Horizon, Host: Ted Simons

August 23, 2005


Host: Michael Grant

Housing Arizona


  • Horizon's“ Housing Arizona” Special offers an in-depth look at the Valley's housing boom. What happens it the so-called housing bubble bursts? How will it affect home sales and the rest of our economy?
Guests:
  • Jay Butler - Director, ASU Real Estate Center


View Transcript
Michael Grant:
Tonight on "Horizon", what is causing Arizona's housing market to expand and home costs to increase so rapidly? The latest real estate figures show the median home price as skyrocketed in the valley causing some working families to be unable to afford a home; while at the same time, driving our state's economy. We take a look at all that, plus whether the phenomenon is a bubble ready to burst. Housing Arizona, next on "Horizon".

>> Announcer:
"Horizon" is made possible by the friends of Channel 8, members who provide financial support to this Arizona PBS station. Thank you.

Michael Grant:
Good evening, I'm Michael Grant. Tonight we bring you a "Horizon" special exploring our booming housing market. The Arizona real estate center is reporting the price of a typical valley home is now about a quarter of a million dollars. Other cities around the U.S. are seeing similar appreciation, but a recent study confirmed our area led the nation for housing price increases over the past year at more than triple the national pace. This phenomenon is prompting talk of a so-called "bubble" in the market, reminiscent of the late '90s dot-com craze. But real estate is different and there are no easy forecasts.

First up, Larry Lemmons looks at the basic trends.

>>Larry Lemmons:
A bird's eye view of the valley reveals the extent of growth inflating like a balloon across the desert floor from good year to Fountain Hills, from sun city west to Gilbert, from Cave Creek to queen creek. Houses sprout on land once inhabited by little more than sage brush and lizards.

>> Elliot Pollack:
There is a ton of construction going on and it seems to be growing every month. Most construction is at the periphery and there is no available land on the inside. It's nice to build stuff downtown, but that's two or three percent of the housing industry. The bulk of the housing, Phoenix tends to grow like a balloon and that pulses out like a balloon, and that isn't going to change.

>>Larry Lemmons:
The housing market is booming not only in Arizona, it's a global phenomenon but each market may be fueled by different factors.

>> Elliot Pollack:
Housing is a market of markets. What happens in San Jose is different than what happens in New York, is different than what happens in mime knee, it's different than what happens in Phoenix. All housing is going up rapidly right now and that's true in Barcelona, it's true in Paris, it's true in London. You name it. It's happening throughout the world.

>> Larry Lemmons:
In the valley, it's a question of supply and demand.

>> Elliot Pollack:
The housing market is incredibly strong. It's never been stronger. Part of it is the money going to real estate, but part is the supply and demand imbalance. Example, in 2002, there were 75,000 resales. This year there will be about 120, 125,000 resales. In 2002, there were 30,000 units in multiple listings. Today there are about 9,000 in multiple listings. So you have this huge increase in demand and a diminishing supply. The same thing is true the new housing market which has gone to nearly 65,000 housing units from about 45 and at the same time in 2002, you could move into town and virtually every builder had units available. Today you have to wait for a year to get a new house. There's a supply and demand imbalance and it's unprecedented for us.

>> Larry Lemmons:
The large demand is growth. Greater Phoenix has a population flow of about 110,000 people a year. That means an underlying demographic demand of about 45,000 single family units a year. Local developers are rushing to provide new homes.

>> Pat Maroney:
Business has been very strong. The last several years have been very, very active. And it's been - a great run.

>> Reporter:
Doesn't look like it's slowing down either.

>> Pat Maroney:
It doesn't. We haven't seen anything that's slowing.

>> Larry Lemmons:
But remember the dot-com bust? Five years after, some prophets are predicting a similar burst for real estate. So just what is a bubble?

