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Housing Crisis in the Making? Industry Experts Offer Predictions on Valley Residential Market

The skyrocketing growth in the Valley’s residential real estate market is expected to continue through 2021, as homebuilders furiously buy land to build more homes to keep up with insatiable demand.

The Phoenix Business Journal recently invited some of the Valley’s top real estate experts for a recent panel discussion on the homebuilding sector outlook for 2021 as well as their take on what may happen with home prices.

“We’re growing at a rate year-over-year of about 20%, 25%, 30% every month when we look at snapshots,” said Jim Belfiore, founder of Phoenix-based Belfiore Real Estate Consulting and a panelist for the Feb. 25 homebuilding panel discussion. “And today, we have no issue with demand. Demand is extremely healthy. The issue is with supply. In fact, builders can’t find lots.”

But he also sees what he calls “a housing crisis in the making.”

With a limited supply of existing homes on the market and homebuilders trying to keep up with demand for new home sales, Belfiore said there essentially are no price controls.

“When you have what seems like unlimited demand that we can’t build to and you have extremely limited supply, you create pricing pressure,” he said.

More land auctions

Michael Ingram, founder of Scottsdale-based El Dorado Holdings Inc. and panelist, said homebuilder demand is keeping everyone extremely busy, from engineering firms to municipalities approving the projects.

“The turnaround time has been tough to get through some of the cities and municipalities,” he said. “It’s tough sometimes to bring the things together as quickly as we want to bring them together.”

Fred Hermann, president of the Phoenix division of Scottsdale-based Meritage Homes Corp. (NYSE: MTH), said he’s buying land on the outskirts of town to help keep home prices more affordable.

“If the size of the home is more important to them, then they’re going into more of the outskirts, where it’s more affordable,” he said. “but if location is more important, they’re going to be paying more money because of the area. And then there’s always the lifestyle with amenities. It’s a buyer’s choice.”

Luckily, the Arizona State Land Department has been auctioning off land for homebuilders — a big turnaround from previous years when there wasn’t much movement in that area.

“I think it’s really in Gov. Ducey’s second term the state land department is truly open for business,” said Jordan Rose, founder of Scottsdale-based Rose Law Group and a panelist. “We’ve seen them release thousands-plus acres of property down in Apache Junction very recently. We’re going through a zoning approval for a private developer on a state land piece up in northern Maricopa County and there’s some in Peoria that they’ve been releasing.”

In an effort to keep pace with demand, homebuilders are limiting new home sales, Belfiore said, so state land auctions open up opportunities for homebuilders to buy huge land parcels.

“We still are going to have this supply shortage on an ongoing basis, but hopefully with folks like Mike being out there on Sun Valley Parkway with his Douglas Ranch piece, he’s seeing tremendous demand, as are other developers,” Belfiore said.

Price increases

But developers need to be careful they don’t flood the market and devalue the private land, Rose said.

“That’s a balancing act that they’re doing a very good job at right now,” she said.

As a homebuilder, Hermann said he’s getting hit on all sides. Over the past 12 months, he said he was getting hit with 24% increases in direct costs.

“You’re looking at maybe a $340,000 house and 40% of it is your direct cost, you’re going to need to raise your prices 13% just to cover those direct costs,” he said. “With land going up — if land goes up 20% to 30% — a replacement cost for your community — you’re going to be needing to raise prices for that. Last year, if you didn’t raise prices somewhere around 18%, you would not be able to replace the current community that you are in, to go to a new one, without a dramatic jump in your sales price.”

Labor shortages also are keeping homebuilders from building faster.

“There’s a real squeeze on labor every place,” Ingram said, pointing to Michael Brewer, who started Brewer Craftsman Academy to provide free apprentice training for those interested in plumbing careers, essentially paying them to learn.

“I’m sure there’s other people in different trades that are doing the same thing, I suspect,” Ingram said. “You’ve got to hand it to these guys. They’re doing everything they can to try to meet the needs there.”

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