November 30, 2007

A recently released National Association of Realtors (NAR) market report for the Phoenix area summed up the situation quite nicely: there are certainly some negative factors affecting the Phoenix-area housing market, but there are also a lot of positive factors. We won't be in a slump forever.

The housing market news has been dominated lately by two topics: sales declines (in numbers of homes sold and price) and foreclosures. In a new series of posts, I'll address both issues and talk about the housing market and Arizona's economy in general.

The bad news: negative factors affecting the Phoenix housing market

In the coming year, a huge number of adjustable rate mortgages, many of them subprime, are due to reset. Barring any Congressional action to freeze resetting rates (which is being discussed), mortgage payments could rise dramatically - several hundred dollars a month - making mortgages unaffordable for some homeowners. That, in turn, could further increase foreclosure rates (which are already relatively high).

In the Phoenix region, especially in the "bedroom" communities on the edges of the Metro area, inventories of unsold homes are high. There are more homes listed for sale in MLS than there have been in a long time; and builders are holding larger inventories of unsold homes, too.

That unsold inventory creates downward pressure on prices. So the quicker home sellers and builders cut prices and reduce the excess inventory in the market, the quicker prices will start rising again. According to the National Association of Realtors report, "Inventories are very high. A sharp reduction in new-home construction will help control the overall inventory situation. . . Homebuilders having drastically cut production will help minimize prolonged oversupply conditions. Further production cuts by builders, which is encouraged, will help the market to more quickly return to a healthy state."

The good news: positive factors affecting the Phoenix housing market

"The outlook is good," according to the NAR report.

The report tries to dispel the notion that home prices have plummeted in the Phoenix area. "Despite some media reports of the worst housing market conditions since the early 1990s or even the Great Depression, the recent home price declines have been negligible at the local level." (And you know what they say, all real estate is local.)

And there are a number of positive factors that cheer up the outlook for the Phoenix area real estate market:

• Job gains add to the number of potential homebuyers
• Rising apartment rents encourage home ownership
• Mortgage rates are low (and may get lower)
• A revival of FHA loans will help low- and moderate-income homebuyers purchase a home

Overall, "A rise in home sales and a strengthening in home prices appear imminent," says the report.

Stay tuned for more analysis of the Phoenix-area market as well as a report on the upcoming Economic Forecast Luncheon.