New-home prices across metro Phoenix soared too high and too fast in 2012 and 2013 for many buyers to handle, leading to a slump in sales that has builders worried.
Higher prices for new houses, along with slower-than-expected increases in household income, population and job growth, will cut the number of home sales an estimated 5 percent from last year’s level, stalling the long-awaited recovery of the region’s homebuilding market.
The slowdown in home sales means fewer construction jobs but better deals for new-home buyers. Home prices have dropped slightly this summer, and builders are trying to lure buyers by offering incentives that include lower mortgage rates and free upgrades on appliances, countertops, lighting and flooring.
One reason: a big gap between new- and resale-home prices in metro Phoenix — a gap that is greater now than at any time in recent history.
The median price of a new house in the Valley climbed to a record $305,000 in May, up from $250,000 at the end of 2012 and far exceeding the resale price for an existing property. The median price of a new Valley house fell 5 percent, to $290,000, in July but is still $79,000 higher than the area’s $211,000 median sales price for an existing home.
RL Brown Housing Reports is projecting that 11,800 homes will be built in 2014, down almost 8 percent from last year. In 2006, at the peak of the housing boom, 60,000 houses were built in metro Phoenix.
Though the 60,000 figure might not be seen again for a decade, the area’s homebuilding market had been expected to continue to recover this year. In other parts of the U.S., including Atlanta, Dallas and Denver, homebuilding is on the rise compared with 2013 levels.
Other reasons for the slowdown are slow income growth and slow job growth.
“Household incomes in metro Phoenix today have not kept pace with the price of new housing,” homebuilding analyst RL Brown said. “The area has seen a decline of over 9 percent (since 2009) in real median household income.”
Metro Phoenix’s homebuilding market began to recover in 2012 when foreclosures began to fall, resales soared and prices began to move up again.
But even last summer, as new-home construction and prices were on the rise, it became apparent the pace of the recovery was not accelerating as fast as had been anticipated. At the time, the slower building pace was attributed to shortages in construction labor and finished lots.
In mid-2013, real-estate analysts were projecting that as many as 15,000 new homes would be sold Valley-wide this year and 21,000 in 2015.
This summer, builders have homes completed or half-built that aren’t selling as fast as expected. Based on slower-than-expected job, population and wage growth, RL Brown Housing Reports recently cut its forecast to 10,800 new-home sales during 2014 and 12,000 next year.
“It comes down to jobs. If we don’t have new jobs to offer new residents, population isn’t going to grow in the Phoenix area,” said Steve Hilton, CEO of Scottsdale-based Meritage Homes, the nation’s ninth-biggest builder. “Other markets we are building in — like Colorado, Texas, Florida and California — have better job growth and higher demand for new homes than Arizona now.”
During the past year, Arizona’s unemployment rate hasn’t recovered as quickly as expected, mainly due to construction-job losses. The state’s unemployment rate ticked up to 7 percent in July.
About 2,900 fewer people are working in construction jobs here than a year ago. Only Bethesda, Md., had worse annual job losses in construction than metro Phoenix did in June, according to recent employment data.
Builders began to offer more incentives and lower prices on Phoenix-area houses this summer when it became clear that overall home sales in the region were slowing.
Brittney and Michael Hernandez weren’t even looking for another home when they found a deal on a 4,500-square-foot house on half an acre, built by Fulton Homes, near their current home in Gilbert.
The price of their new home won’t be final until they finish picking out appliances, light fixtures, tiles and other upgrades, but they expect to spend more than $700,000.
It was a large house but only one story, which appealed to the couple.
“We were really surprised how much home we get for the price and all the upgrades,” Brittney said.
They signed to buy in Juneat Legacy at Freeman Farms community in Gilbert and received $15,000 in incentives to upgrade their house on top of the already included granite countertops, maple cabinets, ceiling fans, special interior paint and covered patios. Prices in the community start in the mid-$500,000s.
For Fulton, the incentives have helped. The homebuilder sold 10 houses at Legacy at Freeman Farms during the first few weeks of August.
The Hernandezes will close on their new house in early 2015. The couple bought their current home new in 2008 and will be able to use profits from its sale toward their new purchase.
Norm Nicholls, president of Fulton Homes, said builders have learned a tough economic lesson over the past several months. The generous incentives are one approach to attracting buyers again.
“Builders are being much more aggressive with incentives to bring in buyers who have been holding off,” he said. “We brought new-home prices up so hard and fast in the Valley. The past 11 months have been pretty desperate for the area’s new-home market.”
Many builders are upping incentives from $5,000 packages to as much as $30,000 in upgrades. Some builders are cutting prices by $20,000 to $30,000 on houses priced from $250,000 to more than $750,000.
Greg Burger, a housing analyst with RL Brown Housing Reports, said the larger incentives are being offered in varying ways across the market.
“The location of the lot, how popular the home plan is and stage of construction of the house all factor into what builders are offering buyers now,” he said.
Homebuilders are cautiously optimistic about increasing sales in metro Phoenix next year.
“Everyone in Valley homebuilding got excited 24 months ago when the market started to show the first signs of a recovery,” said Matthew Cody, president of Scottsdale-based Cachet Homes. “Big investors bought land, and prices climbed. It was all premature.”
Cody said the future housing market will be driven by more realistic price increases and more sales in areas where buyers want to live.
Southeast Valley communities Gilbert and Mesa continue to draw the most homebuyers. But Peoria, in the northwest Valley, is a close second choice for buyers willing to pay more than $350,000.
Buckeye and Goodyear, in the southwest Valley, are gaining a bigger share of buyers looking for more-affordable homes.
Compared with the boom times of a decade ago, new construction remains a relatively small part of the market. New homes accounted for 30 percent of all Valley residential sales before the crash. Now, the new-home market accounts for about 10 percent of sales.
If job and population numbers don’t increase, Brown said, he doesn’t expect the new-home market to grow significantly until the price gap with resales narrows.
“We don’t think the new-home industry overall can deny that the price gap between existing homes and new homes is critically important for the future of new construction in metro Phoenix,” he said.
Brown’s early forecasts for new-home sales call for 14,000 in 2016, 18,000 in 2017 and 21,000 in 2018.
Catherine Reagor, The Republic | azcentral.com