The Phoenix market is now a portrait in contradictions. Thousands of new residents are expected to move into the metro area in the next two years, making finished lots for new-home construction potentially scarce over the next 18 to 24 months. But builders and developers will also find themselves competing against a mountain of unsold resales and foreclosed houses at the same time.

This situation has left builders in a “state of confusion” about their land acquisition strategies, says James T. “Nate” Nathan, a principal with Scottsdale, Ariz.-based land broker Nathan & Associates, which has represented virtually all of the area’s master planned communities over the past 15 years. As usual, contradictions also present opportunities to investors that, says Nathan, are “snapping up all of the finished lots that are available,” at 30 to 40 cents on the dollar. Earlier this month, Nathan’s company brokered an $8.8 million sale of 308 finished lots by Woodside Homes to the real estate investment firm Petrus Partners Ltd.

Despite the current softness in buyer demand for homes, Nathan sees Phoenix’s real estate and housing markets on a collision course with its growth. There are 50,000 finished lots in the greater Phoenix area, which are currently being absorbed at a rate of 1,300 per month. These are also only four subdivisions currently being developed, two of them by D.R. Horton. If Phoenix, as expected, expands by 90,000 people in each of the next two years, and by 130,000 in 2010, Nathan foresees a “serious shortage” of inventory over the next two years, especially if, as he predicts, market conditions bottom out sometime next years.

For that to happen, though, Phoenix must also reduce its abundance of unsold homes, which is exacerbated by an acceleration in foreclosures coming back onto the market for resale. Nathan notes that, historically, between 20,000 and 25,000 resales are listed in Phoenix. When home building boomed, resales dropped to 9,100 in 2005.

But the number of resales has ballooned to 51,000 as of May 2008. On top of these resales are another 30,000 homes that have received foreclosure notices and could be on the market soon as bargain-priced distressed properties. At an absorption rate of 4,000 to 6,000 per month, Phoenix could take 15 months to whittle its resales, “and that depends on when and how many foreclosures hit the market, which no on knows yet for sure,” says Nathan.

Still, Nathan—whose company expanded into Las Vegas two weeks ago—remains optimistic about the future of the Phoenix market. “Phoenix is still the No. 1 target for all of the big money, and for big builders’ asset allocation,” he says. And having gone through three downturns himself, Nathan hopes builders and developers take away some hard-learned lessons from their recent straits, like “share the risk” and “don’t get greedy."

John Caulfield is a senior editor at BUILDER magazine.

Learn more about markets featured in this article: Phoenix, AZ.