Phoenix: A steamy market cools off

<i>City sees prices sag and suffers sharpest drop in building permits among U.S. metropolitan areas</i>

When Devan Farren bought his three-bedroom home in Phoenix in 2005, the market was booming. Farren and his fianc e liked its stucco walls, ample lawn and Mexican tile floor. They paid $400,000, a fraction of what they would have paid in an older, coastal city like Boston. With a slew of Californians flowing into the state, they thought the market would hold.

Not so. Two years later, Farren planned to move to St. Louis and wanted to sell. After $35,000 of improvements, his broker suggested $19,000 more than the original price, but most offers were for $20,000 under. “We were being low-balled,” he said.

Other homeowners are in a similar bind. When Phoenix’s home and commercial real estate market peaked two years ago, everyone piled in. These days prices are sagging throughout the metro area, down as much as 10 percent since this time last year. Some communities are faring better than others. Prices in Scottsdale are only down 3 or 4 percent, and the area south of Scottsdale is booming. Other positive indicators exist. A record numbers of sales associates, brokers and mortgage bankers showed up for an annual conference in Las Vegas held by Realty Executives, a large Phoenix-based real estate firm. And as of July 3, Arizona had issued 110,000 real estate licenses, a small increase over last year.

In spite of all this, a PMI Insurance Company study released in July ranked Phoenix as one of the five riskiest real estate markets, with a 50 percent chance of a market drop over the next two years. Riverside, Calif.; Las Vegas; and West Palm Beach, Fla., were also cited. According to the 2004 and 2006 census, metropolitan Phoenix had the sharpest decline in building permits among U.S. metropolitan areas, falling from about 65,000 in 2004 to 44,000 in 2006.

While the effects of the subprime mortgage industry’s meltdown have yet to be fully gauged, record numbers of Phoenix homeowners have been delinquent on their mortgages. The number reached 2,000 in June, and actual foreclosures reached a new record of 676, according to Information Market, a research firm in nearby Glendale, Ariz.

Sam Wercinski, commissioner of the Arizona Department of Real Estate, also said that most major builders and developers are slowing construction and downsizing, spooking brokers, builders and investors.

Part of what’s gone wrong, real estate agents say, is that Phoenix has lost some of its shine after being hailed for years as a model for its strong job market — still ranked second in the nation by Forbes last year — and a diverse, growing population. With about 4 million residents, Phoenix ranks as the nation’s fifth-largest city. But with galloping growth came the problems all big cities face: crime, smog and controversial infrastructure projects, like the Light Rail system that tears through the city’s few pedestrian-friendly zones. Phoenix’s sweltering summers are no secret, deterring newcomers and spurring some recent arrivals to leave.

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The city has grappled with its rapid growth. The last three years of development have affected water supplies, a scant resource in the parched West. And as the market boomed three years ago, speculators drove up residential prices, making true deals scarcer. Arizona’s city councils, both in Phoenix and Tucson, have been implementing impact fees on new construction, driving up costs for developers.

The city council in Oro Valley, a small but growing community between Phoenix and Tucson, voted in late June to make developers pay for piping in water from the Central Arizona Project after new residents quickly depleted water levels. A $300-per-home impact fee for builders goes up to $1,300 this September. In 2012 it is projected to be $5,100.

Owners also bemoan the expenses of owning a desert home. Farren, for instance, bought his Phoenix house knowing he would need to replace the central air conditioning, immediately adding thousands of dollars in expenses.

Wercinski adds that the market’s growth coincided with a spike in illegal subdividing — when landowners don’t apply for the license to subdivide their land and end up selling off plots and straining the utilities. “This hurts consumers and the Phoenix real estate industry,” he said.

Real estate agents like David Roeloffs of West USA see three major problems with the market: high inventory levels, interest rates and foreclosure rates. He expects the market will rebound, but not for two or three years. “It’s going to take some time,” he said.

Wercinski, however, said there shouldn’t be a lot of panic. He projects that the market will recover in nine to 18 months.

Banks are trying to mitigate the effects of a cooling market by accepting more short sales for sellers in danger of foreclosure. With home values declining, borrowers can sell their homes for less than the current total mortgage, avoiding foreclosure. The bank takes a lesser loss than on a foreclosure, and the seller avoids a foreclosure on his credit history.

Realtors like these steps, too. A foreclosed house can drive down a neighborhood’s property values. Farren, the owner of the three-bedroom home, eventually sold it for $415,000. He says that after all the additions and upgrades, replacing the AC and adding granite kitchen counters, he’s spent an additional $45,000. But he has no regrets. “I knew the market risks when I bought in,” he said.

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