One of the definitions of the word phoenix is a renewal after a calamity, and that is so appropriate for the real estate markets and economy of Phoenix, Arizona. I had the opportunity to again make the annual journey and speak in Phoenix this week and found a dynamically changed economic landscape.
The drivers of all economics are jobs, and the Phoenix-Mesa-Glendale Metropolitan Statistical Area (MSA) is picking up momentum. The MSA has gained back 41,500 of the jobs lost in the recession that commenced in mid 2007. And I believe they will add another 40,000 jobs in the coming 12 months. The latest job growth rate is 2.43 percent compared to 1.35 percent for the U.S. Jobs are everything. And this market is growing. And these are not just minimum wage jobs as many are education, technology and construction related.
The big news is the significant reduction in inventory of homes available for sale. Months inventory is calculated by dividing the number of current active listings (supply) by the number sold in the prior 12 months (a proxy for current demand) and then multiplying that times 12. The table details the number months of inventory for July each year since 2008. While the current inventory is 2.47 months, inventory for homes priced at less than $200,000 is less than two months. Investors, snowbirds and locals have literally depleted the market of current listings.
This sharp drop in inventory is a combination of sales and what has been very limited new construction. The following graph shows the average number of homes sold in the prior 12 months (doing the average removes the seasonality and allows a clear view of trends—if any– in the market). Note that while sales have fallen slightly in recent months, much of that can be attributed to minimal inventory of homes available for sale. Sales, however, since mid 2009 have approached the level seen at the peak of the housing bubble. What has not recovered as much has been the higher-priced housing segment, which is more constrained by a struggling U.S. economy.
Thanks to the Arizona Regional Multiple Listing Service (ARMLS) for the data. ARMLS services the Phoenix Association of REALTORS® (PAR), SouthEast Valley Association of REALTORS® (SEVRAR), West Maricopa Regional Association of REALTORS® (WeMAR) and Scottsdale Area Association of REALTORS® (SAAR).
New residential construction has remained very constrained after the significant overbuilding in 2004 to 2007. That excess inventory, coupled with the loss of more than 200,000 jobs, saw a construction industry that all but evaporated in the desert climate. As the surplus housing inventory was liquidated, (at prices of 50 cents on the dollar from the peak), supply simply dried up. Last year saw 9,081 total dwelling permits issued, and in the past 12 months just less than 12,000. However, when compared to the 41,500 net new added jobs in the past year, that means that there were 3.47 new jobs per new dwelling unit—more than double the typical 1.25 to 1.5 new jobs per new dwelling unit. As a result, cash rents are forecast to rise 2.9 percent this year in the Phoenix region, effective rents (cash rents less rental concessions) up 3.4 percent and the apartment vacancy rate will drop 110 basis points to 6.2 percent after falling 240 basis points in 2011. See report here.
Growing jobs, shrinking supply and rising rents are converging to bolster prices. While prices dropped from almost $350,000 by 50 percent, the past year has seen price increases from 20 to 25 percent (the 12-month moving average mutes that increase in the graph below, so the second graph shows the raw numbers). While the $350,000 median price in 2007 was unsustainable, likewise the massively discounted 2011 price could not hold either, and prices are going up. Finally some underwater homeowners now have the tradeoff of continuing to pay their loans as a competitive response to paying rising rents. That’s a good start.
The bottom line is that the Phoenix regional economy and housing markets are recovering. While not back to the price and construction levels seen in the mid 2000s, it is improving.
And that’s good news.