Horizon, Host: Ted Simons

July 20, 2005


Host: Michael Grant

Housing Arizona: Housing & The Economy


  • The housing market drives our state's economy in many ways, from new home construction to financial institutions and everything in between. HORIZON profiles one Arizona-based company that both benefits from and contributes to Arizona's housing industry. Arizona Republic Real Estate Business Reporter Catherine Reagor Burrough joins the studio discussion.
Guests:
  • Tony Haffer - National Weather Service, Phoenix forecast office


View Transcript
>> Michael Grant:
Tonight on "Horizon," are businesses based on Arizona's housing market on a rock solid foundation? We look at the ties our state's economic prosperity has to the home buying industry as we continue our series on housing. Plus, the sweltering temperatures we're all dealing with are not only uncomfortable but also deadly. 13 people have died from heat related costs. Safety issues related to the monsoon can also be deadly. Those stories next on "Horizon."

>> Michael Grant:
Good evening. I'm Michael Grant. Welcome to "Horizon." There have been some horrible consequences to this heat wave we're having. 13 deaths. That's above the average. 10 heat related deaths Phoenix usually sees in a year. 28 dogs died in an animal training facility because the cooling and ventilation system failed. Arizona's monsoon should provide some respite from the heat but there are safety issues tied to the monsoon as well. The question... is it here yet? Here to answer that, Tony Haffer, with the national weather service. Phoenix forecast office. Tony, it's good to see you again.

>> Tony Haffer:
Pleasure to be here as always, Michael, thank you very much.

>> Michael Grant:
All right. So did we get the third day of dew point 55 or better?

>> Tony Haffer:
Well, actually we're in the process of getting it as we sit here this evening. We will have three days by midnight tonight. So that means the monsoon will have officially, at least for statistical purposes, begun on Monday.

>> Michael Grant:
I was going to say this, gets a little strange, because that means that -- as our producer Merry Lucero put it, our heat wave, our monsoon will have begun last Monday.

>> Tony Haffer:
Yes, English is not one of my better subjects, obviously.

>> Michael Grant:
The heat's been really intense. Are we that much above average for the past couple of weeks or so?

>> Tony Haffer:
Yeah, we've really had unusually hot spell for this time of year, and the reason is that the moisture that we typically get early in July or late in June had not shown up. So the sun's there, and it raised the temperatures quite dramatically to well above normal temperature ranges.

>> Michael Grant:
And then, of course, the humidity starts coming in, you start getting the heat buildup on the rim, those kinds of things. Those are the -- and the wind shift. Those are the basic conditions that start triggering the monsoon, right, somewhere in that vicinity?

>> Tony Haffer:
Yeah. Monsoon literally means a shift in the seasonal wind at most of us real realize in the wintertime we see stuff in California before it comes to Arizona. When the monsoon kicks in we see things develop on the Mogollon Rim and move from the north and east and sometimes south and east from Tucson over the Phoenix area. So it was a change in direction from a westerly to Easterly component.

>> Michael Grant:
You worked with the state health department on putting out heat advisories. How does that process work? What's the determination criteria?

>> Tony Haffer:
It's an interesting issue weather service for many years thought there was this temperature-humidity index one size fits all. Some research has shown if we look at each particular urban area, at the mortality figures above the norm, on especially hot days, we can identify the weather conditions that occurred on those especially hot days throughout history and then as those weather conditions are forecast, we're able to say, hey, yeah, it's hot in Phoenix, but today is going to be unusually hot, and in the case of the 115s that we saw, unusually more so.

>> Michael Grant:
Salt River Project has created a couple public service announcements on safety issues that have to do with the monsoon. One has to do with driving. Other deals with downed power lines and let's take a look at those.

>> Tony Haffer:
Great.

>> Bob Bondurant:
I'm Bob Bondurant. I have been training professional an amateurs for over 37 years. The monsoon season can create dangerous driving conditions. If you are out driving and a dust storm hits, pull over, stop the car, turn off the lights and stay off the brakes. Wait until the wind dies down and visibility improves before you get back on the road. Remember, when a storm hits while you're driving, stop and survive. Don't drive.

>> Michael Grant:
You know, the -- I know one real problem area particularly on that phenomena is that stretch of interstate 10 coming up from Tucson.

>> Tony Haffer:
You bet.

>> Michael Grant:
Right around the Casa Grande area?

>> Tony Haffer:
Absolutely, yeah. Lots of dust available and when the winds pick up, comes across the highway and visibilities drop well below quarter of a mile, sometimes to 0-0 and you can't see your hand in front of your face so to speak.

