AZ Dealmakers Update

I recently had the privilege of attending the AZ Dealmakers event on January 27, 2022. It is an event that includes industry leaders in the residential new construction arena. The presenters included economists, housing analysts, builders, lenders, and more. The conversation was all about the future of new home development in Arizona. These are my notes and takeaways from the event.

State of the Housing Market and the Wider Economy, presented by Ali Wolf, Zonda Chief Economist:

  • Labor market: surprisingly tight
    • Nationwide still down 3.6 million jobs from February 2020
    • Greater phoenix has 70% more jobs
    • Wages are up 4-7% depending on source
    • Inflation is up so real wages are flat
  • Inflation: highest in 40 years, why would inflation increase/decrease? 
    • Could go to 7.5%? Why?
      • labor shortage
      • Wage price spiral
      • Supply chain issues
      • Demand stays strong
      • Fed is cautious on rate hikes
    • Could be 2.7% why?
      • Fed raises rates 4-5 times (announced 3?)
      • Demand stays strong but is more evenly spread
      • Supply chain eases
      • Higher wages bring back more workers
  • Federal Reserve: accelerating policy timeline
  • Mortgage rates: about 3.5%
  • Lumber prices: more than doubled since November
  • Supply chain: disrupting product availability
  • Covid: evolving

Home sales and supply:

The national average new home sales rate:

  • 2018: 1.7 (average per month sales rate per community)
  • 2019: 2.1
  • 2020: 2.9
  • 2021: 2.8

Sales Strategy:

Entry level builds used to be the primary type of home sold. Its lead over the other types is decreasing.

90% of builders are slowing the build times because it is too hard to keep up with supply and labor chain issues. National it is a big problem and locally it is even bigger.

Mortgage rate urgency has pushed the typical spring selling season started earlier in 2022. (it was already starting in January for the past few years)

Community count is trending down. Still searching for the bottom.

Inventory is down 50% from two years ago and is still dropping.

Pricing & Affordability:

  • 50% of all activity was around $200-300K and now it is 5% of the market and the past 2 years saw a big change.
  • Price increases in response to demand and costs.
  • 90% of builders are raising prices nationally
  • Locally all of the buidlers are raising prices
  • One builder raised prices by $25,000 just to cover costs
  • Builder reported buyer hesitancy peaked and then it started to trend down. 48% hesitancy in September 2021 and248% in January 2022.

Equities and equity:

Why has the growth been so dramatic? How has wealth changed?

The average equity gain, per Corelogic, in AZ in 2021 was $92K. #1 was CA at $112K. AZ is #4 in increases. (AZ has more growth than CA)

Most active shoppers in Phoenix:

  1. Move up
  2. Entry level
  3. Relocation

36% of shoppers are coming from outside AZ.

In some markets in FL it is 80%

Policy is trying to keep up. New FHA loan limits. AZ saw a $75K increase. FHA is trying to catch up, not trying to keep up.

It is easier to get an FHA offer accepted on a new build than with a seller on a resale home.

Forecasts and final thoughts:

Mostly positive growth but concerns remain. Zonda forecasts a 5.1% in additional growth for single family starts in 2022, nationally.

Entering 2022 with the same challenges at the start of 2021. As reported by the builders:

Sales are dependent on supply, sales, caps, and affordability.

New home sales are down by 6.6% in 2021 year over year. Zonda forecasts a 10% increase in sales in 2022. The decline in sales is mostly due to slow completions.

Mortgage rates:

Consumers weighing higher wages and increases savings against higher IRs and home prices.

A 0.5% change in interest rate translates to 6.5% in home price.

A 1% change in interest rate translates to 13.2% in home price.

Zonda is calling for an annual average of 3.6%

Depending on what rates do, it will impact buying trends. New homes are more susceptible to fluctuations in rates.

Zonda believes that the appreciation rate will be closer to 12% mostly due to:

  • Low inventory
  • Buyers showing little resistance to higher prices
  • Interest rates plateau around today’s levels or decline
  • Builder costs increases main high and get passed to consumers
  • Demographics continue to drive supply and demand imbalance

These levels of appreciation are not sustainable.

Steven Hensley: Phoenix housing market overview:

Economy:

Rosy employment outlook. Greater Phoenix has more jobs today than in Feb 2020. Only a few states are fully recovered. Lots of jobs coming here, lots of job openings.

