for the developers to you now treble the production. It takes time to, you know, create a new subdivision, get all the permits and get building. At the moment the effort is building multifamily units to cope with the rental demands. So there's a lot of multifamily construction going on. Particularly up and down Scottsdale Road and Rural Road.

Ted Simons: And again, those are the glorified infill projects, are they not?

Mike Orr: Yeah. And they are also pretty expensive as well as rentals, they're not really catering to the average renter, they're catering to the fairly wealthy renter.

Ted Simons: So townhouse and condo prices, those are, according to your report those are up slightly, huh?

Mike Orr: They're up slightly, not a lot of movement on price in the last few years -- in the last few months. They are still up from 12 months ago but most of that increase was quite a while ago now.

Ted Simons: That market always seems relatively stable, doesn't it?

Mike Orr: Yes, and I think we do have a stable market, I'm not saying pricing is moving either up or down over the rest of this year. They're kind of really at a level which seems to be right for this level of demand and supply.

Ted Simons: Arizona's overall economy, we've done stories on how job rebounding in Arizona is not quite what it is around the rest of the country. How much of a factor?

Mike Orr: That's also a factor. If there was a lot of job growth then we would probably have people moving into the state, and particularly into Maricopa and Phoenix. One of the big things that's missing from the demand right now is Californians. If you go back to 2004, 1 in 10 of the homes we bought were Californian. Now it's only about three or 4%. So --

Ted Simons: Why is that?

Mike Orr: Well, I think that's a hard question to answer. My particular viewpoint, and there are many others, is that from a Californian's point of view, when they look over the border, the sort of thing that concerns them is maybe we don't spend enough on education compared with what they spend. They like the idea of paying a lot less tax but maybe not quite as much less if they could have slightly more education. They have moved for their own purposes but they're also worried about whether their children will be disadvantaged.

Ted Simons: Interesting.

Mike Orr: They do however get a lot more home for their money so it's very appealing.

Ted Simons: Real quickly, what do we look for to see that maybe something is happening here and things are changing?

Mike Orr: Well I'm -- Right now I'm looking for the number of new listings coming along on the local MLS. You know I track that every day, and try and compare week with week. Are we seeing an upward trend or downward trend? At the moment it's still very low.

Ted Simons: Do you usually see something hit though once fall comes around?

Mike Orr: Usually listings are starting to arrive quite fast right now. An overwhelming demand, because the hot months are when not many people are out buying and listings start accumulating. At the moment that's not happening, it's unusual. That's why I think we need to sort of prepare ourselves that maybe, the supply could be quite low again next year.

Ted Simons: All right. Interesting stuff, good to see you again.

Mike Orr: Thank you very much.

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

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