Outlook for 2009
by Ken Lewandowski
As we anticipate a new presidential administration coming to Washington DC, and as the world financial crisis lingers on and the housing industry continues to stumble, it may be useful to look at key trends in the Phoenix housing market over the last couple of years to gain insight into what we can expect in 2009.
The data included here is from Hanley Wood Market Intelligence, a firm that collects data on new for-sale housing in subdivisions of 10 units or more, including monthly sales contracts written, cancellations, closings and a number of key data points for every for-sale new-home project/subdivision available within our data collection boundaries-in this case, Maricopa and Pinal Counties.
Monthly new-home sales (gross sales, which represent all contracts, and net sales, from which contract cancellations have been subtracted) have seen a steady decline in most months over the last two years. In late 2006 and early 2007, between 4,000 and 5,000 contracts were written each month with net sales results around 3,000 per month. As of the latest data surveys taken in October 2008, the numbers are under 1,000 per month in both categories. While October was a particularly bad month due to the culmination of the credit crisis, the figures are obviously troubling.
Through October 2008, year over year comparison shows a similar trend, with declines in the most recent period exceeding 60 percent compared with the same month in 2007. It is unlikely that percentage will return to 0 percent (flat from the previous year) until sometime in mid- to late-2009.
In terms of inventory, with over 850 new-home projects/subdivisions of all types available to choose from in the Phoenix new-home market, new-home builders have done a pretty good job of managing inventory levels and slowing the pace of construction. A combination of slower demand and tightening lending standards by financial institutions has forced the issue in many cases.
Standing and under-construction inventory of new homes increased in 2006 and 2007 and leveled off in 2008. Most homebuilders still active in the Phoenix market understand the difficult market environment, and we expect they will plan accordingly for 2009. Ideally, these inventory trend lines will continue a slow decline until housing demand recovers.
Many potential home buyers buying under a contingency of selling existing homes found that they were unable to sell, resulting in numerous cancelled contracts. The cancellation chart shows the number of new home contracts that were cancelled in a particular month as well as what percentage of gross home sales those cancellations represent. While the cancellation rate is still elevated, it is well below the highs seen in 2007.
Sum up all the dynamics of these sales and cancellation trends and it is easy to see why average and median pricing has dipped so much over the past 24 months. Couple this with inventory pressures caused by the foreclosure and resale market and it's little wonder most homeowners face shrinking equity in today's market. The good news for buyers is that there are some incredible values out there. The not-so-good news is that pricing and homeowner equity have taken a nosedive, and it will take quite some time for home values to recover.
Although Phoenix has certainly faced some of the toughest conditions of any metro region during the housing downturn, the area also has some positive characteristics that will be an asset down the road when the economy turns around.
The key for homebuilders in Phoenix is to find a way to survive the next 12 to18 months until the broader economy finds firmer footing. Usually, housing downturns are caused by economic downturns; but in this case, the relationship was the opposite. Unfortunately, the economic downturn that is a result of the housing slump is likely to affect housing again in return; 2009 is likely to be a bumpy road for homebuilders on the brink.
Phoenix has enjoyed strong migration trends in recent years although the population expansion was so rapid that it is likely to level off for a while, at least until the housing and labor markets begin to recover. Nevertheless, the cost of living in Phoenix and the surrounding area remains very attractive, especially for California residents seeking a less expensive home and lifestyle.
The climate and natural environment also attract many retirees, who tend to have more consistent spending patterns than the rest of the population. That will be a benefit to the economy down the road, and active adult home communities may lead the way for housing recovery.
Ken Lewandowski is Regional Sales Director for Hanley Wood Market Intelligence.
For questions about this article or other related topics, contact him at KLewandowski@hanleywood.com.
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