PHOENIX HOUSING 4Q16: 2016 Market Strength Should Continue into 2017
- Annual New Home Starts are up 12% YoY; Annual Closings in 2016 were up 29% for the strongest annual closings performance in four years.
- Despite recent price gains, housing affordability remains high compared to nearby California, which will continue to drive housing demand from out of state home buyers
- The Phoenix market median home price experienced a 10% increase compared to the previous year. Land pricing has also appreciated at a faster rate, which is going to push builders toward higher prices
Metrostudy’s 4Q16 survey of the housing market in the Phoenix metro area shows there were 19,942 total annual new units started during 2016, an increase of 12% compared to the previous year. The annual rate of starts increased slightly compared to 3Q16, up 59 units or 0.03%. The annual rate of starts has increased an average of 3% every quarter during the past four quarters. The annual rate of closings also increased (compared to the prior year) in the fourth quarter, to 18,499 units, a 29% increase compared to the prior year. The latest increase was the strongest annual closings performance in four years. The 4,800 total quarterly units started in the 4Q16 represent an increase of 1.2% from the 4Q15 starts total. The number of homes closed in the fourth quarter of 2016 increased to 5,124, up 24% compared to the 4Q15 volume.
“Heading into 2017, the concern remains the same regarding a lack of real wage increases and rising new home prices,” said David Brown, Senior Vice President of Metrostudy. “However, starts and closings are projected to increase at a moderate pace during 2017, despite wage and pricing concerns. Despite recent price gains, housing affordability remains high compared to nearby California, which will continue to drive housing demand from out of state home buyers.”
Maricopa and Pinal Counties witnessed solid year-over-year growth at the end of 2016. Historically, the market has consolidated around Maricopa County with Pinal seeing healthy but moderate growth. Maricopa County continued to account for the majority of total new home starts during the past year. The county captured 87% of total new home starts in the Phoenix metro area at the end of 4Q16. Maricopa new home starts ended the year up 11% compared to 2015. Pinal County finished the quarter up 9% compared to one year ago. If jobs increase and consumer demand remains in place, then 2017 is expected to mimic the positive showing seen in 2016. Marketwise new home starts and closings are projected to end 2017 higher than the benchmark year of 2014, driven in party by stronger than expected housing demand during the next year.
The latest tally of under construction units was the second highest witnessed since 2008. Despite strong under construction unit volume, that tally still sits 76% lower than the under construction peak seen in the 2Q06. Even though under construction units remain far from the historical peak, it continues to move in a positive direction. With such a high number of units under construction, forecasting for starts and closings for the upcoming year will need to be watched closely. We are projecting approximately 17,000 closings for 2017, with over half of that inventory already under construction. Phoenix is well positioned for 2017 with 6.1 months of supply in the under construction category. Labor shortages in the construction sector are expected to continue to weigh on Phoenix’s total closings and starts potential.
The increased land prices and low supply impacted the starts growth during the second half of 2017. Builders are getting forced to move into the next closest location as a result. Millennials, as first-time homebuyers, will continue to be an important component of new home demand forecasts in the Phoenix market. However, many of the locations continue to be priced above what most buyers in the entry-level category are able to afford. The new home market is expected to continue to have trouble reaching what is the largest pool of potential home buyers in the U.S in 2017.
At the close of 2016, the Phoenix market continued to normalize as housing indicators show more consistency compared to the same time last year. Above-average job growth in critical sectors will help prop up the Phoenix market through 2017. The Phoenix market median home price experienced a 10% increase compared to the previous year. Land pricing has also appreciated at a faster rate, which is going to push builders toward higher prices.
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