Local homebuilders remain cautious starting the second half of 2014. Single-family permits are lower than forecast and tighter credit remains problematic. The Dodd-Frank Act represents the most stringent underwriting laws in decades. Combine tighter credit with an increase in median home values, higher lending rates from year ago, very slow job growth and a housing recovery becomes flat. There are provisions of Dodd-Frank under fire, especially the mandatory 20 percent equity down payment.
The Northwest submarkets, including Marana and Oro Valley, continue to represent nearly two thirds of all single-family permit and sales activity. However, median home prices jumped over 20 percent in the central and northwest areas of the city limits. Expect housing permits within the city to rise in the second half as impact fees are temporarily waived until the start of 2015. The median sales price of new construction has moved higher at $254,000 with a strong showing in the retirement market. This past year, Del Webb and Toll brothers opened in Dove Mountain and gained traction as newcomers.
The key word in single-family housing is MOBILITY. This best describes homeowners successfully selling their primary home to purchase another…typically, families seeking larger space or baby boomers downsizing as empty nesters. MOBILITY has recently improved over the past year as California/Midwest economies improve, but the second home/retirement market has been the most consistent performer in our housing recovery.
A strong housing market is fueled by job growth and lending. Clearly, job growth is the driver. Mobility begins to improve outside the retirement market when new jobs are created and local payrolls are higher. Tucson job growth has been operating below the state and national average
reporting under 2.2 percent growth. In addition, manufacturing and construction jobs have not returned to post recession levels. Population and job growth has been realized, but primarily in the service sector areas. If this trend continues, Tucson single-family permits will remain in the 1,600 to 2,000 range per year.
Where are the sellers? The most notable drag on the housing recovery is underwater homeowners. NOT ENOUGH SELLERS! National reports show 7.5 million homeowners have lost their homes through foreclosure or short sale. It is estimated that another 9 million homeowners have little or no equity keeping sellers on the sidelines. These homeowners truly lack mobility. In my opinion, the total number of frozen sellers is understated when factoring the necessity of retaining adequate cash down payment for another purchase.
In Tucson, single-family inventories under $300,000 are reported near 41/2 month supply. It is reasonable to assume that a local job boom would likely push home prices higher given tight inventories plus low rates. In Phoenix, this is exactly what happened as home prices stabilized much quicker as institutional and private investors purchased distressed residential properties which helped stabilize the overall market. Once stability is attained, increase in home prices becomes a direct result of job growth and higher payrolls.
Over the previous 2013/2014 period, the apartment rental market has been quite active, opening over 740 new units in the Oro Valley submarket. In addition, Miramonte Homes and Aerie Development are opening single-family rental developments anticipating sales conversion. Rental rates for new construction need to be greater than $1.00 per square foot with a target absorption rate at 15 units/month. Tucson has an aging apartment base so in most cases newer construction offers better design and amenities. HSL has been the most active player and recently purchased 12 acres located along I-10 in Continental Ranch at $2.75 per square foot, or approximately $12,000/unit. Competition for tenants is forecast to increase over next 6 months so a stress test remains forthcoming.