Michael OrrDirector

Center for Real Estate Theory and PracticeAugust 20, 2014

Greater Phoenix Housing Market

Euphoria

Denial

Despair

HopeSkepticism

Optimism

EnthusiasmExhilaration

Unease

Pessimism

Panic

Capitulation

Relief

Optimism

Enthusiasm

The Market Cycle

Sep 2004 Jul 2008

Another +50% to reach the peak!

+60%

Most Home Prices Are No Longer RisingSome Are Falling, but Not Much

Normal Listings Only

Southeast Valley Cities + Ahwatukee

Southeast Valley Cities + Ahwatukee Normal Sales Only

Prediction Is Very Difficult, Especially About the Future

- Neils Bohr (1885-1962)

Normal = 100 for all gauges

12 Months Ago

Balanced Market

Buyer’s Advantage

Where Are the Boomers?

• Sun City West (median age 75.8)• Sun City (73.2)• Sun Lakes (70.9)• Gold Canyon (61.8)• Fountain Hills (52.9)• Cave Creek (50.6)• Paradise Valley (50.4)• Apache Junction (47.3)• Litchfield Park (46.4)• Scottsdale (45.1)

These markets are relatively robust

Where Are All the Buyers?

• 232,767 have been foreclosed since 2008– 19% of the home owners in Maricopa County

• 83,849 have completed a short sale since 2008– 7% of the home owners in Maricopa County

• So 26% of former owners have a credit issue• Most are locked out from loans for 7 years• Peak foreclosures were 2008-2011• Peak eligibility to buy again is 2015-2018

Some of this demand will emerge more strongly next year

The Penalty BoxShare Max Foreclosure

WaitDown

PaymentShort Sale Wait Down

PaymentFannie Mae

43% $417,000 7 yearsmaybe 3 if

special case

10% 2 years4 years

20%10%

Freddie Mac

13% $417,000 7 yearsmaybe 3 if

special case

10% 4 years 10%

VA 6% $1,000,000 2 years 0% 0 years 0%

FHA 28% $271,060 3 years 3.5% 1 year 3.5%

Other Loans

10% Variable Variable Variable Variable Variable

Millennial Impact on Housing Market

• Starting families later than earlier generations• Lower birth rates• Many still living with parents• Higher preference for urban lifestyle• Tendency to share accommodation & transport • Not convinced home ownership is good for wealth• Expect to own a home…one day• Not a high priority for them in 2014• Mostly renting – creating demand for landlords

Where Are the Millennials?

• Tolleson (median age 26.7)• Avondale (28.1)• Tempe (28.1)• El Mirage (28.2)• San Tan Valley (28.2)• Queen Creek (28.9)• Buckeye (30.2)• Maricopa (32.1)• Gilbert (32.2)• Phoenix (32.2)

Single Family Rentals

Single Family Rentals

• Investors pulling back but tenants still coming• Only 3,048 SFR rental listings on ARMLS• In January there were 4,345• This is only 36 days of supply• Most of what is left is expensive (avg $1,760 pm)• Average in January was $1,449 pm• Condo rentals are now getting harder to find (63->48

days supply)

Maricopa County – SFR / Condo Homes

Units2015

2015 Assessed Value

Units 2013

2013 Assessed

ValueTotal Number 1,233,164 $240 Billion 1,215,971 $168 Billion

Owner Occupied 901,656 $188 Billion 1,018,809 $152 Billion

Rentals & Second Homes 331,508 $52 Billion 197,162 $16 Billion

…including Institutions 13,553 $1 Billion

Increase in Assessed Value of Residential Inventory in Last 2 Years = 43%

Supply of New Listings at a 14-Year Low

Annual Sales Volume Unusually Low and Still Falling

Almost Everything Is Below Normal

Situation Summary – August 2014

• Supply is below normal & falling (87% of normal) • Demand weak but stable (81% of normal) • AZ loan delinquency below normal at 4.5%• Foreclosures are below normal• Investor buys are below normal 40% -> 13% of sales• Cash transactions decreasing 42% -> 21%• Out-of-state buyers below normal 29% -> 17%• Expect a little price weakness in the rest of 2014• Expect market to improve for sellers during 2015

New HomesStill a small part (10-12%)

of the market

How Will Demand Return to Normal?

• Mortgage applications are at their lowest level since December 2000

• Lenders will start approving applications from people with lower quality credit history

• Rents will increase, driving more tenants towards ownership

• Millennials will eventually join the game• Supply will become an issue once again

Michael OrrDirector

Center for Real Estate Theory and Practice