PHOENIX -- The prices of Phoenix-area homes have been on the rise over the past couple of years, but that could change in the months ahead.
Phoenix-area home prices have been going up since they hit a low point in September 2011, but the increases have been slowing down in recent months, according to a new report from the W. P. Carey School of Business at Arizona State University. That report says the large gains we’ve seen could come to an end -- and possibly even reverse -- this year.
"We are seeing a big drop in demand compared with the last two years, and there are ominous indications of a softening market when we dig deep into the numbers," says the report's author, Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business. "Sales of single-family homes were down 17 percent from December 2012 to this December. Townhome/condo sales were down 11 percent."
Things are still looking good in the luxury market -- homes priced at more than $500,000. While activity is up at that end of spectrum, sales of homes priced at less than $150,000 are down by almost half.
"Overall, buyers are enjoying less competition in bids for homes, but sellers should be prepared for possible cuts in asking price," Orr said in a news release. "A larger portion of the population is simply choosing to rent, instead of buy. That includes much of the millennial generation and those who lost their homes to foreclosure or short sale. They either prefer the rental lifestyle, don't feel that secure in their jobs, or don't have the credit history or down payment needed for a purchase."
The increased competition to get into rental homes could spark an increase in rent prices over the next couple of years, especially because investors have few qualms about raising rents.
Those investors seem to be losing interest in the Phoenix market, according to Orr's report, opting instead for better deals to be had in other parts of the country. The percentage of residential properties purchased by investors was just 19.3 percent in December, down from the peak of 39.7 in July 2012.
That waning interest from investors is not new.
"Demand has been weakening since July, especially demand from investors," the report reads. "Although December recovered from the very weak level in November, we are still seeing a big drop in demand compared with the last two years."
In addition, foreclosed homes are not as plentiful as they once were. What's more, Orr said the number new foreclosures will continue to drop because of the stricter underwriting standards that were put in place in 2009.
While new-home sales were good in December, Orr said construction permits are low by historic standards, which means less building in the immediate future.
Looking at all the factors, Orr says the Phoenix housing market has officially hit a slowdown.
"We're seeing growing evidence the housing slowdown is also being experienced in other parts of the country, including southern California," Orr said. "If current conditions persist in the Phoenix area for several months, downward pressure on pricing will become hard to resist."
While prices might not indicate a slowdown right now, the report points out that pricing is a trailing indicator, which means it might take prices several months to reflect what's happening in the market.
According to Orr, the biggest indicator is the "steep fall in demand" not just by investors, but by traditional owner-occupiers, as well, particularly at the lower end of the market.
"It is already clear that 2014 will give us a much slower rate of appreciation than the furious pace we have witnessed during 2012 and 2013," the report summarizes. "We have been through enormous turbulence since 2002 and it will be a relief for many to be operating in a more balanced market. However if the current cooling trend that started in July continues for much longer, 2014 could easily see average and median home prices move a little lower than they were at the end of 2013."