From the November 7, 2006, New York Times:
In Arizona, ‘For Sale’ Is a Sign of the Times
By VIKAS BAJAJ
PHOENIX — Until recently, this fast-growing area was a paradise on earth for home builders. Fulton Homes’ developments, for example, were so popular last year that it was able to raise prices on its new homes by $1,000 to $10,000 almost every week.
“People were standing in line for lotteries,” recalled Douglas S. Fulton, president of the company, one of the largest private builders in the Phoenix area. And they were “camping overnight begging to be the next number in the next lot in the next house.”
Today, it is the company’s sales agents that do most of the waiting. Not only are there few new customers to talk to, but many buyers who put down a deposit are not even bothering to come back for the walk-through.
“All of a sudden, they just don’t show up,” Mr. Fulton said, noting that such cancellations often mean the buyers forfeit as much as 5 percent of the price. The reason? The prospective buyers got cold feet or simply could not sell their old home.
The striking contrast tells the tale of a housing bonanza turned bust. Today, the number of unsold homes in the area has soared to almost 46,000 from just a few thousand in early 2005. And builders are pulling back as fast as they can.
They have little choice. Sales cancellations among big builders, not just here but around the country, are running as high as 40 percent, double the rate a year ago.
Across the nation, new-home sales are down by more than 20 percent from their peak last year. Prices fell almost 10 percent in September from a year ago. And that reported drop does not take into account the extras that builders are throwing in free or at steep discounts to lure buyers, which means that effective prices are even lower.
The reversal in fortune is at its starkest here in the West. For-sale signs in some new subdivisions are so common that Janet L. Yellen, the president of the Federal Reserve Bank of San Francisco, recently described them as “the new ghost towns of the West.”
Tumbleweeds may not be blowing through the dozen new developments along Hunt Highway in and around Queen Creek, but driving down the two-lane road about 30 miles southeast of downtown Phoenix provides a revealing look into the area’s now vanished housing boom.
Road signs welcoming visitors to Pinal County proffer a menu of new subdivisions. Looking for houses by D. R. Horton, the nation’s largest builder? Keep driving, you have not far to go. Make a U-turn for KB Home’s latest four-bedroom Mc-Mansions. For Centex homes in the Johnson Ranch development, hang a right after the next bend.
Don’t worry, there are plenty more down the road.
So it goes in this and other suburbs of Phoenix, where builders turned scraggly desert and what were once cotton fields into neat rows of homes so fast that traffic on many country roads is often backed up a mile or more during rush hour.
Local officials issued 60,000 single-family permits in the metropolitan area in 2005, twice the number issued in 2000. But in the first nine months of this year, permits fell by 27 percent from the same period last year. And builders are suddenly refusing to pay the asking prices for developable land.
On the strength of a local economy that has added 300,000 jobs since 2000 and a population that grew nearly 20 percent from 2000 to 2005, Phoenix became an epicenter of the nation’s recent building boom, along with Las Vegas and Atlanta, as well as parts of California, Texas, Florida and stretches of the Northeast.
Phoenix, with its endless sun, lush golf resorts and myriad retirement communities, also attracted thousands of second-home buyers looking for bargains and investors seeking instant wealth.
The influx of buyers from California, many of them individual speculators, was so strong that builders overestimated demand and constructed a lot more homes than there were people wanting to live in them, said John Burns, a real estate consultant in Irvine, Calif. He noted that investors bought roughly a third of homes sold in the Phoenix area last year, according to mortgage application data.
Until recently, the calculation was fairly simple for individual real estate investors. “You put $5,000 down and you sell it for a $100,000 profit,” sometimes almost before the paint dried, Mr. Burns said. “And then you roll into 15 more houses.”
The speculators are gone. But builders predict that the current downturn will last no more than six months to a year, arguing that prices and sales will start rising again after the homes on the market are absorbed by the normal influx of migrants to the area.
Though job growth here is not as strong as it once was, local developers like Mr. Fulton contend that most of the positive fundamentals of the region’s economy remain intact.
Google’s plan to hire several hundred employees here is frequently cited as a sign of vitality.
“We will quickly grow out of it,” said Gregory J. Vogel, a land acquisition consultant in Scottsdale who advises builders and developers, noting that before the boom it was considered normal to have about 30,000 homes on the market at any given moment.
But other experts are not as sanguine. They worry that the supply of homes overshot demand by far more than is commonly understood.
