Greater Phoenix Blue Chip

A MODESTLY UPBEAT PICTURE FOR SINGLE FAMILY, NOT SO MUCH FOR APARTMENTS

Third Quarter, 2023

Elliott Pollack

Despite the fact that the number of resale housing units sold is at a level lower than has been seen in years, the Blue Chip panel believes that the bottom in new housing will be this year and that on a monthly basis, the bottom has probably passed.  This is a surprising situation given the very low level of housing affordability in the U.S. as a whole and especially in Greater Phoenix.  Yet, this conclusion is supported by the fact that the inventory of existing homes for sale is at an extremely low level and pushing potential buyers into the new home market.  Indeed, the percentage of new homes sold compared to the total number of homes sold is now higher than it has been in 15 years.  That lower level of inventories (both new and existing homes for sale) means that this cycle is completely different from the one that accompanied the Great Financial Crisis that started in 2006 when inventory levels were at a record high.  New home builders are in a situation where they can buy down the mortgage rate at least for some time to make buyers more comfortable with the situation.  And, the underlying demographics related to the housing market are exceptionally strong.  Last year, 22,222 new homes were permitted in the area while the Panel expects 20,175 this year, 22,300 in 2024 and 24,400 in 2025.  The weakest point in permitting occurred between September 2022 and February 2023, making near-term year-over-year comparisons easier.

The multifamily forecast shows a different pattern.  While permitting is expected to be modestly lower than in 2022, the Panel expects a large decline in the number of permits in 2024 and 2025.  There are several factors at play here.  Keep in mind that it can take two years or more to deliver a multifamily unit after the permit is issued.  Thus, deliveries in 2024 and 2025 reflect permits from perhaps as long ago as 2021 and 2022 when interest rates were lower.  The decline in permits reflects the much higher cost of money today (if someone can find the financing).  That higher cost of money means that many projects that would have gone in the ground before the run-up in rates simply do not pencil out in today’s world.  This suggests that the number of deliveries in 2026 and 2027 will be much lower than the present delivery level.  Overall, deliveries that have been strong in 2022 and 2023 are likely to be lower in 2024-2027.

The current higher level of deliveries comes at a time when absorptions are likely to slow.  Thus, vacancy rates are likely to rise over the next couple of years despite what the Panel suggests.

There is another issue that the Greater Phoenix Blue Chip will address going forward.  That is the rise in the number of units of a relatively new product type known as Build-to-Rent.  For those of you who are not familiar with this for-rent product, these are horizontal apartment buildings that are detached single family units with a small yard in a highly amenitized “village” with pools, health club, open space and so on in gated communities.  Again, they are strictly for rent communities and are usually built under one permit like an apartment building.  This product type is now large enough to justify developing an ongoing data series so you will be able to get a better picture of the total newly built housing market in the area.  Something to look forward to!!

GREATER PHOENIX BLUE CHIP: RESIDENTIAL