Phoenix Finds Its Way Out of the Downturn: A Model for Recovery
By: Carrie Bay
The Arizona capital of Phoenix was one of the hardest hit markets by the housing crisis, with home values plunging nearly 60 percent from 2006 through mid-2011 and foreclosure filings soaring.
As recently as June 2011 Phoenix held the second highest metro foreclosure rate in the country, behind only Las Vegas, according to RealtyTrac. By the end of 2011, it had dropped to No. 6, and by March 2012, slipped to No. 9.
Adam Artunian, senior research analyst with John Burns Real Estate Consulting (JBREC), says it wasn’t too long ago that Phoenix was considered ground zero of the housing market’s collapse. “Phoenix has orchestrated a dramatic turnaround in recent months and has considerably outpaced other distressed markets such as Las Vegas, Riverside-San Bernardino, and Sacramento,” according to Artunian.
So what’s going on in the Valley of the Sun that’s so different from the rest of the country? What market forces are strong enough to lift the nation’s sixth most populous city from the depths of the downturn?
Analysts and local real estate professionals alike attribute the market’s turnaround to investors who are snapping up properties to fix and flip or fix and rent.
While Phoenix has always been an attractive investment market, Artunian says investors have literally flooded the area since the downturn and now make up close to 45 percent of all buyers.
Investor demand is so strong in fact that Artunian says first-time buyers are having difficulty competing with investors who are paying with all cash. Local agents are reporting bidding wars among prospective buyers, with homes going for more than the asking prices.
Artunian notes that single-family rental rates are now averaging $12,500 a year. With the selling price of a distressed home usually well below the median home price of $127,000, he says investors can expect to achieve between a 5 percent and 10 percent annual return, after operating expenses and before any home price or rental appreciation.
Investor demand has served to drive up home prices in the area. According to Michael Orr, director of the Real Estate Center at the W.P. Carey School of Business at Arizona State University, the median price of single-family homes in the Phoenix area rose to $134,900 in March of this year, up more than 20 percent from a year earlier.
He says the increase signals a shift in the mix of properties being sold, with fewer low-price foreclosures moving through the market. Median and per square foot pricing is moving up as traditional sales account for a greater percentage of activity, Orr explained.
The average price per square foot for homes in Phoenix during the first quarter of this year was $956, according to the online real estate marketplace Trulia. That’s an increase of 999.9 percent compared to the same period last year.
Local investors say homes priced at the lower end of the market – under $100,000 – are becoming increasingly harder to find, and once you do find a bargain-priced gem, it’s snapped up and off the market before you know it.
Artur Ciesielski, a Realtor and partner with inPhoenix Realty Group, noted in a recent blog post that the nose-dive in Phoenix home prices since the bubble burst is now fueling investor appetite, especially in a market with such high rental demand.
“Expect investor demand to continue and to be part of the demand that is driving prices up,” Ciesielski writes, “and forget about shadow inventory, it’s not coming.”
The housing inventory in Phoenix has fallen to a mere 2.4 months, down from nearly 5 months just one year ago and over 12 months in early 2008. According to JBREC, months-of-supply has not been this low in Phoenix since late 2005 when sales activity was at feverish levels.
Listings of existing homes for sale have fallen 43 percent since March 2011, and local practitioners are now calling “shadow inventory” nothing more than a myth. They say if banks were holding properties off the Phoenix market, now would be the time to release them and it’s just not happening.
Where are all the real estate investors descending from? Artunian points to Canada. While there are a growing number of local investors taking advantage of current conditions, he says Canadians are increasingly flush with cash, many because of their own real estate boom in recent years.
That combined with a favorable currency exchange rate has given them “unusual buying power,” according to Artunian. He cites data from the Cromford Report, a local real-estate publication, which shows one in every 25 sales registered in February went to a buyer that listed a Canadian address.
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