>> Michael Grant:
Now, Emily grounded in Texas, I think, this morning.

>> Tony Haffer:
That's correct.

>> Michael Grant:
What do we expect from Emily? How does that contribute to the factors here?

>> Tony Haffer:
Well, as we know, the Globe is sort of a big pot with the atmosphere and oceans interacting to provide our weather, and these tropical storms, hurricanes that we've seen in the gulf of Mexico, have kind of stirred that proverbial pot to a good extent, and Emily is coming into the southern part of Texas and northeast Mexico in such a fashion it's going to kind of cause a surge of moisture from the gulf of Mexico and from the tropics as far as it goes in Mexico, up to Arizona, and we have our heat. All we need is some more moisture and we're going to see some good storms.

>> Michael Grant:
Now, we would expect that in the weekend time frame?

>> Tony Haffer:
Looks like the most threat from the moisture would be Friday, Saturday and perhaps Sunday. Some real heavy rains are possible.

>> Michael Grant:
Incidentally, just my imagination, or are we getting a lot more hurricanes a lot earlier this year?

>> Tony Haffer:
I think your imagination is very active. It's not just your imagination. It's a fact. There have been more Atlantic storms this year, and not only have there been more named storms this year, they've really reached some incredible strengths, category 3, category 4. I believe when Emily hit this morning it hit at category 3. So we've had some potent storms hitting the coastlines.

>> Michael Grant:
Tony, I know we were, the last time we were together, was probably two or three months ago after we had the run of winter storms. At that point in time, the expectation was for a short and non-very wet monsoon period. What does it look like now?

>> Tony Haffer: I would like to say things have changed, but as we've seen, we're off to a very late start. Typically the monsoon starts around the 7th of July. Officially it will be on the 18th of July this year. We don't have a lot of days left. We haven't seen anything that indicates we're going to have a continual stream of moistures, just sort of wet periods and breaks. So the overall outlook is for a short and dry monsoon and unfortunately for the heat to continue.

>> Michael Grant:
On the other hand, though, if this early string of, particularly gulf, hurricanes were to keep up, I mean, in other words, if you had more Emilys, obviously could that impact the situation?

>> Tony Haffer:
Certainly could. Obviously the most important thing for our storms is moisture, and our moisture during the summer comes from the tropics. The more action you have in the tropics, whether they be gulf and Atlantic storms, and we've seen some, I think Eugene is percolating in the eastern Pacific, the more hurricane action we see in the tropics the better the chance to keep pushing the moisture up our way.

>> Michael Grant:
Give me some of the averages in relation to the monsoon. How much of our -- for example, rainfall does it normally account for --

>> Tony Haffer:
Usually -- in Phoenix, at least, we usually get about two-and-a-half inches of rain and in a normal year, 12-month period, we get approximately eight inches. So it's a little more than 25 or 30\% of our rain just during the monsoon.

>> Michael Grant:
Given the shortness and those kinds of things we just talked about, give me an estimate on how do you think that will compare to average?

>> Tony Haffer:
Well, if anything has been seen in the last five years, we basically have been half of normal during the monsoon. I wouldn't expect us to be much better than that, but the thing about the monsoon storms is they're kind of hit and miss. Conceivably some areas would be hit with heavy storms while the airport where we officially gauge the strength of the monsoon may not have as much.

>> Michael Grant:
Well, and you know, unfortunately, with all of the wildfire activity that we had, heavy rains on some of that watershed will not be a good idea this year.

>> Tony Haffer:
Absolutely right. Mother nature provides vegetation to kind of slow the runoff, and when we have it burned off, even normal rains that we would see from a thunderstorm can produce enhanced runoff and, hence, we could possibly see some rather quick rises and some flash floods in burned areas. Particularly.

>> Michael Grant:
Tony Haffer, thank you very much for the information. Something else that's clearly hot, Arizona's housing market. All week we have been looking at whether Arizona's housing market is overheated, how increased home prices are impacting affordability. Tonight we take a look at how new home construction drives the state's economy. More on that in a moment. First, Merry Lucero profiles an Arizona based company whose financial ties to the housing market are, well, set in stone.

>> Merry Lucero:
This is the slab yard. Canyons of soon to be granite countertops fill this enclosed carpeted stock room at Arizona Tile in Tempe. The company provides some of the hottest materials for the exploding housing market. Imported ceramic, porcelain and natural stone tile and slabs. Arizona Tile had its modest beginnings 27 years ago in Phoenix. CEO John Huarte.

