Real Estate in Phoenix: Ready to Rebound?

Real estate in Phoenix has been hurt badly by the housing crisis, and since the turmoil began a dark cloud has loomed over the Valley of the Sun. …

Real estate in Phoenix has been hurt badly by the housing crisis, and since the turmoil began a dark cloud has loomed over the Valley of the Sun. But is there a silver lining in sight? Although local experts can’t say for certain, it is presumed—if nothing else—that the worst is almost over.

“Those who are waiting for the bottom of the market may be surprised to discover that it has already occurred in a few areas,” Chuck Willman, a real estate agent for Gentry Realty and founder of AZVest.com, said in an e-mail interview. “Whereas the market decline can be prolonged, the rebound can be quite quick.”

Investors should keep in mind that the Phoenix real estate market is vast. The city alone is geographically larger than Los Angeles, occupying an area of 517 square miles, according to the City of Phoenix government website. As a result, specific parts of the property sector that show potential for upward growth may be easily buried in collective market trends.

“You have to take those numbers with a grain of salt because Phoenix is so big and spread out,” Jay Thompson, broker and owner for Thompsons Realty and blog author of PhoenixRealEstateGuy.com, said. “There are houses here from tiny, older homes that are about $100,000 dollars, all the way up to multi-million dollar homes.”

And as prices fall, affordable opportunities for investment are becoming increasingly abundant.

“It’s a buyer’s market—there’s no question about that,” Thompson said.

For investors who are interested in capturing the potential for growth in a recovering market, real estate in Phoenix might be worth further investigation.

A short history

Phoenix real estate prices began to skyrocket in the winter of 2004 and continued for “two solid years of incredible surges in value,” Greg Swann, designated broker for BloodHoundRealty.com, said. In the fourth quarter of 2003, the median home price in the Phoenix metro area was $155,000, according to the NAHB/Wells Fargo Housing Opportunity Index. Two years later, the median home price peaked at $264,000—an increase of 70 percent. Speculation flooded the market.

Investor activity, however, quickly became a “fool’s parade,” according to Swann. Investors snapped up properties in hopes that they could reap significant profits based on appreciation alone, regardless of the property’s cash flow potential. Nevertheless, sellers who got out of the market when the “music stopped” easily doubled their money, Swann said.

But investors who stayed late or bought late in the game found themselves in a great deal of trouble.

“When the correction hit, many of the less savvy investors who had overextended themselves discovered that they couldn’t find renters to cover their expenses,” Willman said. “We’re currently seeing the fallout of the investor scramble.”

“There’s a lot of people who are upside down in their mortgages, and there’s a lot of short sales and a lot of foreclosures on the market right now,” Thompson said.

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The overall inventory of homes has grown at an exponential rate. 3,400 homes were on the books for the Phoenix metro area as of January 2005; today, the supply of homes for sale numbers 45,000, according to Thompson. In addition, metropolitan Phoenix has an estimated 13.7 months’ supply of inventory, according to the most recent quarterly survey of housing conditions of major U.S. metro areas by The Wall Street Journal.

Phoenix was also ranked as one of NuWire’s Top 5 Overbuilt Markets of 2007.

Total home sales have plummeted, compounding the overall detriment to the market. In 2005, annual home sales numbered 178,410; by the end of 2007, that number had plunged to 95,085, according to research by Arizona State University Realty Studies. Although quarterly sales continue to experience a slowdown across the board, existing homes sales have modestly increased, from 10,180 sales in the fourth quarter of 2007 to 11,390 in the first quarter of 2008.

Housing prices have dropped quarter after quarter, probably as a result of decreased buyer activity and the plethora of homes for sale. For the first quarter of 2008, median home price had fallen to $220,000—a decrease of more than 15 percent from the first quarter of 2007, according to a report by The Phoenix Business Journal earlier this month.

The Phoenix real estate market may be troubled, but positive economic trends hold the key to a healthy recovery. As of March 2008, Phoenix had an unemployment rate of 3.5 percent, the third lowest of all large metro areas in the U.S., according to the Bureau of Labor statistics.

Furthermore, Phoenix is one of the fastest-growing metro areas in the U.S., consistently adding more than 100,000 people to its population each year for the past eight years. The “pure growth factor” should have a positive long-term effect on the area, according to Willman.

Arizona is also viewed as a “business-friendly” state, especially when compared to highly-taxed and highly-regulated states such as California, Swann said. A number of tech companies have established a presence in Phoenix. Its geographical location is an ideal place for server farms, because there is little risk of “cataclysmic events,” such as hurricanes or earthquakes, “that [would] result in massive loss of data,” Swann said.