“By the time all the dust settles, will this be an 18-month correction or a 36-month correction?” said Thomas Bruin, chief executive of Hearthstone, a firm based in San Rafael, Calif., that invests pension fund assets in land and residential real estate. “Nobody really knows.”
Economists note that the construction sector, itself dependent on the housing boom, accounted for about a quarter of all new jobs created in the last six years. Lower-paying retail jobs added about 15 percent.
Wages rose, too, but not nearly as fast as home prices. In Maricopa County, which includes Phoenix and Scottsdale, median home values — half the homes are worth more, half are worth less — increased 64 percent, to $212,700, from 2001 to 2005, while the typical household’s income rose just 5 percent, to $48,711, according to the Census Bureau.
New homes cost more: the median price was $270,000 at the end of August, up from $250,000 a year ago, according to Hanley Wood, a research firm.
Jay Q. Butler, director of the Real Estate Center at Arizona State University, agrees that Phoenix is generally healthy but he wonders which industry will generate enough new high-paying jobs to soak up the more expensive homes. “What’s the next semiconductor industry?” he asks.
The housing correction has, thus far, had only a modest impact on the broader economy. While home builders have cut back, contractors remain busy erecting shopping malls, office buildings, schools and civic projects. Builders and contractors say the costs of concrete, drywall, copper and other building materials remain high, though the supply shortages seen last year have dissipated.
“We have been at such a breakneck pace here,” said Mark Minter, executive director of the Arizona Builders’ Alliance, that a slowdown “might be good.”
Perhaps an early indication of things to come can be found in what has happened with land sales. In September, the Arizona State Land Department postponed the auction of two parcels of prime residential land north of downtown Phoenix after builders said the starting levels were too high.
One of those parcels, 325 acres in the Desert Ridge development, had been set at $461,000 an acre, far above the $243,000 an acre Toll Brothers, the luxury-home builder, had been willing to pay in April for an 81-acre parcel.
Land developers and builders say they remain interested in Phoenix but not at current, lofty prices. Among them is Newland Communities, a developer based in San Diego that is financed in part by Calpers, the large California pension fund.
Newland is developing a sprawling project southwest of Phoenix called Estrella Mountain Ranch, which has 3,300 homes today but is planned to eventually have as many as 60,000. A 30-minute drive from downtown, the development abuts a state park and features winding parkways lined with date palm trees, a Jack Nicklaus-designed golf course, two artificial lakes and numerous other amenities.
Several builders recently delayed construction on 650 single-family homes there, but on an adjacent parcel workers were starting to prepare the ground for what will in five years be 1,700 homes for retirees.
Daniel C. Van Epp, Newland’s chief operating officer, said the company was negotiating to acquire more land in the Phoenix area, some of it from builders starting to pare their land holdings. In a few years, Newland, which has a $1 billion land acquisition fund, expects to turn around and sell that same land back to builders in the form of finished lots.
“As sure as the grass is green, it will all come back,” Mr. Van Epp said about the housing market.
Thomas V. Caldwell is making essentially the same bet — on a much smaller scale.
Mr. Caldwell, a 32-year-old entrepreneur, started a property management firm with a childhood friend six years ago but quickly realized he could make far more by buying homes as well as managing them for others. He and his partner, D. Brett Brewer, now own about 30 homes each and manage a total of 2,200 properties for clients, many in California.
Their firm, Brewer Caldwell, employs about 100 people and puts on seminars in California and Arizona to teach people how to buy and manage investment properties. On a recent afternoon, their two-story office building was decorated as a haunted house for a Halloween party the company was throwing that night for the children of its employees. As they talked to visitors, a fog machine set off a piercing fire alarm.
Asked what he thought of the contention that investors were to blame for the glut of homes on the market, Mr. Caldwell acknowledges “there was some fluff.”
But smart investors, he argued, were absorbing the surplus by buying up homes that builders were now unloading at bargain prices — some for as little as $60 to $80 a square foot, which local experts say is barely enough to cover construction costs let alone land expenses.
At such prices and with interest rates still low, an investor can cover his monthly costs, maybe even earn a modest income, by renting homes for $900 to $1,400 a month while the market recovers, Mr. Caldwell noted.
“It is not a get-rich quick scheme,” he acknowledged. “But investments in real estate,” he added, “do go up over time.”