Homebuilders opt to deliver luxury homes as building costs increase

Above: A home Tinker Development built in Paradise Valley. (Provided photo) Real Estate | 20 Sep, 2017 |

Arizona’s housing market is getting more competitive leaving those at the lower end of the market struggling to compete, and many developers opting to build luxury homes and projects instead.

A new study from the National Association of Realtors shows that sales for cheap housing options are decreasing while luxury housing sales have increased by 20 percent during the month of July.

Mark Stapp, a real estate professor at Arizona State University’s W.P. Carey School of Business, said these trends are due to extremely low inventory in Arizona’s housing market.

“The market is extremely tight right now, more than it’s ever been,” Stapp said.

Erik Tinker, CEO of Tinker Development said builders are facing challenges that are contributing to the low supply of affordable housing in Arizona.

“Since the new construction has taken off there seems to be less of a supply of trades,” Tinker said. “The commercial side of real estate has been booming.”

The higher cost of labor can make hiring newer, cheaper laborers tempting, but Tinker said sticking with people you know and trust, even if they cost more, will pay off in the long term.

“Even if I get a quote my guys are 10 percent more, I’m still going to go with them because they build a camaraderie with my other trade,” Tinker said. “That’s how I have been able to build so fast without compromising quality.”

Because of the rising costs, builders have a harder time making low income housing profitable, Stapp said.

Tinker said he decided to move into the luxury housing market after the great recession of 2008. He has chosen to focus on the Paradise Valley market, recently building two 7000+ square-foot-homes.

“A recession isn’t going to affect a buyer who has the kind of money to purchase a $4 million home,” Tinker said. “And I just wanted to challenge myself. I have a passion for building, and I just wanted to climb the ladder and take another step.”

Tinker said he is confident that the new homes will prove successful.

“We have some strong leads and a couple open house parties, and the feedback has been phenomenal,” Tinker said. “It was way beyond my expectations.”

The transition did not come without challenges though.

“It took over a year just to get permits,” Tinker said. “I would do remodels and other side projects while I was working on these two houses. The town of (Paradise Valley) is a little tricky. I had to write letters to every person within a half mile. I had to write over 300 letters, and let them know when my hearing was. It would give them a chance to go to the city if they had any rebuttals with anything I was building. You didn’t have that in Phoenix”

While Tinker has found his niche, he said many builders are still focusing on booming suburban areas like Arcadia.

Stapp said this has led to the urbanization of the suburbs.

“Young families want the space and lower cost that the city doesn’t have, but they still want to have the dining, nightlife and culture options,” Stapp said. “So, you’re seeing things like downtown Gilbert, which is in the early stages, where dining and the arts are getting established.”

Economic challenges

Arizona’s housing market saw a huge drop off in sales in July, according to the National Association of Realtors. Stapp said this is indicative that the cost of housing has reached an unsustainable price for many people.

The U.S. Department of Housing and Urban Development considers families that spend more than 30 percent of their income on housing “cost burdened.” The department estimates that 12 million people spend more than 50 percent of their income on housing.

Arizona renters in need of cheap housing are being left with fewer options because developers are not building new affordable housing, Stapp said.

Many developers do not want to build low income housing because the process to get federal funding to subsidize low income housing and make it profitable is slow, Stapp said.

“There is a stigma against low income housing,” Stapp said. “People do not want it built in their neighborhood.”

But, a lack of affordable housing negatively impacts those at all income levels. Expensive housing markets slow down the entire economy, Stapp said.

An essential part of bringing new jobs and companies to Arizona is having a place for their employees to live.

“Companies will not move to Arizona if their employees cannot find a place to live,” Stapp said.

Rental housing may be the next housing bubble to burst.

Stapp said there are new precautions in place to ensure that the housing market does not crash like it did in 2008. Lenders are more scrutinizing in underwriting, the process where the credit and financial background of potential borrowers is reviewed.

“The problem is in renting, because people do not go through the underwriting process like they do when they are applying for a mortgage loan,” Stapp said. “This leads to people getting in over their heads with rents they cannot afford.”

Landlords may be realizing they have outpriced many tenants, Stapp said.

“When you can’t fill units, the price of rent has to drop,” Stapp said. “Everyone deserves a reasonably priced place to live.”

Millennials and other young people are holding off on buying their first home and more people than ever are renters, according to the U.S. Department of Housing. This is not always by choice; many millennials are not making high enough wages or have too much student debt to become homeowners.

“I do think we will still see a return to traditional patterns and young people will want to become homeowners,” Stapp said. “It might happen later in life, but we will still see it. There will be a challenge then, because affordable single-family homes are the lowest inventory in Arizona.”

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