Beyond the housing shortage: Urbanized suburbs and dense development

April 08, 2013

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Event video

Although many people may find it hard to believe, the Phoenix area is facing a growing housing shortage, according to real estate experts from the W. P. Carey School of Business who were featured speakers at a forum on April 6. And, the future may bring more dense developments and urbanization of the suburbs.

The forum, titled “Phoenix Housing Market Explained," was sponsored by The Arizona Republic and the ASU Real Estate Council at the W. P. Carey School of Business. Speakers included Mike Orr, director of the school's Center for Real Estate Theory and Practice, and Mark Stapp, director of the Master of Science in Real Estate Development (MRED) program. Joining Orr and Stapp was Catherine Reagor, senior real estate reporter for The Republic.

More than 400 registered for the free, on-campus event, which was designed to advise the public how to survive a market that has been volatile and confusing for almost a decade.

"After five years of very low construction volumes, we don't have enough homes to match the rate of population increase," Orr said.

The metro area has less than half its normal supply of homes for sale, and active ARMLS listings under $200,0000 have dropped 74 percent since January 2011, speakers said.

Home construction has begun to pick up but lags where it needs to be to meet demand. At the fringes of the metro area, land abutting recently developed areas is unavailable for commercial development because it is owned by the tribes or the U.S. Forest Service, or is State Trust Land -- which is added to available supply for development at a measured pace.

At the same time, the Maricopa Association of Governments projects Maricopa County will add about 2.6 million people by 2040, or about 96,000 a year on average, Stapp said.

“To accommodate our future growth, we have to build the equivalent of an infrastructure sufficient to support metropolitan population of Denver,” he said. “That’s pretty unbelievable.”

The first-time event was interactive, with real estate experts and non experts alike peppering speakers with questions on a wide range of topics. They wanted to know if another speculative real estate bubble is likely, whether a shadow inventory really threatens, where certain numbers came from and general advice. Stapp said the W. P. Carey School hopes to have these events more often.

Expect more density, smaller homes

The Phoenix metro area, the 13th largest metro area in the country, is about to undergo an evolution from the dominant owner-occupied, single-family home environment of the past to one that will have more dense pockets and more residents choosing to live near public transportation, Stapp said. “We will see the urbanization of our close in suburbs and a continued expansion of the edges.”

Cost of available land, construction labor and demographic changes are among the constraints and trends driving the area towards this density. Water is not expected to be a primary constraint but may be a factor in shaping the character of growth.

The main reason builders haven’t been making more homes is that they can’t make enough money at it, Stapp and Orr said.

Stapp explained: “First, the recession and related foreclosure and credit crises brought new home construction to a near standstill. This reduced available new home inventory to near zero. Second, the crises caused pricing of existing homes to plummet well below replacement costs. Now as demand is back and prices have risen it is becoming feasible again.”

But, land in the more desirable metro areas now costs $100,000 or more an acre, he continued. For a standard subdivision of 3.5 dwelling units per acre, that translates to approximately $28,000 per unit for land alone. This is on top of the cost of direct construction of the infrastructure and the house, fees, profit and overhead, which all contribute to a total home price.

Until the price of existing homes rise sufficiently to make these new homes attractive by comparison, builders will not be able to afford to construct new ones in significant volumes, Stapp said. “If people can’t move because they can’t sell or they can’t get a mortgage, the actionable demand is kept in abeyance.”

Another factor is the severe shortage of construction workers in the nation, causing labor costs to rise. Many construction workers have streamed into North Dakota for energy jobs, and others will be drawn to New Jersey and New York for hurricane Sandy reconstruction work.

Others have left the state for their homes in other countries. Experts say that a very significant proportion of the construction workers in 2005 were undocumented, although nobody wanted to count them or talk about it at the time. Orr said often these were highly skilled laborers that are now very hard to find because many of the economies of Central America have had less of a downturn than the U.S. and are now growing faster. The increased legal obstacles to migrant workers mean few are willing to return now that construction demand is picking up, he added.

“So we have a long-term chronic supply shortage of housing until the construction industry can grow to its former size in 2000," Orr said. "And they are not obligated to build the homes that we need. They are commercial operations, right? They build homes when they can make a profit.”

The price of land means more homes are being built again on the fringes of metropolitan Phoenix, a trend that started in the last home-building boom of the early 2000s. Stapp explained that development of more dense infill housing occurs in small quantities, takes longer to build and presents other difficulties. "It is not the solution to the supply problem but will become a more prevalent form as we grow," he added.