>> John Huarte:
I lease add place before 4,000 square feet and the rent was about $800 a month, and at first there was just myself, and then another guy, and then began to add on people. And just started very modestly in a very modest showroom, nothing like this.

>> Merry Lucero:
You may recognize Huarte from his pro football and Heisman trophy winning days. Now he has 20 Arizona Tile locations in the southwest, and five foreign offices. The company has only grown over the years.

>> John Huarte:
It largely went with the economy of Arizona, which if you look back at, it went through cycles. We had some really strong cycles, and then we had some off years, too. The important thing is you have to work your way through those off years. Where housing is not as red hot as it is today.

>> Worker:
Okay, so that bathroom is done, that bathroom is done then there's also a gray marble called BARDIGLIO --

>> Merry Lucero
: The hot housing market and corporate tax incentives have enabled Huarte to expand his company.

>> John Huarte:
There was an important tax cut when we were an small company and we had more money, opened up in Tucson, hired more people, opened up in Albuquerque and hired more people. Then this year we're going through the same cycle with the tax cut. We've been able to -- hire more people again, and so we're growing this year from about 800 to almost a thousand people. Because both the economy and availability of money, where we can go out and open new branches.

>> Merry Lucero:
The company often promotes from within, although employees are reticent about their salaries.

>> Lisa Wright:
I definitely got a promotion with my management, and I'm -- I'm recently a single mom, so I very much rely on my job here, and I know they take very good care of their employees. So it's very appreciated. I do enjoy my job here very much.

>> Merry Lucero:
While this industry thrives on a hot home building market, it still profits if new housing loses pace.

>> John Huarte:
You would have to make some adjustments, both inventories. Based on what we've experienced, three serious downturns, that we made money during those years, but you have to switch your attention from new housing to especially the person who wants to remodel and to improve their home.

>> Merry Lucero:
But new building is Arizona Tile's mainstay. It is one player in the vast economic web driven by new home construction.

>> John Huarte:
It's a very intricate relationship. If you just look at a house and start analyzing what goes into it from the planning, before you ever have a house, there the engineering and the roads and all the infrastructure, and then you finally get down to a lot, all the people, the engineers and the architects and all the people that were part of that, and you haven't even started the house yet, then you get into the house itself with all the basic products for the foundation and the rebar and then they start to put up the walls a and you think of the suppliers and you start multiplying. It's absolutely huge.

>> Merry Lucero:
And most new homebuyers don't have to worry about their role in our overall economy.

>> John Huarte:
Hundreds or thousands of people involved in bringing a home to what you finally see. Most of those people are invisible. You think of all the people who supply us in other parts of the world and then you think of all the trucks we use, and we're wearing out forklifts and trucks and all these things to get these products there. It's absolutely amazing.

>> Michael Grant:
Joining me now is economic and real estate consultant Elliot Pollack, and Catherine Reagor, real estate and business reporter for "The Arizona Republic." Hello to you both.

>> Elliot Pollack:
Nice to be here.

>> Michael Grant:
Elliott, you haven't been on the show since last night. It was on tape. That is a good point. We tend to think about the housing market or the housing portion of the economy being throwing up the houses, but businesses like that that are supplying the innards, I assume account for a large percentage.

>> Elliot Pollack:
If you take a look at the direct jobs, the guys actually building the houses and then you look at the indirect jobs like the supplier to the housing market and the induced jobs, the spending of the people who are paid to build houses and supply houses, it accounts for probably 15, 16, 17\% of all the jobs in the Valley. In terms of dollars, as Catherine's survey showed, it was higher than that. The impact is huge because it's not only the construction workers, it's everybody who supplies. So it's the tile guy. It's the guy at the title company. It's the lawyer. It's the guy who sells stuff at Home Depot. But it's also the guy who sells stuff at Circle K. The usher at the ballpark because these people go to the ballpark. It just ripples throughout the entire economy.

>> Michael Grant:
Catherine, what were the stats on just licensed realtors, the number was incredible.

>> Catherine Reagor:
73,000 now. A year ago it was 66,000. Five years ago 50,000. Just shows you, 44\% growth in five years.

>> Michael Grant:
50\% in five years or so.

>> Catherine Reagor:
Yeah.

>> Michael Grant:
Overall -- just overall jobs that are somehow directly tied to the housing --

>> Catherine Reagor:
What's tough with real estate because there are so many jobs that don't show up on the rolls, small consultants, small contractors, economists that may not show up or investors who are flipping houses that may not show up on the job rolls but they are making their money off real estate. So we used a model on revenue just on the money generated and we found 1 out of every 3 dollars is tied to the housing economy in Phoenix. Manufacturing was less, tourism was a fraction of that.

