No Housing Bubble for the Phoenix Area?

Despite dramatic home-price boosts, don’t expect another housing bubble anytime soon in the Phoenix area. A new report from the W. P. Carey School of Business at Arizona State University breaks down what’s happening in the Maricopa and Pinal County housing market, as of April:

• The median single-family home price climbed again to $181,399, up almost 30 percent from April of last year.

• The report’s author sees no housing bubble on the way, with a very tight supply of available homes for sale.

• He also sees no significant negative effect yet from rising interest rates on local housing demand.

Phoenix-area home prices have been soaring since they reached a low point in September 2011. The median single-family home price rose 29.6 percent — from $140,000 to $181,399 — between April 2012 and April 2013. Realtors will note the average price per square foot went up 23.5 percent. The median townhouse/condo price went up 34.6 percent.

 “In previous reports, we predicted prices would rise significantly during the strong annual buying season that lasts until June,” says the report’s author, Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business. “From February through April, the average price per square foot did rise more than 9 percent for single-family homes, but the upward pricing pressure may finally ease somewhat this month.”

 One big reason for the price gains has been the chronic shortage of available homes for sale in the Phoenix area. The number of active single-family-home listings (not including those already under contract) fell 7.3 percent just from April 1 to May 1. Only 24 days of lower-end supply (priced under $150,000) is out there. However, the frequent drops in supply have at least slowed down enough to let the market accumulate 20 percent more listings than it had at the same time last year.

 Investor interest in Phoenix has also waned as prices went up and better bargains were still available in other areas of the country. Orr says the institutional-investor buying spree here began in 2011, peaked in summer 2012, and is now in a downward trend. The percentage of homes purchased by both small and institutional investors in Maricopa and Pinal counties in April was 26.8 percent, down all the way from 39.7 percent in July 2012, and most of these purchases were actually made by small-scale investors.

 Many of the investor-purchased homes have already been turned into rentals for people who lost their houses during the recession. Some commentators have been saying there might be another housing bubble when investors decide to sell these homes, but Orr strongly disagrees.

 “Some commentators talk ominously of a bubble bursting when these homes come back onto the market,” he says. “Such talk gets a lot of attention because we are over-sensitized to bubble talk after the disruptive events of 2004 to 2006. However, this idea falls flat when we examine the actual number of homes involved. The entire institutional inventory of 10,000 to 11,000 rental homes here represents a tiny fraction, less than 1 percent, of our housing stock. If every single one were to be placed for sale next month, we would still have less supply than in a normal balanced market.”

 Demand from investors is already being replaced by demand from owner-occupiers and second-home buyers. Most homes priced below $600,000 continue to attract multiple offers within a short time. The luxury market is also gaining some steam. Single-family-home sales activity overall went up 4 percent from April 2012 to this April, beginning to reverse a long downward trend in year-over-year activity.

 “There has been much talk of the negative effect that rising interest rates might have on demand,” says Orr. “So far, the increases have been minor, and the main effect has been to reduce the motivation to refinance existing home loans. At the same time, higher interest rates often create a greater sense of urgency among home buyers, so if lenders simultaneously relax their underwriting rules, this could stimulate demand, rather than reduce it.”

 The market also continues to recover from the foreclosure crisis. The number of completed foreclosures on homes and condos in April of this year was down 46 percent from April last year. Foreclosure starts – homeowners receiving notice their lenders may foreclose in 90 days – dropped 60 percent. Orr expects the rates to fall below long-term averages soon.

 With fewer foreclosures coming on the market, some buyers have turned to new-home builders. However, Orr says the construction industry is still building far fewer homes than needed to keep up with rising population and demand in the area. This is partly because the prices of land, materials and construction labor are all rising as subcontractors struggle to attract more workers. He says the developers are also being very cautious in their expansion. They enjoy the fact that limited supply allows them to continue increasing prices faster than their costs and don’t want to disturb this trend by overbuilding.

 “Given the balance between supply and population growth in Phoenix, home prices are unlikely to fall below today’s level and are more likely to continue to climb for a long time, though at a more gentle pace.”

 Orr’s full report, including statistics, charts and a breakdown by different areas of the Valley, can be viewed at http://wpcarey.asu.edu/finance/real-estate/upload/Full-Report-201305.pdf. A podcast with more analysis from Orr is also available from knowWPCarey, the business school’s online resource and newsletter, at http://knowwpcarey.com/index.cfm?cid=13.