IN-DEPTH ANALYSIS

September 2008

 

New Homes: The Five-Year Picture

 

The current over supply situation became undeniable when our market exceeded the historical record for specs twenty-six months ago (2,400 specs reported the week of January 15, 2006).  This article provides you with a historical perspective and a glimpse at our current market in the big picture. 

 

Five-Year Subdivision Count

 

The first two years of the five-year graph below shows a normal ebb and flow of active subs; the count climbs in late spring, when builders are preparing for the summer when sales are typically higher, and declines a little in late summer.  In 2004 and 2005 the active sub count dropped dramatically with the investor/speculator boom, when plans for coming subdivisions could not be acted upon as fast as active subdivisions were selling out.  The lowest count was 482 active subs in May 2005.  Compare that with the current count of 926 active subs and you can see that the active sub count is still almost double what it was two and one half years ago, but the subdivision count has been declining for the last nine months.

 

UIS defines an active subdivision as one accepting contracts from qualified buyers.  The subdivision count data we report comes from the Ultimate New Homes (UNH) database, which covers the entire Phoenix metro market area and approximates the area covered by the Arizona Regional Multiple Listing Service (ARMLS).  Ultimate New Homes covers all of Maricopa County (74% of UNH subs) and significant portions of Pinal County (23% of UNH subs) as well as a few location outside of these counties (primarily in Yavapai County) (3% of UNH subs). 

 

 

Five-Year Spec Count

 

The Ultimate Information System (UIS) spec count is made up of the individual properties that each subdivision chooses to report to us to be included in the UIS system for ARMLS affiliates.  The degree of completion will vary from builder to builder and from one subdivision to another.  We believe our current count is on the conservative side, as some subdivisions do not report their total spec quantity to us.

 

We only have comprehensive spec data going back through October 2004.  Prior to that our data is spottier, but we know that the highest historical spec count was 2,400 in May 2003.  Even with this partial data, a pattern is readily apparent.  The spec count maintained a low to normal level throughout 2004, and fell sharply in 2005 during the real estate boom when supply was unable to keep up with demand.  For a year after October 2005 the spec count climbed steadily and then declined over the next six months to a new plateau.   Since April 2007 the spec count has remained at a level well above the normal market level.

 

Five-Year Builder Count

 

Again, UIS lacks complete five-year data, but a pattern is still clearly visible.  We have the highest historical builder count in March 2003 (159 builders), and a slow decline of builders since then.  The builder count started rising again in June 2005, and is now at 162.

 

Commentary

 

The subdivision and spec counts and graphs clearly illustrate that the Phoenix metro area new homes market is in uncharted territory and has been for two and on half years.  Confirming this is the fact that many builders are taking extraordinary measures to attract buyers in order to reduce spec inventory including:

1. Offering huge buyer incentives

2. Offering unprecedented RealtorŪ co-broke rates. 

3. Offering very substantial price reductions

 

 

It is our belief that we will not see what would be considered a normal market until the spec count has been reduced to about 2,500 and the subdivision count is back in the range of 800.  These counts have been leveling off in the past couple months, however even when these levels are reached the resale inventory must be considered. Therefore, we conclude that we are still many months away from a balanced market.

 

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