Sunday, February 2, 2014

3 bold predictions for the Phoenix real estate sector in 2014

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3 bold predictions for the Phoenix real estate sector in 2014

Kristena Hansen
Reporter- Phoenix Business Journal
What’s in store for the Phoenix real estate sector in 2014? Experts say the housing market should see less dramatic price gains, higher interest rates and dissipating interest from Wall Street investors. Meanwhile in the commercial sector, a we’re likely a few years away from a healthy recovery. Here’s a closer look at what to expect in 2014:

Prediction No. 1: The housing market keeps recovering, but at a slower rate.
The metro Phoenix housing market has been in recovery mode for two years, and it’s been a roller coaster every step of the way. Local real estate experts are confident the rebound will continue in 2014, but at a much slower, and even more “normal,” pace than we’ve been experiencing lately.

Experts say the 25 to 30 percent year-over-year price spikes Phoenix saw consistently throughout 2013 will look more like 6 or 8 percent in 2014. We’re already seeing signs of this too; according to Arizona State University last week, October’s median price — $200,000 — was 27 percent higher than a year earlier, but up by only one-half percent, or $1,000, from September. Last year, the median price climbed 4.6 percent between September and October.

The other thing to watch for next year will be in the mortgage sector. Experts agree that the days of 3.5 percent interest rates are long gone, but it’s unclear how much higher they’ll climb in 2014. The Federal Reserve said last week it will begin to wean the economy off of its $85 billion monthly bond buying program next year in an attempt to lure private capital back to the mortgage sector, but it’s unclear how investors and the financial markets will react.

The potential upside to higher interest rates, some experts say, is looser underwriting standards for potential borrowers, which we’ve already been seeing in the jumbo-loan market.

Local housing experts are also expecting continued improvement in the home-building sector, although the degree of optimism varies. Growth in the new-home market this year was far below everyone’s expectations as land prices skyrocketed to what many describe as unreasonable heights. Analysts had predicted roughly 17,000 new-home permits for the Phoenix area in 2013, but it looks like we’ll end the year with less than 13,000. Next year’s predictions are as buoyant as 20,000 permits and as conservative as 14,700 — which, either way, still is a fraction of the 60,000 or so issued during the housing boom — while some expect land prices to come down.

Prediction No. 2: Wall Street’s home-buying binge passes

It’s been about two years since Wall Street got into the home-buying and renting business, and metro Phoenix — once plush with foreclosures and bargain deals — was among its top targets. (Note: Institutional investors generally are defined as larger firms, many of which are publicly-traded hedge funds or real estate investment trusts, that own more than 200 single-family homes in the Valley.

The institutional investor buying spree in the Valley peaked in July 2012 with the acquisition of 831 single-family homes. Today, the nine firms that fit into the “institutional investor” category own roughly 13,400 rental homes across Maricopa County — which may sound like a lot, but it’s really only 5 percent of all single-family rental inventory and less than one-half percent of the Valley’s total housing stock. Additionally, Wall Street’s buying activities in Phoenix have slowed to a trickle this fall, netting a record-low 63 home purchases in October.

With foreclosures and short sales now extremely hard to come by and Valley home prices up dramatically this past year, Wall Street investors are setting their sights on other markets, and local real estate experts predict this will continue through 2014.

With the buying spree winding down, there are fears these groups will soon see dollar signs in the recent price increases and thus dump their portfolios all at once. Many local experts say that’s highly unlikely, but if it were to happen, the impact would be minimal given their small market share and 2014 won’t be the year.

However, it should be noted that the bulk of these groups’ portfolios are concentrated in select neighborhoods rather than spread out evenly throughout the Valley. Also, some of the early entrants into the rental home business have already begun purging their assets elsewhere in the country. And because this is an untested businesses model, skeptics say only time will tell whether the strategy is successful and what the long-term impact will be for the housing market.

Prediction No. 3: Construction industry still struggling 

The multifamily market has been on fire this year, and demand has been driven by the recent housing bust that turned many homeowners into renters. Experts tell me they expect that sector won’t lose any of its momentum until after 2015, and without any threat of overbuilding.

Industrial construction has been doing well in recent years, but the demand has been driven solely by a handful of big users, so experts say that the sector still is two years away from recovery when we start to see the smaller mom-and-pops making a comeback.

Experts also say 2014 won’t be the big rebound year for office and retail construction either. Those two sectors have been hard-hit by advances in technology, whereby employers are shrinking their office footprints with the proliferation of mobile connectivity. Retailers are staying competitive by growing their e-commerce platforms.
Local experts say office construction won’t make a comeback until sometime around 2017, when jobs return and absorb the glut of vacant space still remaining. Retail, which usually follows the other real estate segments, will come thereafter.

The other concern is the shortage of skilled construction workers. The industry has struggled with a shrinking workforce for the past three decades, but the issue was exacerbated by the recession and, in Arizona, immigration reform. The home-building sector has already been feeling the labor crunch as demand has picked up in recent years. Experts say that will continue to be problematic through 2014 and as commercial construction makes a gradual comeback.

How I see it in the trenches here on the front lines. Arizona Real Estate/Rental Market Update.

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