A recent story in the Arizona Republic inspired a good deal of commentary on the thread of the last post. I'm going to hang it out there, make a few comments and let you go to town (or suburb). It starts, "The rebound of metro Phoenix's new-home market continues to build." Then:
New-home permits were up 61 percent in the region during March, according to the latest Phoenix Housing Market Letter. The increase is more staggering than the actual numbers, but still it signals "evidence of a new-housing rebound," according the report's publishers, RL Brown and Greg Burger. In March, there were 1,036 single-family permits issued. It was the first month in a while in which home-building permits topped 1,000.
Last year in March, there were 645 single-family permits issued across the Phoenix area. Overall, homebuilding -- one of the region's biggest economic drivers -- was up 74 percent during the first quarter of this year compared with 2011. Here's an even more positive number for the new-home market: Builders reported a spec inventory of only 383 houses during the first part of April.
AZRebel made an essential point to Emil on the previous thread:
You were speaking spec homes. I was speaking "shadow inventory" as a whole. Let me explain how they are related and how they impacted the number you quote. During the depth of the housing downturn, there were several large local builders who had a large inventory of spec homes. After pulling their hair out for about a year they came up with this plan. Through Realtors, they located homeowners who had not been able to sell their homes. (if you recall, there were no buyers at all). They approached these people and offered to buy their homes if they in turn would buy the homes the builders had in their inventory. They even helped with the financing.
The builders then went to the high risk insurance market and insured the now vacant homes they just bought. They did this with large schedules of vacant homes. These large schedules of vacant homes are still out there, vacant. So, you see, they "reduced" their spec inventory by creating a new vacant home in the shadow inventory. (they figured they had the time to sit on the homes and sell them in the future).
That future hasn't arrived yet. As you can imagine, like in a used car sale, they offered the homeowners very low prices on their homes, charged them extra on the spec home, and gave them higher than normal interest loans. Of course, there were many people who were dumb enough to fall for the scheme just so they could get that "new home smell." Anyway, that's what happened to your spec home inventory. Now you see it, now you don't.
Let me add a few more. First, RL Brown's newsletter, although beloved by the Real Estate Industrial Complex, is hardly a reliable source — Reb's comments show one of the missing pieces. Second, the reliable sources show an ambiguous picture. Yes, "investors" are buying plenty of cheap tract houses in Phoenix. That doesn't turn into demand for massive new construction or even houses that will be resold to actual house buyers (note that I avoid industry jargon: "home," "community" etc.). And it certainly does little more than put an uneasy floor under the metro Phoenix housing depression, whatever little burps of tiny hope erupt in Gilbert or Scottsdale.
Third: prices may be modestly up, but what does that mean? Using median prices is tricky because it can be affected by the mix of properties sold. As the Calculated Risk blog wrote, "fewer foreclosures at the low end could lead to higher median prices, even if repeat sale prices are still falling." What we do know is that Phoenix is second only to Las Vegas in the collapse of housing prices from their peak. Among the consequences was the financial ruin of hundreds of thousands of Phoenicians, a drag that remains on the regional economy. So, according to Case-Schiller, as of February, Phoenix prices are up 125 percent vs. 2000, but still down more than 50 percent from their peak.
We know that Phoenix was among the most overbuilt metros in the United States. Moreover, house-building and its attendant sectors, along with spec commercial and industrial construction was the major engine of the economy. Real estate didn't follow as a consequence of the region's economic productivity and wealth production, as is normal — it by far was the biggest driver. This levitation act was dependent on 100,000 or so new residents moving in each year, and most of those with the means to buy and flip houses. That's done now: The liar loans, mortgage boiler rooms and flood of capital into laying out tract housing. The average Phoenician working in an average Phoenix lower-wage job probably can't qualify for a mortgage. The local bigs still haven't processed what this tectonic shift means to the region's "business model."
Finally, what nobody really knows is of great consequence. Among these are the total inventory of vacant houses and the shadow inventory of bank-owned properties, empty or with squatters or being used to grow pot. While there are data on underwater mortgage holders, people owing more than their house is worth, we don't know how many are on the edge of being underwater. Finally, after a pause last year while the big banks swindled the states attorneys general on the robocall settlement, foreclosures are going to pick up again. Phoenix, for all the reasons listed above, will be hit hard.
And this doesn't even account for the Midwestern baby boomers who even want to retire to "the Valley" but can't now, and will have to work until they're 90, if they can get a job, in metros that actually have family wage jobs. Or the long-term consequences of the "bust-burbs" higher energy prices or climate change.
The old Growth Machine ain't coming back. If it did, the results would cause an even more retrograde move in Arizona before an even more disastrous crash. State and local leaders should be focused on doing all the things they can to bring in well-paid jobs and create an environment that lures quality investment and talent. The motto is simple: Not enough good jobs, not enough house buyers. Instead, it's the same old crap.