Some Rays of Sunshine for Homebuilders

Last month I put up a post  about the Phoenix housing market and what appeared to be some revival of “animal spirits”. I was pretty tempered in my enthusiasm even though the report from Arizona State University’s business school was on the bullish side. Their report for March (the previous report covered February) is out and confirms continuing improvement if not some outright froth and suggests that I was probably a bit too skeptical in my assessment of the strength of the local market.

Here is their summary and you can read the entire report here:

 The recovery of the Phoenix residential market has gained in strength over the last month and is unlikely to falter while supply remains very low. Prices have begun to rise at a fast pace and bargains are no longer plentiful. The basic rules of economics require prices to change enough to bring a new wave of sellers onto the market and/or enough to suppress demand.

We are not there at the moment. Most homes that are priced well are attracting multiple offers within a couple of days, and often many will exceed the asking price. The only exceptions are the luxury market and active adult sector where supply is adequate. Prices in these two sectors have not fallen by anything like the rest of the market, so are not widely perceived as bargain buying opportunities.

Life for the average home buyer is now extremely difficult despite low interest rates and cheap prices by any historical standard. This is because the very low number of homes for sale means any offer they make will have severe competition. Sellers will generally give preference to all-cash offers which puts ordinary buyers who require some form of financing at a severe disadvantage. This is because sellers prefer to avoid making their sale dependent on an appraisal. It is inevitable that most appraisals will come in well below current market value when market value is climbing at the present rate. Many transactions fail for this reason.

This situation is driving home buyers to the developers’ sales offices in far larger numbers. Despite an increase in production, new homes are not plentiful and build times are increasing as sales pick up. New home construction rates are limited by the small skilled labor pool currently employed by subcontractors.

Some observers still suggest the banks hold a significant “shadow inventory” of homes they can release onto the market. Since there is tangible evidence of banks owning a home, in the shape of a recorded deed, this is an easy theory to test by simply examining the deed history and counting. We can confirm that in Maricopa and Pinal Counties at least, no such unusual number of bank-owned homes exists. This is unfortunate, because what our market desperately needs is a far greater supply of affordable homes for purchase.

Calculated Risk quoted an item in a Las Vegas newspaper yesterday which reported a surge in demand for new homes in that city. He suggested that new homes were competitive from a price standpoint due to lower land costs and developers switching to smaller homes. Undoubtedly true but one wonders if Vegas is suffering from a similar lack of supply of affordable homes.

Given the large number of homeowners in both markets with either limited or negative equity, it seems unlikely that a significant number of natural resales will materialize in the near term. Supply may increase at the margin as investor demand shrinks due to rising prices eroding returns and some supply will hit the market as the more savvy cash out, but it’s very much an open question as to whether that will be sufficient to satisfy demand.

So, after years of wandering in the wilderness, it’s entirely possible that home builders might well be in for a turn in their fortunes. So long as lending criteria remain conservative (sane?) they’re unlikely to revisit their salad days which isn’t a bad thing, but recovery in the sector could be a nice shot in the arm for the economy.

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