Aerial view of suburban homes, Phoenix, AZ
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The Phoenix market has cooled substantially, and there are signs the housing boom is fading in many parts of the country.
By Martin Wolk Executive business editor
msnbc.com
updated 11/10/2005 4:53:43 PM ET 2005-11-10T21:53:43

Phoenix real estate executive Rich Rector has been seeing something unusual lately as he makes his rounds: “Open House” signs.

A few months ago the market around Arizona’s biggest city was so hot that homes sometimes sold “within a matter of minutes” after they were listed, Rector said. There was rarely any need for real estate agents to drum up business as they typically do in most places -- by sitting in an empty house and waiting for would-be buyers to walk in off the street.

Now the Phoenix market has cooled substantially, and there are signs the housing boom is fading in many parts of the country. The question is whether the slowdown is the beginning of a potentially damaging decline in sales activity and prices predicted by some experts, or whether the market will regain momentum again in the spring as it often does.

Disappointing sales figures published in late October, coupled with a steady rise in mortgage interest rates, sparked a flurry of articles suggesting that the long-awaited housing bust had arrived.

A story in USA Today, for example, referred to “nervous chatter” about increased inventory available for sale, and anecdotes about sellers cutting their asking price.

And to be sure, even many housing industry experts believe 2005 will end up being the peak year of the long, strong housing cycle that has a dependable engine of economic growth.

“I do think we are either at a plateau, a crest or whatever you want to call it,” said Frank Nothaft, chief economist at mortgage giant Freddie Mac. “It will clearly turn out to be a record year for home sales and single-family construction. …. As mortgage rates go higher, that will work to reduce housing demand.”

But it might be a bit early to leap to the conclusion that housing prices are about to crater.

Mike Englund, chief economist for Action Economics, points out that the housing market tends to go into a seasonal slowdown every year at this time. Spring is a far more popular time to buy a home, especially for families with children who may have to switch schools, so the strongest demand and price gains typically are seen in the second quarter.

And even though some housing data are adjusted for the expected seasonal variations, the “clustering” of high demand in the spring and excess supply in the fall appears to be getting more pronounced, Englund said.

Looking at sales of existing homes from 1968-2005, the median sales price typically has risen 15 percent in the second quarter, risen 8 percent in the third quarter and then fallen 5 percent in the fourth quarter. But over the past decade the median has risen 18 percent in the second quarter, 11 percent in the third quarter and then fallen 6 percent in the fourth quarter.

Major Market Indices

This year prices rose 49 percent in the second quarter and 16 percent in the third quarter, so even a sharp drop in the final two months of the year would not be surprising, Englund said.

“Virtually everyone you talk to in the market thinks we’re seeing a pullback in the market, and clearly we are seeing a seasonal pullback,” Englund said. “What we’re arguing is it’s not clear this bubble period is over because this pullback in the fourth-quarter happens every year.”

The true state of the housing market will not become evident until the spring, when seasonal demand will peak and savvy sellers who can hold out will try to get the highest possible prices.

For now Rector, president of Realty Executives International in Phoenix, is happy to see prices and sales activity moderating.

“A market like we had over the past year and a half — it’s so unbalanced that it’s no fun being a buyer and no fun being a seller, because most sellers have to go buy something,” he said. “A balanced market to me is much healthier.”

A 30-year veteran of the market, Rector said he had never seen anything like the buying frenzy that gripped the region recently.

“We have never had a market where it was common to get multiple offers on properties, and for houses to sell in matter of minutes, and we’ve never seen appreciation rates like these,” he said.

After rising at a steady 6 to 7 percent annual pace for most of the past decade, the median price of an existing home sold in the Phoenix metro area jumped 46 percent over the past year to $259,700 at the end of the third quarter, compared with $177,500 a year earlier, according to the Arizona Real Estate Center at Arizona State University.

Prices also have been soaring for new homes, which are more common in fast-growing Phoenix than in many older markets. A typical 2,000 square-foot home in the southwest Phoenix area that sold for about $244,000 in June 2004 was selling for $407,000 last month, according to local analyst R.L. Brown, publisher of the Phoenix Housing Market Letter.

The reasons for the surge in demand are unclear. Some analysts chalk it up to the near-mythological “California investors” who arrive flush with cash and snap up home sight-unseen, sometimes even before they are built. After sweeping through Las Vegas and now conquering Phoenix, they are believed to have moved on to relatively untapped markets like Albuquerque, N.M.

"There is clearly some evidence of speculative behavior taking place," said Ross DeVol, director of regional economics at the Milken Institute. "You can't really predict what the outcome is going to be. You could see a correction, but I don't think it would be a major correction."

In addition to the speculation, high real estate prices in California probably boosted normal migration patterns, and low mortgage rates might have induced some baby boomers to buy their retirement homes in advance.

Whatever the reasons, there are signs the frenzy is coming to an end. There are now 17,000 residential properties listed for sale, up from just 5,000 a few months ago, and would-be buyers have regained some of their bargaining power.

“Prices have settled,” Rector said. “I won’t say they have come down, but they have stabilized.

Brown agreed, saying, “We are seeing a decline in the rate of increase in housing prices here, and that is a very positive development for the sustainability of the housing market.”

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