Updated on December 1, 2016
2008 Sedona Verde Valley Real Estate Market Forecast- January 2008
Back in late November, Ken and I attended a economic forum whose sole purpose is attempting to forecast the climate of the Phoenix and Arizona housing market for the coming year. Lead by Elliott Pollack, a nationally renowned economist who resides in the Phoenix area and currently serves as the economics department for Maricopa County, the forum also contained speakers from some of the leaders in the industry such as Cushman and Wakefield, Capital Pacific Homes, Grubb & Ellis, Land Advisors, The Alter Group and CB Richard Ellis. To follow is a synopsis of their thoughts for the Phoenix housing market and the national economy in 2008.
2008 is expected to be a tough year for the American consumer, though Phoenix and Arizona are in a relatively good position and will again outperform the nation in job growth and will continue to lead the states in population growth. Because 2008 is expected to be a tough year for the American consumer, it will also be a tough year for the American economy. While troubles in the housing sector will spill over into other sectors of the economy, the psychology of our nation as a whole will have a huge effect this coming year, and will probably have a larger effect than the true fundamentals of the underlying economy.
So how does your and your neighbors “mood” effect the economy? For the plain simplistic reason that you may not be feeling as wealthy as you have in the past few years, and that may make you less likely to spend your money on big ticket items and luxuries. Shrinking real estate prices in many locations across the country equates to many as a reduction in net worth, which translates into a reduction in spending and holding off on major purchases.
So what…big deal, right? Absolutely. In 2006, one out of every seven dollars floating about in the American economy was a equity dollar, spent by a consumer who took it out of their home in the form of an equity line or other refinancing product. The slowing or dead stop of appreciation and tighter lending guidelines in many parts of the country have officially turned off the lights and cut the power to the music of the great refinancing party. The boom those dollars added to our economy are now gone, and when we remember the fact that approximately 70% of our American economy is based on the daily activities of each and every American, we have a recipe for a slow, stagnant year for the economy. In our economy, it truly is a matter of buy or die.
The chance of a recession in 2008 is about 50-50…..So go out today and buy yourself a ridiculously high priced cup of coffee, see a movie and order out for dinner. Buy yourself a new stove, car or….a nice new house! The American economy is counting on you!
Arizona’s peak housing market, in terms of sales and prices occurred July 2005- January of 2006 (about the same for the Verde Valley). A normal supply for the Phoenix area is about 30,000 homes. Currently, there are about 55,000 homes on the market in the phoenix area, 20,000 of which are currently vacant and unoccupied. Pricing has cooled substantially in some areas, while going up 2-3% in select zip codes. Pollack estimates that currently, 106,000 homeowners and investors in the phoenix area are upside down in their homes, owing more on them than they are currently worth.
There is only one factor which will matter in the 2008 Phoenix real estate market, Inventory and how much additional inventory debuts on the market in the coming year. It all boils down to supply and demand. The same can be said for the Sedona / Verde Valley real estate market.
Due to the great amount of speculation which occurred during the boom years, additional inventory for Phoenix in 2008 is a completely unknown amount. Pollack estimates that the Phoenix area in 2008 could have anywhere from 30-50,000 extra housing units floating about in the market, which will certainly mean hard times for many small scale builders in the area. Currently, the Phoenix Metro area has a 14 month supply of homes, which means it will take a over a year to sell all the homes currently on the market today (Sedona and the Verde Valley currently have a 23 month supply). The peripheries of Phoenix have been hit the hardest, both with substantial reductions in pricing and lots of excess inventory currently available. These are the areas in Phoenix where vast amounts of speculation and new construction took place during the boom years. In other words, buyers should look for and will find a lot of incredible bargains in areas where a lot of new construction exists, which is mostly on the peripheries of the Phoenix Metro area.
Residential raw land prices have plunged on the peripheries of Phoenix. In fact, a few of the panel members said their companies were valuing some of their raw land holdings at zero dollars…because it will cost more dollars to develop the raw land than the individual lots can be sold for.
