The real estate market fluctuates with the seasons, and the lead up to summer – a popular time to move — is usually busy. But this year June was the prize-winner with exceptionally strong sales. Mike Orr, director of the Center for Real Estate Theory and Practice in the W. P. Carey School of Business, reports that single-family sales in June rose 9 percent over May, and were 22 percent higher than a year ago. Orr says there are a number of reasons why this might be so.
Michael Orr: Some of the builders that really liked it closed off their quarter with a good, strong number. So, they’re trying to get everything recorded. There’s a number of different reasons why June might be strong, but even so it looked pretty strong. Particularly as it was all nearly done by ordinary local homebuyers; not by people out of state or investing.
Research and Ideas: These ordinary buyers, unlike investors flush with cash, are also accessing financing at a higher rate.
Orr: People using finance to buy a home are now reaching higher levels than they’ve been for several years, it’s still not back to normal, but it’s starting to get there. A lot of people at the luxury end are still paying cash but the rest of the market including the million dollar homes — people taking out jumbo loans — are starting to get easier and easier to get a loan compared with what it’s been like for the last two or three years.
Research: The increase in sales activity, however, is confined to the mid and high portions of the market. Affordably priced homes are a different story. One of the consequences of the real estate collapse is the large number of rentals in the low end of the market. Investors swept those up, and now when tenants leave to perhaps upgrade, the house does not go on the market. It remains a rental. That means the supply of homes to buy is low, which eventually impacts prices. Even with weak demand there are so few properties for sale right now that prices are bound to inch up. Peoria is a case study.
Orr: Peoria is interesting because at the top end you’ve got the more expensive area where there’s lots of new building going on. And then the old part of town where it’s much cheaper and older, the cheaper end has actually gone up by 10 percent in just the last 12 months. Whereas the top end hasn’t gone up at all. So that’s partly that there’s more demand at the bottom end of pricing , but also the new supply coming along in the north part of Peoria.
Research: The number of permits pulled by builders has been climbing for the last few months, and Peoria is second only to Gilbert in terms of new home construction. Builders have observed the increase in demand in the mid-range, and Orr says they are not worried about selling them. Getting them built is another matter.
Orr: They are very worried about the cost of building, though, as we’re still very short of tradespeople. The latest complaint is for people to put up the frames. They just don’t have frame teams, they say “We want this house framed” and the people who do that say, “Well we’ll get to you in eight weeks’ time.” And of course when the people who are good at framing hear that — they also say “Now rates are going up 10 percent by the way.” Because they know they’ve got little competition and I think we’re all generally worried that there aren’t enough younger people going into these trades.
Research: Many of the workers who did these skilled labor jobs in the past left the state for various reasons, but the labor shortage extends beyond the work site.
Orr: I’m concerned that every discipline needs a flow of younger people. The whole real estate arena is actually lacking in younger people going into it. Realtors: the median age of a realtor is in their 50s. Mortgage brokers: they tend to be much older than average. And many of these disciplines are in fields where you don’t get a salary — it’s all commission.
Research: Orr thinks part of the problem is that salary structure: commission only. Younger buyers are a new market, however, and they will probably want to shop and buy using their phones and other electronics. This is a big opportunity for young people.
Orr: So the younger people who understand that will actually be much more successful at interacting with them and understanding their requirements. So, the few that do go into the business can do extremely well.
Research: Speaking of those millennials, Orr says many who might be ready to enter the market are held back by misinformation or timidity. Surveys show that young people believe they need 20 percent of the purchase price as a down payment, when the average in the Phoenix market is about 14 percent. And many are reluctant to take that step, having watched their parents struggle. As a result, most of those who are contributing to the upsurge in demand are in their 30s or older.
Still, what we see developing is a seller’s market. And the seasonal affect can be expected to come into play, too.
Orr: I’m not seeing violent changes anymore. We had a big step up in February and things are marginally getting more inclined towards the seller. If there’s going to be any sort of backward movement on that, I think it’s going to be in the mid-range. The mid-range usually has a little bit less demand in the second half of the year and it’s also getting a lot more supply because the mid-range is where all of the building starts.