>> Elliot Pollack:
Any bubble is basically, as Greenspan defines it, a rational maneuvering where people tend to believe that things are going to be good forever and they have to own the particular commodity, whether it's tulips in Holland, or housing in New York City. And it's usually accompanied with a huge increase in flows of money to that sector. It happened to the stock market, it's happening to all real estate right now. A fee-up type of money, in other words, people find ways to make the thing work either by borrowing, or using second mortgage or using some other form of money. It's that flow of money, the irrational exuberance, of people thinking things are going to get good forever by investing in this and the general excess in liquidity of the economy flowing through that sector which causes a bubble. And clearly that's happening in real estate. The trouble with bubbles, you don't know how bad a problem it is until after they burst.

>> Larry Lemmons:
But there's a different, too. There's a certain amount of speculative behavior in real estate but most people buy homes to live in them. Even if housing prices collapse, the homeowner would still have a roof over his head. Another factor fueling the market is low interest rates.

>> Elliot Pollack:
Interest rates are very low. Long term rates are surprisingly low for a lot of reasons, mainly having to do with the fact that China and Japan are essentially financing our deficit right now. But the effect of higher prices has offset lower interest rates.

>> Larry Lemmons:
Meanwhile, houses continue to be built in one of the fastest growing areas in the country. Despite dire warnings from some economists, it would seem that so long as demand stays high in Arizona, and prospective buyers have a way of financing mortgages, the housing market will expand deeper into the desert.

Michael Grant:
Jay Butler joins us now. He is the director of ASU's real estate center. He has been producing monthly reports on the housing market for about 30 years. But who's counting?

>> Jay Butler:
I'm sure not.

Michael Grant:
Jay, it's good to see you again.

>> Jay Butler:
Glad to be here.

Michael Grant:
You've had 30 years of experience. Anything that quite compares to what we've been seeing for the past 6, 8, 10 months?

>> Jay Butler:
In a much shorter duration, the late '70s, '76, '77, early part of '78 when we had double digit inflation, the CPI was only 22\%, home prices going up, nothing really this long. It's almost been 18 months we have seen the run-up in the housing market. In a more rational sense, the housing market has been around since about '93. Nothing of this duration we have seen before. And that's true worldwide. Phoenix is not unique.

Michael Grant:
And that's another curiosity. We get to expect appreciation in Phoenix and Las Vegas, certainly in California, other markets but what explains Paris, Barcelona, Amsterdam with similar kinds of phenomena.

>> Jay Butler:
Well for one interest rates are low worldwide, so in countries where homeownership is lower than the 65, 70\% we see in the United States, there's an opportunity for people to buy a home, a country home or summer home. This is happening worldwide. It's also the idea that also worldwide is the idea of self-sufficiency. You can't count on your company to keep you in a job for 25 years, the United States Social Security may have issues in 25 years. Private pension plans may not be what you think they are. The only way you can guarantee yourself a future is to wisely invest your household funds. The strongest investment people have is the home they live in, plus additional homes they acquire.

Michael Grant:
From that standpoint, is this somewhat like the dot-com bubble people saw those stock prices going through the roof and said, that's the investment for me?

>> Jay Butler:
In a large degree yes. People are sort of flowing money into markets throughout the world to buy homes. In a sense it's like the dot-com, but one problem you have, one big difference is the issue of liquidity. It's when the dot-coms sort of died, you could sell your stock. You may not make a lot of money but you could sell almost instantaneously. Day trading. In the housing market or real estate market it takes longer to sell your home. And if the market is nose-diving on you, then you may have difficulty selling your property. That's why some people may be now moving to sell their property, because there are people willing to buy and the prices are very good.

Michael Grant:
Alright well where is Jay Butler on the questions, irrational exuberance, and the bubble?

>> Jay Butler:
Basically, think we have to look at two things with the bubble. Yes, we have a bubble. Are we paying a premium for the house you're going to move into? If we looked at long-term growth rates for prices in Phoenix, our median price should be around 180, 185,000. We're at 250,000 in the resell market. The other issue gets to be, in order to acquire this home, are you putting your household at risk. Doing interest only, adjustable rates, there are fields out there of where to pay your monthly payments. Interest only, whatever. Are you putting your household at risk? If there is a burp in the economy, then you may be putting the whole household at risk in the situation. In that sense yes we have a bubble.