Data received from the Land Advisors Organization shows that out of the 37,000 conventional finished lots available now, 16,000 are in Pinal County, where a commute to central Phoenix can stretch out to an hour or more. The number of available lots closer to the city center include 8,000 in the southwest part of the metro area and only about 1,000 in the northeast, Stapp said.

Stapp said that density and urbanization will increase in the suburbs, particularly communities like Mesa, Chandler, Gilbert and Avondale. Part of the reason is the long commute times to communities on the edge of the metro area, and the price of gas. Demographic changes are also underway. Growth in metro Phoenix over the past decade has been in smaller one-and-two person households. Those smaller households are expected to grow by 64 percent from 2010 to 2040, Stapp said.

“Basically, about 20 percent of our population is going to want to live near these high-capacity transit corridors,” he said. Unfortunately, there is a finite amount of space within a quarter mile of the transit stations where those people would like to live.

Another socio-economic trend is that younger people may prefer to rent instead of buy, so they can more easily move to where the jobs are.

When asked if water is likely to be a constraint, Stapp said that Arizona has some of the most sophisticated water laws and management systems in the country and studies show that it will not be an overriding constraint on growth in the Phoenix area, although water may impact character and in some cases locations.

So long investors, hello higher prices

The problems of distressed homes, foreclosures, and late mortgage payments are largely behind us, Orr said, yet the market remains unbalanced because the housing shortage is driving prices up. As a result, investors are now starting to focus on other regions.

In early 2010, 16 percent of first-home loans were more than 30 days late on their mortgages, which made Arizona the fifth worse state. By January 2013, that percentage dropped to 7 percent (national average was 10.6 percent), and Arizona ranked 42nd, Orr said. A normal level is considered five percent. Notices of trustee sales, commonly known as foreclosures, in Maricopa and Pinal Counties have almost fallen back to a normal level.

Investor purchases peaked in the summer of 2012 and while still high, have been dropping. “Prices are moving so fast, it is changing the investment equation,” Orr said.

The new-home market has awakened, rising from an unprecedented four-year low, Orr said. There are only 326 active subdivisions in the region and 62 percent will be sold out with a year. New subdivisions are needed quickly.

Home prices are rising fast. The price per square foot hit a low $78 in August 2011 and climbed to $110 in February 2013, his figures show. The median sales price rose from $112,205 in October 2011 to $170,000 in February 2013.

“If you wanted to buy a home for under $200,000, you should have bought it two years ago or even four years ago,” Orr said.

Several larger investment companies started scooping up large quantities of homes a year ago but now appear to be slowing down, Orr said. The most common investor in Phoenix has been a small scale investor or “mom and pop” entity. Some homeowners who bought a brand new home found they couldn’t afford the payments, so they moved to a cheaper place and rented out the first home.

Although prices are rising at rates similar to the real estate bubble that began in early 2004, Orr said he does not believe another speculative bubble is likely because real estate loans are so hard to get. Speculators can use their own money, and if they lose, no one else gets hurt.

“When people borrow money and don’t pay it back, we all suffer. That was the fundamental cause of all the economic problems in the recent past,” Orr said.

Nor does he believe a shadow inventory is a threat. A shadow inventory refers to homes that are in various stages of foreclosure or that are already owned by a lender. The fear has been that large numbers of homes could get dumped onto the market at once. This is not going to happen, Orr asserts.

Orr, a mathematician by training, has studied many specific areas and found this not to be the case. An careful examination of the 85281 Zip Code in Tempe, for example, showed that out of 10,533 homes, only 26 homes were owned by banks and only 9 of those could be considered part of shadow inventory.

A U.S. Census report that the residential vacancy rate in Arizona averaged 18 percent raised fears that the market is over-supplied, Orr said. But he said many of those vacant homes are second homes, mobile homes or recreational homes that are seasonally occupied. That is why communities with high numbers of seasonal occupants have higher vacancy rates. Scottsdale's is 18 percent, Mesa is 16 percent and Gilbert is just 5 percent, while Show Low is 43 percent and Christopher Creek is 76 percent.

Stapp said he hopes the residential real estate market will remain reasonable and not grow or shrink too fast again.

“We need to do this in a responsible organized way that allows us to build the type of place we really want to be and not just build because we can. I think the capital constraints on the market are going to help keep this tempered for a while.

Resources

Event Video: The Phoenix Housing Market Explained from Keith Jennings on Vimeo.