Metrostudy’s survey of the Phoenix housing market indicates that initial expectations for 2014 were overly optimistic, and we expect to see the market down 5% for the year. Our 2Q14 survey shows that home starts, attached and detached, in the Phoenix area numbered 11,270 over the last four quarters. The Northeast Valley continues to see the strongest starts growth year over year with an increase of 53.3% (857 starts). Closings over the last four quarters are also trending down to 10,981, a slight decrease of 2.5%.

MLS listings are down to 23,099 listings in June when compared to our market a year ago we have seen listings increase and sales decrease.  These seems necessary in order to get a stronger resale market in June 2013 the market was sitting a 2.1 months.  Now we are seeing stronger numbers at 3.7 months. A normal resale market carries 5 to 6 months of supply. Just as the new home market has experienced, appreciation has start to slow with only a 2.5% increase in median price over the last quarter. Days on market have been holding steady at 82 days for the past 3 months.

“For the four quarters ending in 2Q14, single family annual MLS sales numbered 73,938 units,” said Rachel Cantor, Regional Director for Metrostudy’s Phoenix office. “This is down 12.7% from one year ago, but it still represents a large volume of transactions. The median price of a single-family home sold through the MLS reached $200,000 in June, a 7.1% increase from twelve months ago. Though listings are increasing and sales are decreasing we do feel that some of this is just due to market stabilization.”

The SE Valley continues to dominate in starts with 3,901 for Q2 and with 35% of the starts coming from this market.  Though boasting larger start numbers more builders have initiated decreases in base selling prices and higher incentives to attract buyers to their communities. The competition is fierce in the master planned communities with multiple builders. Buyers are attracted to this market for a number of reasons and builders are looking to replace lots in this corridor. Land prices in this corridor have skyrocketed and though builders would like to stay in this submarket the land pricing has to adjust. With no appreciation expected for the remainder of the year builders are wondering how to make the next deal in this area work for them.  The Northwest and Northeast Valley continue to be strong markets but keep your eyes peeled on the Central Valley as builders start testing the waters of new product in this market.

“The hottest market is the Northeast Valley, where starts grew by 54% from June 2013 numbers,” said Cantor. “Closings are now feeling the impact of the slow spring selling starts for the year. Though only a 2.5% decrease being felt across the market with positive numbers being seen in Northeast and Central Valley.”

The overall inventory of vacant developed lots (VDL), or finished lots, continues to rise in Q2. The total of 54,177 vacant lots includes all product types, including attached product as well as custom lots. With the decrease in starts we are starting to see movement upward with the total market now sitting on 57 months of supply, well above equilibrium range of 24 months. A majority of the vacant developed inventory is in the Southwest Valley and Pinal County. With these two markets maintaining 29,369 lots, 54.1% of the total finished lots the market appears heavy in finished lots. Taking out these two markets, the finished lots count is more equalized. We are still slightly above equilibrium at 36 months of supply but it explains what builders are feeling. Finished lots in the more desirable locations are decreasing and replacement lots with higher costs and thus higher home pricing may not be possible with the low appreciation expected for the remainder of the year. The SE Valley has the lowest months of supply at 31 months.

With nearly all of the finished lots in the more desirable parts of town under builder control, proper tracking of future lots is of utmost importance. As builders continue to struggle with sales across the valley we have expected to see more finished vacant inventory on the ground this quarter. The number of newly built finished vacant units totals 2,530, which is up 26 percent from one year ago. Months of supply grew from 2.01 months in 2Q13 to 2.76 months as of 2Q14. This is considered to be just above normal, and the upward trend is a concern that should continue to be monitored.

We should see a decrease to around 11,000 starts for 2014, 5% lower than the 2013 numbers.  The expectation is that what is occurring is a balancing within the market. Caution is advised as builders begin to make their plans for 2015. “With no strong indicators of changes in the Phoenix economy, my expectations for the next year will be moderate growth of 10-15% in starts up to 12,200 and price appreciation in the 2-4 percent range if we see the continued scale back in pricing for the remainder of the year,” said Cantor. “If interest rates start to rise, we could see some positives in the latter part of the year if buyers decide to get off the fence and buy.”