Apollo 13 and Phoenix Housing

In 1995, movie audiences worldwide were introduced to the story of Apollo 13, which recounted NASA’s efforts to get three moon-bound astronauts back to earth after an explosion severely damaged their spacecraft. I was actually quite familiar with the story before the movie release, as I had seen a PBS documentary and read the book Lost Moon by Jim Lovell, Apollo 13’s commander. After the explosion, which damaged the service module’s oxygen tanks, the astronauts had to shut down the spacecraft’s power to conserve battery life. After sling-shotting around the moon and bypassing a moon landing, it was eventually time to power the command module back up for earth re-entry. The power that remained, however, was very low, and the NASA team of engineers had to devise a meticulous power-up procedure that would work within the parameters of the remaining battery life. You may recall Jack Swigert, played by Kevin Bacon, entering the dark, lifeless command module to execute the procedure. The spacecraft was cold, and the controls were covered in condensation. He carefully followed the instructions, got the ship powered up, and they returned to earth safely in a mission that was later described by Lovell as “a successful failure” in that they all survived but failed to land on the moon.

Apollo 13 Damaged Service Module

Apollo 13 Damaged Service Module

The mission brought challenge after challenge, with nothing going as planned, resulting in numerous teams working around the clock to tackle each obstacle. Even powering up the spacecraft was an ordeal; they couldn’t simply flip the switch. Arizona builders are learning a similar lesson. After navigating a tumultuous housing market that barely had a pulse from the second half of 2010 to near the end of 2011, builders are scrambling to meet a sudden increase in demand from homebuyers this year. According to Metrostudy’s weekly survey of selected homebuilders, net contracts have more than doubled from an average of .45 weekly sales per subdivision in 2011 to .93 this year. In other words, sales contracts have grown from an average of less than 2 sales per month (per sub) to a little over 4 sales per month. Demand is back, so now all we have to do is build them, right?  It is not that simple, unfortunately. You need a finished lot, a cement mixer to pour the slab, lumber and framers, electricians, plumbers … you get the picture. The industry was not prepared for this, and – believe it or not – supply constraints are limiting homebuilders’ capacity to construct homes. So, to control the demand, many builders are raising prices and/or capping sales in some locations. Some builders are writing contracts on homes that they can’t start for several weeks (with the buyers’ understanding). Land departments are now in high gear to fill their pipelines so they can replace subdivisions that are selling out. Who would have thought?

Believe it or not, this was not totally unforeseeable. Throughout 2011, resale inventory was declining steadily while sales were strong and increasing. By the end of 2011 supply of MLS listings measured only 2.1 months, almost certainly the lowest reading in the country among major metro areas. Not only that, but new-home inventory – according to Metrostudy’s lot-by-lot survey – was already at a very low level and remained low throughout last year. Seeing that both types of housing inventory were low, demand for homes was steady, and with Phoenix experiencing some modest job growth, one year ago I forecasted that resale prices had to rise and that starts could reach as many as 13,000 units in 2012. Many thought this wildly optimistic, and even I was questioning this outlook when the market showed little momentum heading into 2012. However, in the last two weeks of January, sales contracts surged notably and the momentum has continued through June. We may not be able to start 13,000 units this year because of the aforementioned capacity limitations, but the market appears to be exhibiting that type of demand. According to Metrostudy’s market survey, there were 3,061 home starts in the second quarter of 2012. Permits during this same period, according to HBACA, numbered 3,749. The fact that permits are outpacing actual home starts is further evidence of the capacity limits facing builders. I stand by forecast albeit with the constraint that capacity weakness is a delaying factor.

Can this momentum continue? Most likely. While there is concern about slowing economies in Asia and an apparent recession in Europe, very few are forecasting another U.S. recession. Locally, mortgage delinquencies are down to less than 6% in Arizona, which is lower than the national delinquency rate. New notices of trustee sale are down in Phoenix, as are foreclosures. We are still far from a normal market, but the distressed housing inventory is healing quickly. We are certainly not in danger of overbuilding as, even if we could achieve 13,000 starts this year, that would still be considered a dismal year by historical standards. After starting only 6,620 homes last year, though, the improved market we are now enjoying feels pretty good … if not quite as good as landing on the moon (or so I assume).

Ben Sage, Director of Metrostudy’s Arizona Region, has been researching and analyzing housing markets for seventeen years. He has prepared hundreds of market studies in various cities around the country for numerous product types. His knowledge and experience combined with Metrostudy’s accurate and reliable information have enabled Ben to advise many Arizona real estate firms in their risk assessment, decision making, and strategic planning. He can be reached at (480) 756-9300, option 3 or bsage@metrostudy.com, or visit www.metrostudy.com.

Metrostudy, a national housing market research firm, conducts an onsite, lot-by-lot audit of all new home subdivisions in the Phoenix, Tucson, and Prescott metro areas. Our survey includes all new-home subdivisions, attached and detached, whether custom or production. Metrostudy drives over 15,000 miles every quarter to visually inspect every homesite, resulting in accurate information on starts, closings (move-ins), new-home inventory, vacant developed lot inventory, future lots, and lot deliveries. We supplement our core information with public records – new home, resale, and foreclosure deeds – along with a weekly and monthly builder survey.