>> Michael Grant:
And that has been pretty stable over the past --

>> Elliot Pollack:
Well, it's higher now than normal because you are probably producing 30, 40\% more houses than you did a few years ago. When we thought the market was good and in 2002, we were producing probably 30\% fewer houses than we are today. The market now is just incredible, and it's a genuine supply-demand shortage. It's going to continue for a while. But everybody who comes to town, every time you -- 2.8 people show up, you need some form of housing unit. So given the fact we're growing at about 110,000 people a year there's a lot of base demand and that creates a lot of jobs.

>> Michael Grant:
I guess what I was thinking of particularly in relation to its stability, I know when I first showed up in the Valley, you'd have cycles maybe every three or four years, and actually since the turndown of the '80s, I'm not suggesting we haven't had dips and those kinds of things, but it's been a pretty sustained market.

>> Elliot Pollack:
Actually, it's been growing every year, and it's now gotten to the point where this year you'll probably be at 65,000 housing units for greater Phoenix, which is a number I don't think anybody thought we would ever get to.

>> Catherine Reagor:
Highest in the nation. Last year we beat Atlanta and now Phoenix is on track to be the top home building market in the country.

>> Michael Grant:
You were making the point that the remodel -- we tend to focus on the new home industry but the remodeling aspect is also booming?

>> Catherine Reagor: Yeah. You saw from this firm they're making their money off that as well. Yes, the first time it's close to new home building. The people who are looking at the equity saying, I like my neighborhood, it's a seller's market, if I sell do I have to move 10 miles away for a smaller home or bigger home. Why don't I tap some of that and add that bedroom, add that pool, redo my kitchen with granite countertops.

>> Michael Grant: Just try to schedule a workman to do that, though.

>> Elliot Pollack:
Again, this is -- this is an overheated cycle. It can't last forever. But it's going to last at least another couple of years because it's going to take that long to get sufficient supply through the pipeline to get supply and demand equal.

>> Michael Grant:
Elliott, obviously what you just said is true, but I'm hard-pressed, and I've asked the question a couple of times, I'll put it to you as well, I'm hard-pressed to say what is it about 2005 that's so significantly different. The population has been moving at a pretty good clip. Also it seems like building activity has been moving at a pretty good clip. But all of a sudden there just seems to be this gap.

>> Elliot Pollack:
Well, you basically have -- in 2002, which was a good year, there was 75,000 resales and about 35,000 new homes. 2005, there's about 120,000 resales and about 65,000 new homes. A lot of that can't be explained by demographics. A lot of it has to do with the investment craze into housing, especially in the resale market. A lot of it has to do with the demographics, people who are ancient like me getting to the point where they want to buy a vacation or retirement home, and this comes into play now and it hasn't before. I don't know that it's sustainable, but right now builders can't keep up. If you want to buy a new house, it's seven months to a year to get it, and the ratio of sales to listings in the multiple listing service is probably -- it's very high. In other words, listings are very scarce relative to the demand. And this can't be sustained.

>> Michael Grant:
but it will be the next couple years.

>> Catherine Reagor:
This is something we talk about all the time, affordability, median price 250 last month, quarter million sounds outrageous but we are the cheapest major Metro in the west. Las Vegas, 325. Of course, you look anywhere in California, including Bakersfield and some of those cities, a couple hundred thousand dollars more, double, triple our price.

>> Michael Grant:
An Oakland real estate consultant was on last night, across the board in California, $560,000, and it was where we are actually only about five years ago. There had been like a doubling in that time frame.

>> Catherine Reagor:
See, and if you sell there and come here, you can buy a house, you know n Scottsdale for $750,000, use your equity and we see more of that, and we see investors looking here because they still look at us, they went to Las Vegas first, prices jumped, started looking at Phoenix, and now we'll either get to the a level where prices are too high and they'll look at other places, we're hearing Boise and some cities like that or we'll just level off, keep our values and slowly appreciate.

>> Michael Grant:
How do we figure out that it's investors that are driving some part of this market? I mean, how do you do that scientifically?

