The receding housing market is affecting all cities throughout the nation. However, Builder Online writes that cities such as Phoenix have felt its effect sooner. According to Zonda market reports, including unsold inventory, these four cities are hopeful for only short-term concerns and rapid rebounds. Let’s hope the first markets down will be the first markets up?
What’s up in Phoenix
A key metric to Phoenix’s hurting market is affordability. “Home prices increased so rapidly beginning in summer 2020, and local buyers are feeling that burden the most. Questions of home price corrections, buying at the ‘top,’ and recessionary signals have pushed buyers to the sidelines,” shares Steven Hensley, senior manager at Zonda Advisory.
The median closing price for a new detached home in the Phoenix-Mesa-Chandler region increased 23.9% from 2021 to $457,490 in May, and attached homes increased 5.2% over the same period to $386,253. Homes priced over $550,000 had the most closing activity, according to Zonda’s market report.
“There has been a noticeable slowdown in new-home sales activity since May. It was first driven by mortgage interest rate increases, which priced prospective buyers out of the market,” says Hensley. “Since interest rates have generally stabilized, lower demand levels are being driven by consumer confidence. Uncertainty with historic inflation levels and fears of a recession are resulting in buyers pausing their new home searches.”
The buyers who are still looking are finding bargaining power as resale inventory for the market has spiked in recent months creating competition for builders. From a year ago, quarterly housing starts decreased 12.3% while the number of available vacant developed lots sits at 27,750, down 14.6% from the same quarter last year. Currently, the market is 0.28% undersupplied.
Looking ahead, the diversified and growing workforce creates hope as fears of a recession flicker. The area has seen job growth as there are more people now employed than pre-pandemic. “Overall, the changing of market conditions are a result of affordability challenges and consumer confidence. Both of which will take time to balance out and the ultimate impact is unknown,” Hensley says.
Austin feels similar
As rates have increased and market sentiment has become negative, new-home sales have dropped while inventory levels have been relatively contained. Bryan Glasshagel, senior vice president at Zonda Advisory says, “According to our data, new-home sales contracts dropped 31% in June. FOMO is gone.”
Zonda’s market report for Austin-Round Rock-Georgetown shows that quarterly housing starts increased 14.6% over a year ago as available vacant developed lots sit at 27,149, up 4.7% over the same quarter last year. This means that the area is 4.55% oversupplied.
For Austin alone, there are 18,260 new homes under construction and not yet closed. Glasshagel explains, “Roughly 30% of those [18,260] likely are not under contract with buyers. That equates to 5,240 potential inventory homes—three months of supply. If you build in a cancellation factor for the backlog under contract with buyers, you could get to four, five, or six months of inventory. That would have negative pricing implications in the market.”
For the metro area, the median closing price for a new detached home increased 30% from 2021 to $448,338 in May as attached home prices decreased to $358,108 over the same period. The most closing activity over the past year was for homes priced over $550,000.
To recover, Glasshagel believes the next nine to 12 months will be bumpy as builders work through inventory accompanied by possible declining sales activity. He says, “Good news is the excess supply will likely just be on the inventory home side only. Lot supply levels remain excessively low. We won’t have to work through excessive lots at the same time.
“The long-term potential for Austin and Texas remains very strong. The reasons people and businesses move to Texas are not changing. The market will strongly rebound.”
Vacant lots in Boise
Affordability distress and consumer confidence declines have also reached Boise sooner than other regions. The once booming housing market is now feeling the effects of the slowdown with lowering sales activity. Evan Forrest, vice president at Zonda Advisory, says, “The sales rate per subdivision has fallen substantially since the start of the year from 3.1 to 1.3, a 58% drop.”
As inventory increases and sales prices decrease, detached annual lot deliveries have been outpacing starts, prompting an increase to 14.9 months of supply (MOS), Forrest says. “Annual starts have been on a multiple quarter decline that can be attributed to metered sales initially and then the slowing marketplace aided by the media/social media creating decreasing consumer confidence in the market and pricing becoming less affordable.”
He adds, “Generally, annual starts and closings have been running in line with each other across multiple price segments with some push into the $600,000 range, which also attributes to the largest MOS of vacant developed lots in the marketplace while other price segments are all below 11 MOS.”
Forrest points to the Eagle-Starr-Middleton and Meridian areas for most of the vacant developed lots in the Treasure Valley. “These two areas could see some overdevelopment of lots if starts do not increase, meaning more potential incentives.”
Denver vs affordability
For Denver, the expensive market has seen an increase in pricing for new homes over the past two years. “The rate of home price increase has been very robust from an already high-priced market to begin with prior to the pandemic,” says John Covert, principal at Zonda Advisory.
From 2021, the median closing price for a new detached home in the Denver-Aurora-Lakewood area increased 26.6% to $706,125 in May. The median closing price for attached homes also increased to $504,290 over the same period, up 9.8%. The most closing activity over the past year was for homes priced between $450,000 and $550,000.
With a healthy economy that has fared well in previous recessionary conditions, Covert is hopeful that the slow building times due to tight regulations will keep builders from an overabundance of vacant developed lots.
“What’s challenging here in Colorado, and particularly Denver, is the regulatory environment and the time it takes to get new communities approved and built. What might normally take five months to build is now 10 months, and that’s the highest that it’s ever been. That is fine when demand is there, but when cancellations go up, it exposes that inventory.”
From a year ago, quarterly housing starts for the Denver-Aurora-Lakewood area decreased 3.9% while the number of available vacant developed lots sits at 12,791, up 0.3% over the same quarter last year. Despite the slowing of sales, the market is still 0.8% undersupplied.
“Housing starts will slow the second half of this year. Once they get rid of that inventory, then the way to look at it is if they have a sale, then they can start a house. I think they will probably stop having a higher concentration of their starts as spec starts and will go back to pre-sales,” he says.
The area’s long sustained growth and lot supply constraint benefit it greatly. “If the broader economy cooperates and we get rid of the inventory, I look at this as a short-term problem.”