Overall, “given the fact that Phoenix has good population growth, good jobs, low unemployment—all those economic indicators [suggest] that when we hit bottom, it won’t last very long,” Thompson said.

Opportunities for investment

Phoenix is no longer a flipping market, but local experts have observed growing interest among investors returning the region.

“There’s a lot of investors and even speculators that think Phoenix is probably close to returning to a moderate appreciation rate, and that appeals to [them],” Thompson said. “The days of buying and selling it three months later for 20 percent profit are gone…but if you can buy and hold, there [are] still a lot of opportunities here.”

The recent upsurge of real estate owned (REO) properties, for instance, is “getting snapped up like crazy,” according to Swann. Foreclosure actions have bombarded the Phoenix market in record numbers, with the greater Maricopa County documenting 4,421 notices of trustee sales in April 2008, a 331 percent increase from April 2007, according to a report by The Phoenix Business Journal earlier this month.

“I think this is an excellent time for investors to be in this market, especially if they’re willing to put in the sweat equity, either directly or by contractor, to take these lender-owned homes and whip them into shape,” Swann said. Rehabilitated homes can then be sold or turned into rental properties.

Because it is a buyer’s market, investors can “pit sellers against each other” by making simultaneous offers on several REO properties at once, according to Swann. However, it is important for investors to bear in mind that these are often distressed properties and require thorough inspection on the part of the buyer. Furthermore, REO properties seldom sell for much less than market value. For more information about REO property considerations, read our previous article, Investing in REO Properties: Deal or No Deal?

The outlook for investment properties is heavily dependent on the outlook for individual neighborhoods within the Phoenix metro area. Subdivisions with unique amenities, such as golf course communities, appear to hold their value better than properties in “typical suburbia,” Thompson said.

Destination places such as Scottsdale, which “has a hint of luxury to its name,” are also more resistant to real estate market fluctuations, according to Willman.

Smart investors should scout specific areas for solid investment opportunities, such as properties with positive cash flow potential.

“When it rents for more than it sells for, that’s when you know that you have an undervalued property,” Willman said. “There’s a little bit of math [involved], but there’s a whole lot of [need to know] the neighborhoods.”

Homes within walking or driving distance of Arizona State University, for instance, can show great potential for cash flow because of the demand created by students in need of housing. A growing elderly population may also be attracted to the amenities available near colleges.

“If you look at the [number of] days on the market and pricing at homes near major universities, you’ll see that these areas have great potential,” Willman said.

Bargains on new homes can be found, especially among homes that have been constructed by large, publicly-traded builders. These builders “tend to more aggressively price their homes,” Willman said. New homes also come with warranties, presenting an additional advantage to buyers.

Investors may want to keep their eye on homes closer to the center of Phoenix, which seem to show better price performance than homes in outlying areas. Arizona has traditionally been a commuter state, and people were amenable to driving a greater distance if it meant they could get “more house for their money,” Willman said. However, rising gas prices have lowered the cost effectiveness of commuting to work.

As a result, “homes in the far flung sections of the valley are going to continue to face pricing pressures. There is room for prices to continue to fall,” Willman said. “Meanwhile, existing homes in the heart of the valley…those closest to Phoenix are beginning to see better activity.”

Properties in greater Phoenix, however, are not necessarily a loser’s game. These properties may appeal to retirees, who are not as concerned with the commute, according to Thompson. “[Phoenix] is appealing to a very large senior community,” especially for those who are searching for a warmer climate to retire, he said.

It is also anticipated that baby boomers will flock to Phoenix as they reach retirement age, according to Swann.

Lastly, the opportunity to purchase land in Phoenix is the “biggest speculative area right now,” Willman said. Acquiring land at bargain prices is generally easier for those who have cash and time on their hands; those who need to borrow money will discover that banks have difficulty valuing land without tenants or without a commercial purpose.

“Although there are many bargains out there as some cash-strapped people are selling off property…land near fast growing cities, and highways—current and planned—are becoming harder to find at a low price,” Willman said.

The collective market numbers may seem discouraging, but a wide range of solid real estate investment opportunities in Phoenix can be easily overlooked. Investors who are interested in buying real estate in Phoenix, however, need to take an educated approach in order to increase their likelihood of success.

“If [you are] going to invest in today’s Phoenix real estate market, it’s pretty important to know what you’re doing…to know what you’re [getting] into, and [to] have realistic expectations,” Thompson said.

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