120,000 new jobs in AZ Moody’s forecasts in Phoenix in 2022.

Strong household growth and household formation expected.

48,000 new household formations each year over the next 5 years. We need roughly 50,000 new units to support this growth.

Demand:

  • Contract sales are lower in 2021 than 2020
  • Closings are down in 2021 from 2020.
  • Starts are way up, highest since 2007

Run up in demand that led to historic level of starts in 2021.

  • 2019: sales contracts 22,050
  • 2020: 27,399 (levels not seen since 2005-2006)
  • 2021: 24,215

Demand took a step back for a few months, then heading into 2021 demand shot up and then the supply chain issues surged seemingly overnight.

This summer we had a considerable pullback and then in October demand picked right back up to 2019 levels. Demand was down 12% in 2021 from 2020 but up 10% from 2019.

Sales rates back to “normal”

  • 3-4 sales per month in 2019
  • 5 sales per month in 2020
  • 2021 it was 8.5 in the spring and the year ended around 4.5 sales per month.

Huge peaks and followed some normalization.

Pinal always outbuilds and outsells Maricopa. It is newer and has more land to build on.

Affordability still drives this market. Under $300K saw 6.5 sales per month. Healthy demand in all price points.

Supply:

Existing inventory is down 52% since 2019 and 2% since 2021.

New home supply, active community counts are down 5% year over year and 15% from 2 years ago.

We had 100 fewer communities active in 2021

Same number in December as March 2021

Low vacant developed lot count, there are 28,000 vacant developed lots that are ready to go, lowest levels since 2003.

Lot development is up 13% year over year through Q4 2021.

Supply is on the way and should have more coming to market this year.

Plateaued on sales but starts are way up. Labor is the biggest struggle. Over a 12 month build time for a regular house, way up.

New home price appreciation is softening, slightly. Median base home price $450K, 26% higher year over year. 51% up from January 2019. Slight leveling off. Lots of price increases this month. Some increasing $15K to $20K per home and builders are pushing costs to consumers, not adding to profit.

Median resale prices reached $425K in 2021. (pending sales median is currently $450,000 – I have friends in high places 😊)

Home affordability ratio:

The median sales price of new homes compared to a 30-year fixed and household income* affordability ratio has dropped *data issues on wages. Affordability is under a lot of pressure.

Final Thoughts:

  • Lots of homebuilders are going towards the freeways
  • Home sales are limited due to lack of capacity to develop
  • Strong migration trends
  • Zonda forecast, new homes sales will be similar to 2020
  • Lot counts are up
  • New home appreciation 6-7% expected this year
  • Stable sales per month
  • Fewer building permits
  • Record number of starts last year

Should we be worried? Why?

  • Interest rates could rise too quickly. Watch the 10 year yield, rates go high then it could put pressure on the buyers.
  • Land prices are significantly higher.
  • Could have a bit more inventory but not much, this year.
  • Affordability and interest rates are buyers’ biggest challenges.
  • Rates are 3.5%, up 0.75% year over year.
  • Are we nearing a potential bubble? Watch the 10 year treasury yield.

Lender Q & A

Mortgage applications are a leading indicator.

2020 $4.1T, 2021 $3.9T, 2022 expected $2.1T(f). Market is built for $4T. Expecting a 65% decline in refis this year. Lots of refi shops, are going to attempt to move to new home lending. Refis are super different than new home lending (homeowners financial). Seeing lots of shifts in the lending market already happening. Have seen lots of announcements of layoffs from national lenders. Believes rates could reach 4% – 4.5% in the next 6 months.

A way to address increased rates, look at the overall budget, figure out how to make other adjustments to handle house payments. Shelter is a bigger need than an extra car. Or look at what can be cut out. Lifestyles are forever changed. Maybe re-addressing options for how people use their own homes.

Home has evolved. Work at home, work out at home, hopefully not teach at home anymore.

(Ryan Sandal things rates may reach 4% in the next 6 months)

Wells Fargo said north of 4% for rates in 6 months from now.

Austin Bates with Fairway:

Thoughts on the increased upfront fees for high balance and second home sold to Fannie and Freddie?

He said that it supports the fundamentals that has helped the market so it is easier for owner occupied buyers and buyers without a ton of money to have more options because second homebuyers pull back due to the extra cost.

