Just how hot is Arizona’s housing market?

Real Estate | 20 Mar |

Last year was a good year for the housing market homebuilding industry, according to data collected by Belfiore Real Estate Consulting, a residential market research firm that services all of Arizona. In fact, last year was good for Arizona’s residential real estate market with boosted home sales, prices, and agents making deals.

Demand for both new and resale homes was higher than a year ago, while supply was balanced by a limited resale inventory. And despite the shortage of resale inventory, 7 percent more resale homes sold in December of 2017 than the year before.

While the market has picked up in the past year, so has the number of people looking to capitalize on the hot market.

As of January 2018, the Arizona Department of Real Estate counted 45,326 sales agents and 12,128 brokers in Arizona for 57,454 active licensees in total, a 4.4 percent increase in just one year.

“Most of the increase is related to market health,” says Wendy Forsythe, COO of HomeSmart International, a technology-driven real estate company. “A positive year in the market means more people get licenses and 2017 was one of the best years for home sales in a long time.”

She noted two main reasons for this. One is that housing inventory is projected to increase as builders strive to meet demand and more sales require more agents. Second, higher home prices lead to better commissions, encouraging more people to become real estate agents.

One might wonder if having more agents competing for a limited housing inventory will result in changing commission rates to stay competitive. HomeSmart International thinks not, mainly because the trend hasn’t been seen in other markets.

For instance, markets like California that entered the downturn earlier (in 2010 or 2011) than Arizona recovered first and are now ahead in market growth. They have yet to see any indication of agents requesting higher commissions.

According to Forsythe, “This may be because, from a seller’s perspective, limited inventory means properties sell faster, requiring less time, effort and expense from an agent.”

However, Belfiore Real Estate Consulting reported that, starting in September of 2017, co-brokerage fees increased above the standard 3 percent in three of the four Metro Phoenix Area regions. Some of the submarkets that experienced the highest average co-brokerage fee were North Glendale (4.0 percent), Central Scottsdale (3.3 percent), North Scottsdale (3.2 percent), Sky Harbor South (3.2 percent) and Paradise Valley (3.2 percent).

However, this appeared to be only a temporary change. By November, only two regions in the Metro Phoenix area had higher than average commissions. Whether commission percentages will fluctuate during 2018 is yet to be seen.

Sales move forward

Compared with 2016, 11 percent more homes from homebuilders were sold in 2017. Typically, sales fall from November to December due to the holidays, but this past December saw 10 percent more homebuyers signing new purchase contracts than in December 2016. Throughout 2017, builders sold an average of 32 homes for every active community, resulting in almost 18,000 new production and semi-custom home contracts.

Overall, new home supply is up 6 percent, partly due to the proliferation of condominium units in the Metro Phoenix Area. Central and South has the most substantial new home supply, driven primarily by the North Central, Downtown and Biltmore East markets in the Phoenix metropolitan area. Apartments have been on the rise for the last five years, with all-time lows for vacancies in the last 36 to 48 months.

Though housing has become more expensive over the last few years, Metro Phoenix is still one of the most affordable western U.S. metropolitan areas, with the median home price for 2017 around $245,000. Sales of both new and resale homes in 2016 were higher than any year since 2006, and 2017 increased even further.

While the market was focused heavily on rentals after the financial crisis, buying is making a comeback.

“This is because the cost of renting in the Phoenix Metro Area is becoming less desirable than homeownership of a similar size,” says Jim Belfiore, owner of Belfiore Real Estate Consulting. “The laws of supply and demand suggest people will buy a home if they can afford it.”

Currently, increased job security is boosting people’s confidence and purchasing power, allowing more potential buyers to afford a downpayment. Furthermore, the foreclosure crisis that resulted in hundreds of thousands of repossessions and near-repossessions has officially passed. Foreclosures have reached near normal levels, falling 22 percent in 2016, and 28 percent by the third quarter of 2017.

Millennials entering and renters returning

One noticeable shift in 2017 was that Millennials are now reaching a point of financial well-being.

“Unlike previous generations, most Millennials have waited until their late 20s or early 30s to purchase their first home,” Belfiore says. “Now, a large percentage of Millennials are entering the housing market, increasing the percentage of first-time buyers.”

This trend is expected to continue for at least the next decade.

According to Homeowners Financial Group, a local mortgage banker specializing in the residential market, this transition is made easier by recent changes to conventional loan limits, which are allowing more first-time homebuyers into the market. Joe Conner, branch manager and licensed mortgage professional for HFG says, “The loan limit has been raised from $424,100 to $453,100, meaning that home buyers can purchase a more expensive home at a higher price point and still qualify for a loan.”

Due to this change in market subgroups and financial capability, as of 2017 the best-selling areas were new home communities with smaller, lower-priced lots, targeting entry-level buyers. However, these entry-level homes (usually under $300,000) may have a more limited inventory. Because of that, many first-time buyers may want these homes, but be unable to find them, leading them to continue renting or seek alternatives elsewhere.

Another subgroup showing signs of growth is in the older population that lost their homes during the financial crisis or sold out of necessity and began renting instead.

“Recently, credit agencies have changed their policies, choosing not to report certain judgments and liens on credit,” Conner says. “This can improve people’s credit scores, enabling buyers to get better interest rates and qualify when they may not have been eligible previously.”

With renewed confidence and repaired credit spurring them to re-enter the housing market, this older subgroup may begin buying homes again, alongside the Millennials who are buying a home for the first time.

Continued growth for 2018

This year should be healthy as far as the market is concerned.

“It’s the American dream to purchase your own house and most people will strive to achieve that,” Belfiore says. “Right now, we have a burgeoning population, a healthy job market and buyers with increased levels of confidence and financial wherewithal.”

Belfiore reports that out of the 555 active communities in Arizona, 56 percent have 32 or fewer lots remaining. This means that if builders can maintain their 2017 sales average, they may sell out within this year. However, this doesn’t necessarily mean the number of active communities will drop.

Fulton Homes is outwardly optimistic for 2018, according to CEO Doug Fulton.

“We see 2018 as a year we’ll be able to hang our hats on. All leading economic indicators look great and the trends in sales are surprisingly solid even in our typically slow months of November and December,” says Fulton. “It’s time again to bet on housing.”

For the first 10 months of 2017, 12 percent more construction permits were issued than in 2016, with a projected yearly total of 21,200. By 2018, that number is expected to be 23,500, and it could be 25,400 by 2019.

In general, new openings are increasing, while close-outs become slower. Smaller community builders with fewer than 20 lots are also entering the market, and these homes tend to sell less rapidly than the Phoenix Metro Area average.

Builders in high-volume sales areas, such as suburban and exurban submarkets, are upping inventory to be ready with a deliverable supply of homes. However, it should be noted that during the last two years, home construction costs increased 30 to 35 percent, so builders will most likely aim to raise prices to compensate and continue replacing land supplies.

Though construction costs are rising, the projected increase in appreciation, sales volume and continued lack of resale supply offer builders an opportunity to make up the difference. While the estimated new home appreciation rate for 2017 was 4.3 percent, appreciation rate is expected to move to 5 to 7 percent within the next year.

Looking ahead to the rest of 2018, there will most likely be an increase in new home sales. Builders are purchasing more land, developing new subdivisions, and working on more infill projects in urban areas, as well as vertical growth in the form of condos or town homes. However, though the 2018 market is expected to be strong, there are no dramatic increases projected.

“The lack of housing inventory has increased competition between buyers, resulting in more multiple-offer situations and much faster home sales, despite the rise in home prices,” Conner says.

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