Phoenix Housing Market Ends 2006 On a Sluggish Note

With 4,620 sales recorded in December, the 2006 Greater Phoenix housing market continued to slow, with 5,040 sales in November 2006, compared to 6,480 sales for a year ago.

This is the lowest level of activity for 2006 and the lowest for December since 4,785 sales were recorded in 2000. For 2006, a total to 67,035 sales were recorded, in contrast to 110,835 sales for 2005 and 102,115 closings for 2004.

Even in a slow year, the local real estate market showed historical improvement, according to Jay Butler, the director of Realty Studies at Arizona State University’s Polytechnic campus.

“The local housing market, since 1982, has been fairly stable, representing 7 percent of the single-family inventory, while the 2005 indicator stood at 11 percent,” he said.

“The 2006 Phoenix housing market stands at 6 percent of inventory, which is comparable to the housing markets of the mid-1990s.”

While home sales declined 40 percent, the median prices increased 8.4 percent from $240,500 in 2005 to $260,600. While this is another record year, the median price has been steadily declining during the year from $267,000 in June to $255,900 in December, which marked the lowest median price since $255,000 was reported in July 2005.

A fundamental component of the economic development of the area has been the relative affordability of housing, especially when compared to parts of the California housing market and the national housing market.

While most of the local Phoenix market is still priced well below what a California mortgage would cost, home prices are now well above the U.S. median sales price of $225,000.

Although low Arizona mortgage interest rates have been very important in sustaining the market, the rapid increase in the median home price has greatly increased the monthly payment.

Based on 85 percent loan-to-value ratio, a 30-year, fixed-rate mortgage payment would have been $1,160 in 2005 (at a 5.5 percent interest rate), compared to $1,330 in 2006 (at 6 percent home loan rate).

The 2006 resale affordability index is 74; it was 84 for 2005.

While improved affordability is important for the continued development of the area, declining home prices could impact many households, especially those who have used the increasing values in the form of a home equity line of credit or other such product to finance a desired lifestyle.

The rapid growth of sales and prices of the last few years has been due largely to the ever-increasing involvement of investors in the market. Thus, the slowdown in the speculator market can be a big reason for the overall market slowdown and the increase in distressed properties.

Many investors have found it increasingly difficult to rent and are trying to sell their homes before they lose them to foreclosure or to salvage any appreciation.

Another source of trouble properties are those households, in anticipation of continued appreciation, that bought more home than they could afford and probably used non-traditional financing - risky adjustable-rate mortgages - to acquire it.

Now, confronting financial issues, these households are trying to sell in order to obtain some appreciation and/or to avoid foreclosure.

“Many of the market issues of 2006 and potentially 2007 can be attributed to individuals, trying to secure their futures, who became emotionally involved through believing in constant success and appreciation,” said Butler.