Falling Prices Feed Increased Sales Volume in Tucson…and Other Regional Tidbits

July 13, 2009

By Ken Fears, Manager, Regional Economics

Over the last three years, the Tucson metro area witnessed a whopping 29.0% decline in the median home price, significantly more than the 21.9% decline for the U.S. as a whole. This drop translates into a loss of $72,200 in equity over this period for the typical homeowner. However, if a homeowner had purchased the median priced home seven years ago, their loss would only have been $3,500 and if they had held their property for nine years, they would retain $28,800 of equity in their home.

For the third consecutive quarter, NAR’s Research group has released the Market Price Reports. These reports cover sales, price and affordability information for more than 150 markets. The Market Price Reports also contain statistics highlighting the state of each MSAs economy as well as the demand and supply factors that drive each MSA’s housing market.

Digging deeper, one sees that Tucson’s pains are real and sharp relative to the rest of the country, but Tucson remains a strong long-term investment. Furthermore, the sharp decline in the median price bares a silver lining…an equally dramatic rebound in home sales for the state of Arizona.

This pattern of a sharp price decline followed by an equally rapid sales increase is repeating itself in large parts of California, Nevada, and Florida. These significant price declines provide potential buyers with the confidence to get in the game. From the perspective of a would-be buyer, with large price declines already registered, it is unlikely that prices will continue to decline at this pace in the future. Furthermore, during the typical ownership period (seven to nine years for the average homeowner) prices and homeowner equity are likely to rise.

The drivers of demand and supply for home purchases in Tucson are a mixed bag. Employment has tumbled locally, far faster than the national average. Over the last 12 months, job growth is down 4.8% compared to the national average of 1.3%. This sharp decline of employment can impact both the demand for and the supply of housing by limiting sales or eroding confidence in economic conditions, but also by forcing some owners into foreclosure thereby boosting inventories. A decline in mortgage rates can have a large impact on the decision to buy a home, but very few people can buy a home without a job. However, Tucson is not a typical market and a larger than average share of homes purchased on Tucson are by retirees and second homeowners who’s purchases decision is affected by a number of factors including current economic conditions.

Employment and interest rates drive demand, but construction of new homes drive the supply side of the housing equation. Locally, home construction has plummeted 46.8% over the 12-month period ending in March of 2009. Construction is down even further from its peak if one looks at a longer 24 or 36-month time period. This decline in construction helps to reduce supply relative to the slack demand, creating or moving the market toward a balance that will stabilize prices and inspire confidence for both buyers and sellers to get in the market.

 

Falling prices are a mixed blessing is a housing market like Tucson. Those buyers who purchased in recent years may see their equity eroded, but the price declines help to improve affordability. In Tucson, affordability has improved dramatically as the combination of falling prices and record-low mortgages rates pulled the ratio of the average monthly servicing cost to income (payment relative to income) down below its long-term average. This indicator of affordability is back to pre-boom levels, a change that echoes the rise in state-wide demand for housing.

Foreclosures remain an issue in Arizona and the Tucson area, but the local foreclosure rate is below the national average, 1.4% versus 1.7%. The same point is true of the share of sub-prime loans used to finance purchases in the Tucson area, 15.4% versus the U.S. average of 15.5%. Foreclosures swell the supply of housing, pressing down on prices. The relatively low exposure to the sub-prime problem bodes well for price stability and should inspire confidence in the potential for long-term, local price growth.

This discussion of the Tucson market suggests two important observations. Local price declines have set the Tucson market up for a period of stable and steady growth in the future. Furthermore, local data is critical to discerning patterns like this and differentiating the patterns that make national headlines from the truth on the ground at the local level.

Once again, all real estate is local, so your analysis should be as well. For the best insights on local level trends, check out NAR’s Market Price Reports.  Click here and check for the market closest to you.

 

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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