Maybe it's the heat—it's supposed it hit 100 degrees today—but some builders in Phoenix supposedly have been talking about jointly raising prices on their inventoried homes by as much as 8%.
Those conversations could be construed as unfair business practice and illegal. But even if this rumor were true—and BUILDER finds scant evidence to support it—such a strategy would likely make these builders' homes even less sellable in a market still flooded by unsold existing homes, a growing number of which have been foreclosed on.
"They can collude all they want," says Reed Porter, president of Gilbert, Ariz.-based Trend Homes, about what his competitors might be considering. "With so many foreclosures coming onto the market every month, you have to be competitive [because] buyers are considering all of their options." Porter says he has noticed some price upswing in Phoenix's southwest valley, "but I don't know if these homes are actually selling."
Foreclosure filings in Arizona increased in August by 62.5% over the same month a year ago, with the heaviest concentration in the counties surrounding Phoenix, according to RealtyTrac. Arizona State University recently released a study that showed 44% of the 7,505 existing homes sold in August in Maricopa County, which includes Phoenix, were foreclosures, compared to 20% in August 2007. The study also found the median selling price for a foreclosed home was $161,875, or 26% less than the $220,010 median a year ago. The median price for the sale of a non-foreclosed home was $193,550 in August of this year. However, ASU's study also shows that foreclosures aren't always the best bargains: in North Scottsdale, Ariz., for example, the median price for a foreclosed home in August was $545,000, versus $525,000 for a non-foreclosed property.
Jay Butler, director of Realty Studies at ASU's Morrison School of Management and Agribusiness, tells BUILDER that local home builders have been aggressively pushing 100 percent financing in their ads before they are prohibited by law next month from offering down payment assistance to buyers. Aside from those promotions, he hasn't seen any signs of price increases, least of all in overbuilt places like Buckeye or Sunrise where foreclosures have been rampant.
"Our competitors are selling houses a little bit above their construction costs," adds Steve Soriano, executive vice president with Robson Communities of Sun Lakes, Ariz. He offers a hypothetical example of a builder that has $100,000 in a developed lot and spent $100,000 to construct a house it is now selling for $175,000. That price might be below the builder's costs, but it still provides that builder with roughly $75,000 in cash flow, he explains.
Soriano says NVR is the only big production builder in the market that has "hung tough" on pricing and has resisted deep discounting to move unsold inventory. Robson has attempted to hold the line on prices, too, despite the "tremendous temptation" to match competitors' reductions. But market realities can't be ignored, and single-family homes selling in Robson's newest active-adult community—SaddleBrooke Ranch, located north of Tucson, Ariz., where this builder has approvals to build 7,500 houses—are priced, on average, about $50,000 less than what comparable homes sold for at Robson's SaddleBrooke community, which is nearing close-out.
John Caulfield is a senior editor at BUILDER magazine.
Learn more about markets featured in this article: Phoenix, AZ.