Michael Grant:
Lets go back to where you mentioned financing. Let's go back to the point you just touched on. How much of this is being driven by -- this is really weird, exotic loan products.

>> Jay Butler:
It's one of the interesting issues. Why do we need these sort of dot-com financing packages? Largely, income is not keeping up with home prices. In order to stretch that income, we have to stretch the financial structure. We have interest only where we pay $200, $300 a month. We have seen adjustables adjust once a month in this thing. We have seen some adjustables being advertised at 1.99\% for the first six months and interest only for the first 10 years.

Michael Grant:
A negative amortization. You're not paying the full interest, you're adding to the loan amount.

>> Jay Butler:
A lender can do anything to get you in the house. If they can't get you in the house you've got real big issues. Either you're way over priced -- and that's the other issue, some appraisals are not supporting the home price and deals are falling through.

Michael Grant:
I know, Jay, it's impossible to answer this question but I'll ask it anyway. The exotic loan product, is that 10\% of this bubble in demand, 50\%?

>> Jay Butler:
Estimates are around 20 to 30\% if you throw in the adjustables.

Michael Grant:
Okay.

>> Jay Butler:
A lot of people, because of the long term fixed rates have stayed relatively low, people are refinancing back to the fixed rate to reduce the numbers. If you look at even 10 or 11\%, if you take that out of the market, that's a pretty significant number every month to lose in the housing mark.

Michael Grant:
How much of this is investors? We hear stories about people from California coming over here and investing.

>> Jay Butler:
Estimates are somewhere between 20 to 40\%. We really don't know. There's nothing in the database. Basic situation is a larger number in certain neighborhoods, especially the lower priced neighborhoods, in areas that have been predominantly rental housing, we may see 60 to 70\% of the homes that are rental homes.

Michael Grant:
Here's one of the chill factors, though, if you look at the price of your house right now. You think boy, I can make some real money. Assuming that you want some place to live after the close of escrow, now you enter the same sellers market.

>> Jay Butler:
Well, the other thing is there's a supply restriction. You can't really sell your home unless you're ready, willing and able to buy a home. A lot of people can't do that. They've got a nice home, a good school district, everybody is happy, a 5\% interest rate. Price is good, you can go to the cocktail parties and brag about how valuable the home is and how cheap the mortgage is. You're not going to put it on the market at this time because you can't find a replacement. That restricts the buyer even further.

Michael Grant:
Alright, big question. When is it going to burst?

>> Jay Butler:
Probably not going to burst. At least on a natural level, unless we have something unusual happen to the economy. Right now, we have a good economy, reasonable job growth and low interest rates. Three very positive things going on. The one big unknown in every economic forecast is the unknown event, the next 9/11 or something similar which could put a chill factor on the economy. The big thing is on a metro level we'll probably see a backing out. We can't sustain these growth rates. Slow down the growth rate, stabilization, more sustainable market.

Michael Grant:
All right. Jay butler, thank you very much for joining us.

>> Jay Butler:
Thank you.

Michael Grant:
A year ago, the median home sales price in metro Phoenix was $175,000. Now it has jumped to $250,000. A 43\% increase. While sky rocketing home prices may be great for sellers, it is of course a different matter for home buyers. Escalating home prices make the American dream almost impossible for 10s of thousands of families. Paul Atkinson reports.

>> Paul Atkinson:
A for sale sign. They pop up from time to time in this neighborhood northeast of downtown Mesa. The MacElhaneys live across the street from a house for sale. Dad Russell, mom Emily, daughters and son move into the home two years ago.

>> Russell McElhaney:
It was a long process for us. I'm a schoolteacher and that became a concern when we looked at our financial situation. We had little kids and we were trying to figure out how we could get a home and afford to get the home having the situation we have.