Pollack and other panel members agreed that it will be 3-6 years before the Phoenix housing market begins to once again resemble a normal market. Buyers will continue to be in the drivers seat, and call all the shots.
Pollack and other panel members offered advice to home builders, speculators and investors who purchased at the height of the market in 2005 and the beginning of 2006. Forget your profit….it does not exist. Forget recouping your interest. The only thing you should be concentrating on is the preservation of capital. Period. Pollack said, “Ask yourself if you want to swallow a moth ball, or a basket ball, and then make your decisions accordingly.”
Builders in the area have already heeded the advice. $50-70,000 discounts on newly constructed homes as well as 20% commissions to brokers are occurring in some areas. Some builders are selling homes below replacement cost, and turning little to no profit.
Harsh words, but very sound advice, given the current conditions. Panel members also recommended builders cut production of new units in the coming year. New permits in the Phoenix area for 2004 and 2005 were 65,000 each year, and only 45,000 new units were needed. The first 6 months of 2007, the phoenix area saw more new home permits, than home sales.
Advice to listing brokers of Arizona real estate was “Ask your sellers if they want a 90 day list price or a one year list price, and if they insist on listing higher than those numbers, ask for a 3-5 year listing.” In other words, sellers will need to price their home very competitively, if they haven’t already.
Buyers and savvy investors of Arizona real estate get a big green light in 2008, and will find some amazing bargains. While it is impossible for anyone to determine exactly where we are in the “U” of a down market, Pollack said point blank that “fortunes, absolute fortunes will be made by real estate investors buying in Arizona in 2008, 2009 and 2010….fortunes will be made. Market timers looking for the absolute bottom always fail, incredible opportunities exist for real estate buyers and investors right now….. Interest rates are low, plenty of money is available….. financing may tighten considerably in the coming years.”
Arizona received 170,000 NET new residents in 2007, the majority of which settled in the Phoenix Metro area. Though that number is expected to shrink in 2008 as stalled housing markets in other parts of the country will slow the wave of incoming residents, the valley of the sun still will need to add an average of 45,000 new housing units in the metro area to house all of our new residents. In other words, A whole lot of homes will still be bought and sold in Arizona and the Phoenix area in 2008. Sellers will just have to woo buyers more with upgrades, concessions and, of course, the best trick in any sellers bag….a good, fair price! Internet marketing will also be crucial to a sellers success, as many of Arizona’s 2008 real estate buyers are currently freezing, shoveling snow and scraping ice off the windshield in another state.
Arizona real estate buyers will find their best deals on existing resale homes, because many of them can be bought below replacement cost. That will be the key to finding a good value for home buyers in 2008. If you can buy it for less than it would cost to build today, you will weather the market just fine. Buyers who prefer new construction will find subdivision reps. bending over backwards with enticing concessions, upgrades and deep discounts.
Traditional, longer term investors will find incredible opportunities: once again you can find rentals that cash flow, a few well priced foreclosures and fixer-uppers and raw land at an extreme discount. Arizona investors should look to the peripheries of the metro areas for bargains on land, in areas that are close to being built out and have a relatively small amount of vacant land left available for development (like Sedona and many pockets of the Verde Valley). Pollack and other panel members expect builders to be dumping land inventories in the next 24 months. Although there is a huge oversupply of vacant land in the entire state of Arizona, Northern Arizona is expected to fair better than the metro areas, as many Northern Arizona communities are approaching build out.
And by the way, interest rates as of today on a 30 yr fixed rate loan just dropped to 5.5% WOW! Buyers! This is no longer a market to be scared of, this is a market to take advantage of! Give Ken and I a call or send us an e-mail a call to help you find some exceptional deals here in Sedona and the Verde Valley! Holly Grigaitis-Svercl and Ken Svercl, Mingus Mountain Real Estate 928-300-5228 firstname.lastname@example.org