Maricopa county is not considered a high cost county, yet but probably will. A lot of CA counties are and that is why so many people are moving here.

Mike Sturgis with Loan Depot

  • 50% of buyers are millennials
  • Educational and marketing is how you get in front of buyers today
  • Expects 4%-4.5% rates in 6 months

The Future of Build to Rent:

Darin Rowe national president BFR Taylor Morrison and Tim Sullivan Zonda and George Maravilla senior vice president Tower Capital (land development and DMB, lots of funding for BFR):

Build to Rent Market Is it the foundation of affordable housing?

BFR is it a one size fits all? Not really. It depends on the cost.

Phoenix is ground zero for the movement.

Struggle to find rents that are high enough to make it make sense to buy the land. Land is expensive so if the numbers don’t make sense it is much harder to make it happen. Depends on the cost of the land. CA is too much. If there isn’t traditional multifamily it is hard to comp out the BFR to gauge pricing and demand.

2 types:

  • Traditional separate lots, divided and stand alone, can be sold individually.
    • Single property is bigger here than in other markets, easier to develop
    • Traditional appeals to different renter types and different price points
    • All one property, like an apartment, horizontal apartment complexes (Christopher Todd)

Taylor Morrison is the owner/builder and Christopher Todd is the franchisor. Idea was to team up. Wants to build this across the country, 2 years in Phoenix. Targeting markets where Taylor Morrison has communities. Are working on about 10 markets nationwide. Phoenix is a successful market.

Different markets have different demographics and different demand.

Any cities struggling? Smile states are doing the best (sunbelt states) the migration patterns are where the strengths are. CA has been a challenge and will always be and will likely be one of the later states for BFR. Most will not consider CA for BFR.

Massive Flood of capital coming into this space. Pre-covid lots of capital, then as covid hit everyone was chasing the capital.

Covid stopped many asset classes except for:

  1. Residential
  2. Industrial
  3. Life sciences
  4. BFR

Capital has gotten cheaper because so much capital is available for bfr development. Huge drops in interest rates.

November 2021 dropped to 3.5% from 4.1% rates, getting more and more aggressive to get capital. Money is cheap right now so it is good on the competitive side.

Each city has different policies for rentals so each area is carefully selected. Need to know who the target audience is.

Each market is different but about 80% of development can be the same across the board. Many are 1 and 2 bedrooms. Finding more people are moving units than expected. 2 people in a 1 bed, or 3-4 in a 2 bed, even families.

Hybrid projects, some rentals and some for sale. Like having a for sale project near the rental projects.

Talked about modular, off-site builds. No one has done it successfully.

BFR and SFR fight over land. Will land get too high for the single family builder? George said yes. Math is skewed towards the for rent and policy will likely come to limit that so SFR still comes first.

BFR asset class is in its infancy, expect a lot of growth here. Right now there is so much capital in the space, best time to get in but it is harder than it looks.

Housing Builder Panel:

6% appreciation by the end of Q1 2022.

Everything is costing more. Not seeing people who will pull back due to cost growth, at least at this point. Expecting a good year.

The backlogs are not scaring the builders. Expect a great first half and then demand pull back the second half and inventory rises.

Timelines are increasing significantly. Labor issues is bigger than supply chain issues. Not feeling the improvement in new jobs. Still needs a lot more. AZ is not immigration friendly, trades are not growing, expect to see continued labor issues.

Build side:

  • Very similar to 2004-2005 demand
  • A lot that feels like 2004-2005
  • The fundamentals are very different
  • Potential to overbuild but it will take years because such a lack of supply now.
  • Appreciation forecasts are 6-8%, 10%, 10% by March 31.
  • If we see 10% increase and a 4%+ interest rate could pressure demand.

Potential Challenges:

  • Continued high inflation
  • Declining job growth, no economy with no job growth
  • NIMBYism AKA not in my backyard (an issue in Levine)
  • Migration impacts demographics

Biggest takeaway: adapt.

Notes by Sarah Perkins, Director of Strategic Accounts, Clear Title Agency of Arizona

Published by Sarah Perkins

Sarah has been in title & escrow sales since 2004. As an award-winning sales executive and now the Director of Strategic Accounts, Sarah’s role is to bring real estate transactions to Clear Title. To do this, she focuses on supporting her clients and helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.

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