>> Paul Atkinson:
The MacElhaneys got in just in time. They bought their house for less than $130,000. The home across the street is for sale for twice as much although it does have a pool and is remodeled throughout.

>> Russell McElhaney:
We were very fortunate to get in our home when we did looking at today's market.

>> Emily McElhaney:
We've been amazed to look at the market, even in our own neighborhood. Friends who sold their homes and are looking to buy their homes, if we didn't buy when we did, we probably wouldn't be able to at this time.

>> Paul Atkinson:
That's the situation Nicole Wilson finds herself in. She is meeting with a loan officer to qualify for a new loan after coming up empty-handed the last three months.

>> Nicole Wilson:
I've looked at houses. They're on the market for a certain amount but are selling for $20,000 more than people are asking for it.

>> Edna McLaughlin:
It's more difficult now than ever to bid on a property. We have a lot of investors coming into the market and buying houses right now.

>> Paul Atkinson:
Edna McLaughlin is Director of education and counseling at Housing for Mesa, a nonprofit that assists first time home buyers.

>> Edna McLaughlin:
We have an influx of families who are looking for affordable housing, I'm not talking about families earning very low income, I'm talking about hard working families, maybe high income families, two income families, families that are earning 40 or $50,000 that maybe have large families that just can't get into the market. There's a huge sense of frustration there.

>> Paul Atkinson:
Wilson is frustrated but she hasn't lost hope. She wants the benefits that home ownership has to offer.

>> Nicole Wilson:
My children are growing up and I'm looking for a home that's a nice neighborhood, a good school district. I've been renting for so many years, it's time to invest my money into something I can call my own.

>> Paul Atkinson:
Buying a home allows Wilson to tap equity that she can use to send her kids to college or use for other major expenses.

>> Edna McLaughlin:
It's also a lot more stable for families to have their own home, to be in the neighborhood, be part of a community, to be close to work or at least in the same location. And it strengthens neighborhoods to have homeowners really take care of the homes, which is what we're seeing a lot now with investors coming in and renting.

>> Paul Atkinson:
The MacElhaneys wanted to stay in the neighborhood where they rented and their youngest daughter went to school. Some of their friends were forced to live farther away because it's the closest housing they could afford to buy.

>> Edna McLaughlin:
It's not affordable for a lot of young families who are struggling trying to find a place to live. So they're moving further south in order to move into something they can afford.

>> Paul Atkinson:
One reason is that salaries cannot keep up with the huge increase in home prices.

>> Nicole Wilson:
Something that I could afford last year is so much more expensive and it's really hard for average incomes, single income homes to find something they can afford.

>> Paul Atkinson:
That doesn't mean Wilson can't buy a home, it just may not be what she ideally wants.

>> Elliot Pollack:
The prices have increased nearly 25\% over the last year. That means A, you could be priced out of the market or B, you're probably buying less of a house than you wanted to, or C, you're putting more money into a house than you really wanted to. One of those three things is going on. Right now, you can still buy new housing in Phoenix for 150, $120,000. You're not living maybe where you want to be, but it's available.

>> Paul Atkinson:
But for people like Wilson and the MacElhaneys, buying farther away would increase the amount of transportation and decrease the amount of time with their children who don't want to move too far from their school and friends.

>> Emily McElhaney:
Its still hard from month to month but we're making it and we're glad that we're finally getting some equity.

>> Paul Atkinson:
The MacElhaneys are glad they got out of the home buying game before prices sky rocketed.

>> Russell McElhaney:
I just wonder what's going to happen with the market the way it is and whether, how long this can go on.

Michael Grant:
Tonight we take a look at how new home construction drives the state 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 counter tops at Arizona tile in Tempe. The company provides some of the hottest materials for the exploding housing market. Imported ceramics, porcelain, and natural stone tile and slabs. Arizona tile had a modest beginning 27 years ago in Phoenix. CEO John Huarte.

>> John Huarte:
I leased the place of about 4,000 square feet, the rent was about $800. At first it was just myself and another guy, then we began to add on people. Just started out very modestly. We had a very modest show room, nothing like this.