>> Elliot Pollack:
You speak to realtors. Realtors are telling me anyplace between 25 and 30\% -- 35\% of their business comes from investors. And I still think --

>> Michael Grant:
Local, out of state --

>> Elliot Pollack:
-mainly out of state. But if you go, I bet your hairdresser owns two houses, you know, the guy who fixes your car. It's becoming a craze, and the excess liquidity that was in the stock market in '99,2000 has now gone to the housing market. Just like you must own stocks in 1999 or 2000. You must own housing today. It's the same craze. When the craze ends, I don't know. But I will tell you that it's created a supply-demand imbalance so it's not likely to end tomorrow.

>> Michael Grant:
How much this also, Catherine, do you think is fueled by some of the just almost bizarre loan products that are available.

>> Catherine Reagor:
The interest-only loans makes buying a second and third home much easier than it was five, six years ago. Your payment is only interest. Say on a $200,000 mortgage, be paying $600 or $700 instead of 12 hundred and we have the zero down mortgages. Which economist people are more concerned about because no one is vested into the house. You're getting in for nothing. So as long as you can make your monthly payment like an apartment loan, you're okay, but if people are stretching, if values decline at all --

>> Elliot Pollack:
This stuff isn't a problem now. The stuff becomes a problem when the economy turns down. That's not 2005. It's not 2006. It's not 2007. Somewhere lurking out there this stuff becomes a problem when people can't make those payments or if they have adjustable raid mortgages where they adjust every quarter or month as interest rates go up they're going to be squeezed, but we're building a problem for the future.

>> Michael Grant:
And is that one of the downsides of having so much of the local economy tied to housing in some form, fashion or other?

>> Catherine Reagor:
Unfortunately, yes, because--we've looked at the apartment model, and if home building dropped by 10\%, that would be at least a billion dollars out of the economy. Now if you have another industry to replace that -- manufacturing has shrunk with downsizing of some firms. We're looking at different industries like Bio-Tech and T-GEN to grow.

>> Michael Grant:
To Mr. Pollack responds it is what it is.

>> Elliot Pollack:
This economy is inherently cyclical and housing will move the same way manufacturing does, will move the same way retail does, and that is they will go up at the same time, but, unfortunately, somewhere down the road they go down the same time. It's not this year, not next, probably not 2007. This is a problem that will be postponed.

>> Michael Grant:
How much of a risk, those, are individual -- people that get enthused by what's been going on here the past --

>> Elliot Pollack:
They better have a positive cash flow. IF they're buying homes and prices are so high that they have a negative cash flow, that is a very high risk, and I suggest that they don't do that. If they can rent it for what the payments are, more power to them. They've created a one-unit apartment building. But if they have a negative cash flow, I think they're going to be sorely disappointed at some point.

>> Catherine Reagor:
Too many people have a negative cash flow and have to sell quickly and aren't worried about prices, just unloading, that could depress the entire market. That's where we could see a rise in foreclosures.

>> Elliot Pollack:
Which good is for an economy as a hole but bad for investors.

>> Michael Grant:
What your definition of a bubble.

>> Elliot Pollack:
A bubble -- let's put Greenspan's terminology the best, irrational exuberance, where you are buying something not based on underlying economics, you're buying on some feeling, gut feel or craze that something is going to stay good forever, whether it's a tulip bowl in Holland 500 years ago, or it's the stock market five years ago, or it's housing today. But the fact is in fact, in Phoenix, given the underlying population flows, we are not likely to have a bubble here, and prices are going to continue to go up until supplied-demand gets in balance and even they you'll have a minor decline in prices and -- it will probably stay flat for several years. But it doesn't appear to me that we're going to have any disaster here. That's not true on the coasts. On the coasts where there is not as much population flow and where housing prices are much higher there will be a bubble but not in Phoenix Arizona, I don't believe.

>> Michael Grant:
That's where it seems to me, Catherine, that term being used currently, at least for this market I think is a little misleading.

>> Catherine Reagor:
I agree. I think it's defined in many ways. I agree with the irrational exuberance. Now we're seeing home prices climb 6\% a month, five years ago they were 6\% a year.

>> Michael Grant:
Tomorrow, more on the housing market with a look at what happens if the so-called housing bubble bursts. For transcripts of "Horizon," and to find out about upcoming topics, visit the web site. You'll find it at www.azpbs.org.

>> Mike Sauceda:
Arizona's housing market continues to boom. When might it slow down? We'll talk to one local analyst about his predictions, plus President Bush has made his choice for the next Supreme Court justice. We'll talk to ASU law professor Paul bender about John Roberts and how he might change the direction of the court. That's Thursday at 7 on "Horizon."

>> Michael Grant:
Friday, of course, the Journalists Roundtable. Thanks very much for being here on a Wednesday evening. I'm Michael Grant. Have a great one! Good night.

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