Phoenix New Homes Ready for a Downsize

Ken Perlman Headshot

Ken Perlman

January 29, 2016

With a median household income of only $53,600 per year, many prospective Phoenix home buyers cannot qualify for a mortgage in excess of $200K, even with low mortgage rates and an FHA loan limit of $271,000. At a median new home price of $294K, $23K higher than the FHA limit and $77K higher than the median resale price, the majority of home builders are competing for a small slice of demand—those with higher than normal incomes and credit scores. The table below, pulled from our monthly Phoenix Metro Analysis and Forecast, shows the income required for a range of typical home buyer purchase scenarios.

From 1988 through 2008, the median new home was priced 20% above the median resale home. Today, that premium is 45%. Some of the increase in premium can be attributed to better locations for new homes, larger homes, and increased builder tolerance for lower sales rates. Nonetheless, our feasibility study research shows that new homes are frequently priced at a higher than normal premium over resales down the street.

Overall, we forecast a bright future for Phoenix. Total employment in the Phoenix MSA topped 1.9 million in 2015, a 2.6% year-over-year rate of growth, and the unemployment rate in Phoenix has plunged to just over 5%, which we consider full employment. We anticipate continued employment growth in Phoenix between 2017 and 2019, partially driven by solid construction employment growth. With unemployment so low and a surge in retirement across the country, a lack of qualified labor will prevent job growth from becoming too robust.

This year, we expect some of the current new home incentives in the market, particularly above the FHA limit, to become permanent as new communities open up with lower prices and less incentives—the same impact on the builder’s bottom line but an easier sell to consumers. With the public builders alone increasing their Phoenix community counts by 47% (some of it through M&A) in the last two years, we expect increased competition to generate more construction and sales volume, but less price appreciation. We also expect to see a moderate pullback on land prices in Phoenix, particularly in the highest-priced eastern Phoenix markets.

After conducting numerous feasibility studies in the Phoenix metro area in the last few months, I believe the best strategies for many Phoenix builders this year will be to build:

  • Smaller, more attainably priced new homes that can effectively compete with resales and that will appeal to younger home buyers
  • Age-qualified / age-targeted homes for these younger buyers’ parents
  • Multigenerational housing for the two to live together (much smaller demand)

Each location has different dynamics, and the West and East Valleys could not be more different now, so please contact us to discuss your specific project.

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About The Author

Ken Perlman Headshot
Ken Perlman
Managing Principal
Ken works with real estate executives to help them make appropriate strategic decisions regarding their residential communities, including for-sale and rental of all types. He has a particular specialty in large-scale master-planned communities.

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