>> Merry Lucero:
You may recognize him from his pro football 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. You look back at the cycles, very strong cycles and we had some off years, too. The important thing is you have to work your way through those off years, when housing is not as red hot as it is today.

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

>> John Huarte:
There was announced by President Reagan, an important tax cut when we were a very small company. We had more money, we opened in Tucson, hired more people. We opened in Albuquerque, hired more people. 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 1,000 people because 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 recently a single mom so I very much rely on the job here. I know they take very good care of their employees. It's very much appreciated. I do enjoy my job here very much.

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

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

>> Merry Lucero:
But new building is Arizona's tile mainstay, in the vast economic web driven by new home construction.


>> John Huarte:
It's a very intricate relationship and if you look at a house and start analyzing what goes into it, from the planning, before you had a house, engineering, the roads and the infrastructure and you get down to a lot, the engineers, architects, all the people that were part of that, then you get into the house itself. With all the foundation, rebar, and then start to put up the walls, and think of all the suppliers, start multiplying that, it's absolutely huge.

>> Merry Lucero:
Most new home buyers don't have to worry about their role in our overall economy.

>> John Harte:
Hundreds of thousands of people involved in bringing a home to what you finally see. Most of the people are invisible. Think of all the people that supply us in other parts of the world. Trucks, all the things that get products there, it's amazing.

Michael Grant:
While the valley's sizzling hot real estate market can be a boon to the economy, it can have its ups and downs for realtors. In our final segment, Mike Sauceda takes a closer look into the so-called housing bubble through the eyes of a local real estate agent.

>> Mike Sauceda:
For 28 years, Craig Sanford has sold real estate in the valley but not since the late 1970s have prices in the valley increased so rapidly in such a short span of time. Housing prices going up 43\% in one year.

>> Craig Sanford:
I think a 43\% price increase goes back to a couple of things, first it's just the demand, there are a lot of people moving here; and two, we've had good values here for a lot of years and people finally found them, basically. And they can buy a property, and with the value of homes, now you have some profit for profit-makers.

>> Mike Sauceda:
Not only have prices shot up, the value of homes being sold is incredible.

>> Craig Sanford: It's harder to find properties for your buyer and that's what's kind of frustrating. And the sellers side it's a little easier because he has more control over the product over the client.

>> Mike Sauceda:
The frantic pace of business has not only made prompts harder to find, but is cutting into the profits for realtors. There are over 72,000 licensed real estate agents in Arizona, up 22,000 from just three years ago. The U.S. median income of a new real estate agent dropped $3,000 from 2002 to 2005.

>> Craig Sanford:
It's like all businesses, costs go up. Advertising is more expensive, office space, rents have gone up, as well, so the net cost of business has gone up. But if you look at the true dollar, that one should make on a sale based on negotiable commissions, that has seen steady attack. That has resulted in a decline in what most people assume you get paid.

>> Mike Sauceda:
It' hard to say whether it's a sign that the market is slowing down but Sanford says the number of homes listed for sale has increased recently. More homes listed can indicate a slow down because that means they're staying on the market longer.

>> Craig Sanford:
I've been trying to analyze that on my own personal basis. I'm not sure if the market is slowing down or if that's summer activity increase. It's going to be interesting to see what happens when people get back into the school mode and house hunting activity starts to potentially be over.

>> Mike Sauceda:
So what would be Sanford's ideal market as a real estate agent?

>> Craig Sanford:
If I had my magic wish, I would like to see the real estate market continue on at least a steady pace. Not the huge positive swings, not the huge negative swings. Just a steady supply of inventory, a reasonable cost of money for people to truly afford to have a good home around them.

Michael Grant:
For transcripts of "Horizon", and to find out about upcoming topics, go to our website at www.az.pbs.org. Thank you very much for joining us at this special edition of "Horizon". I'm Michael Grant. Have a terrific one. Good night.

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