2007 Real Estate Market Forecast

Every November, I attend a seminar, lead by Elliott Pollack, that forecasts the future of Arizona’s real estate market. Elliott Pollack is a well respected economist, who lists Maricopa County among his many clients. He is frequently quoted by the Arizona Republic as an authority on State and National Economic Issues. VP’s of the largest home builders in the Phoenix area, Pulte (Del Webb) and Trend Home also spoke.

Most of the information contained herein is, of course, geared to the Phoenix metropolitan area, but we can consider ourselves a microcosm, if not a very distant suburb!

History

Firstly, to understand where we are now, we must understand what got us here in the first place. The past few years, Arizona has simply had a huge shortage of new homes available for purchase, and then, a very short time later, a huge oversupply.

Arizona has over 120,000 new people moving here each year from other states. To house all of these people, Phoenix needs to add 45,000 newly built housing units each year. In 2004 and 2005, 65,000 units were built each year.

The majority of this inventory was absorbed very quickly until the last half of 2005 and beginning of 2006 when many new subdivisions began selling produc. THAT CAUSED the “slowing” of the market. It is no coincidence that Phoenix currently has 44,000 homes on the market. In 2004 and 2005, they overbuilt the area by 40,000 homes.

But it wasn’t the market that slowed, it was simply that the inventory pendulum swung in the other direction, rapidly. We went from shortage, to massive oversupply. Suddenly, there were more homes than buyers as 40,000 extra homes were dumped on the market (Think of all the new subdivisions that have recently opened in this area). This also coincided with every “day trader” investor trying to dump their inventory, and cash in on the supply shortage price increases.

What happens when a vendor wants to clear out his warehouse of excess supplies? They hold a sale…..and New Construction in Arizona is currently on a blue-light special.

Builder Activity

Pulte homes, like many area builders, are not currently acquiring more land and are attempting to sell excess land inventory. Pulte has over 40,000 lots of nventory, in various stages of development. Willis Martin, the Vice President of Land Acquisitions for Pulte, openly admitted there were several subdivisions that Pulte was “upside down in,” meaning they were going to lose money on the projects, rather than turn a profit. “…Take the loss and move on,” was Martin’s response on how they would handle these projects.

Phoenix area builders (as well as many local builders) are currently offering huge incentives to buyers as well as their real estate agents. Buyers are cashing in, as builders scramble to unload inventory. 10-20K upgrade packages are now included. You might get a free pool, or a waiver of lot premium. Last minute closing table discounts are becoming common as well as other last ditch efforts to tempt buyers willing to walk away from their earnest money. Many builders in the Phoenix area have halted all production of spec homes in an effort to reduce inventory.

After reading all of this, would you believe me if I said that the year 2006 was the 3rd best real estate market the Phoenix area has ever seen? It’s true. And the same goes for this area. Sales figures for 2006 in this area are very comparable to 2003…which was an excellent year for real estate in this area, and the 3rd best on record. Please be sure to tell that to everyone you hear grumbling about the market!

Pricing will probably stabilize at some point this year, but just like the Phoenix market, when that will happen here will depend largely on new inventory. Most likely, area developers will need to under build for a little while, until some excess inventory can be absorbed by the newcomers to the Verde Valley.

Local sellers should be aware that we have returned to normal marketing times in the area, home sellers should expect a 3-6 month time frame, and land sellers should count on 6 months to a year. Double this if your home or land is in one of the more rural communities of the Verde Valley. Pricing will be quite crucial to achieving your goal in 2007.  You may be directly competing with 50-80 other homes similar in size and price to yours.

Sellers will also have to keep in mind how much less affordable homes are in 2007, and be realistic about the number of buyers who come looking. In the year 2000, 70% of AZ households could afford the average home in Arizona. Today, that number has dwindled to 28%. That is the percentage of Arizona households that can afford the AVERAGE (220K) home. That number dwindles exponentially once we inch the sales price above the state median priced homes. Luckily, we are a relocation market.

Buyers can expect to find some EXCELLENT deals in the Verde Valley in 2007, as investors, builders and cash-strapped homeowners seek to sell in a highly competitive arena.

The good news is, Pollack expects that real estate markets will perform very well in rural areas of Arizona for decades to come, fueled by tourism, retirement and second home markets. The baby boomers are coming and long term real estate investors and owners in the Verde Valley will reap the benefits for years to come!!!

National Economy Forecast-2007

Since Arizona’s real estate market depends on folks relocating to warmer climates, it helps to have a picture of what the national economy may look like in the coming years.

The next few years we are expected to have strong employment coupled with increasing wages. According to the Blue Chip Forecast, growth will slow from 3.5% to 2.7% as consumer spending slows from previous years. One of the major reasons consumer spending will slow is that people have spent their excess money, along with excess equity. Currently, 1 out of every 7 dollars in the US economy is an EQUITY dollar, money that was put into a consumers pocket by taking it out of their house.

Oil and Gas prices will remain high and unstable. He explained the world’s oil supply exists in the world’s “Bad Neighborhoods.” In 2001, Oil sold for an average of 20$ per barrel. In 2006, it hovered around $70 a barrel. While high gas prices greatly effect businesses by squeezing profits and cutting into budgets set, most households are relatively unaffected. Pollack pointed out that most households spend 5% or less of their monthly budget on energy and a 20% increase in oil prices only equated to an additional 1% increase of annual income expenditure.

A recession is not very likely for 2007, (1 in 4 chance according to Pollack), though may occur in 2009-2010. Democrats taking power will have a positive effect on the economy as government will do little to change the status quo as opposing forces, gridlock the legislation until the next round of elections.

Holly Grigaitis-Svercl, Associate Broker

Multi-Million Dollar Producer, Partner

Cottonwood Real Estate

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