For the Sunday Seattle Times, I wrote on whether Seattle's smokin' hot real-estate sector is in a bubble. My answer is, not yet. It seemed like a good time to check in on Phoenix, using gold-standard metrics instead of the local-yoken cheerleading. Here we go:
Prices are definitely up. They're not in 2000s territory and that's a good thing:
However, permits for single-family houses are still way down by historic standards. This is especially true so far (seven years) into a recovery. While good news for the environment and understandable with such a huge inventory from the bubble, it undercuts the prime mover of the metro area's economy:
As a result, construction employment is depressed. Not only has it not returned to 2000s levels, but it is lower than in the late 1990s, when the metro population was far smaller:
An additional problem is that although metro Phoenix prices have begun a recovery, they are well below the 20 big metros in the Case-Schiller Index. They shot above these peers in the bubble years, crashed below them, and are still lagging the recovery:
• Seven years into the expansion, the old growth machine — with championship golf — has not come back. In a normal metropolitan area, real-estate activity is a consequence of a real economy. In Seattle's case, for example, a robust diversified economy juiced up by being a technopolis with Microsoft, Amazon, and tons of startups. It's the go-to "affordable" new outpost for dozens of Bay Area companies, where they can find a talented, educated workforce. In Phoenix, real estate is the economy. Or at least it was. Without a Plan B — all the cluster strategies etc. failed — Phoenix remains exceptionally dependent on low-end spec building. And that's not happening at the rate as in the past.
• Building a high-end, high-quality economy worthy of such a large metropolitan area will take more than branding. It will take more than "selling Arizona's lifestyle." That may attract more of the same. But top companies, capital, and talented people are put off by the pervasive atmosphere of intolerance and the lack of a real urban downtown in Phoenix. Meanwhile, the drag of a large underclass and incomes much lower than peer metros (with the possible exception of San Antonio), along with defunding universities and anti-city policies in the Legislature hurt economic development. Roaring population and housing growth in previous years cloaked some of this. No longer.
• The metro real-estate economy remains vulnerable. Much damage, such as large inventories of bank- or speculator-owned properties in zombie subdivisions, remains. Household formation is way down. Mortgage underwriting standards are stricter than they have been in decades. A global or national shock — or natural end to this aging expansion — will hurt markets such as Phoenix badly. Another little-discussed problem is that retirement will look very different for those born after the mid-1950s. They will have less savings than the retirees that helped power the Arizona economy in the past. Many will prefer real cities or more tolerant states. This has profound consequences for the growth machine.
• The situation is worse in Tucson, where housing permits have been bouncing barely above the bottom since the recession. One has to go back to the late 1980s, when these records began being tracked, to find similar numbers, and Tucson was both smaller and less dependent on real estate then. The workforce still has not reached its pre-bust peaks.
This would be a good time for a Plan B. I won't hold my breath. We're back in Kansas.