Demand, not supply issues, driving home prices - SanTan Sun News SanTan Sun News

Demand, not supply issues, driving home prices

April 29th, 2021 SanTan Sun News
Demand, not supply issues, driving home prices

Executive Editor

The cost of lumber may have risen 260 percent since last April, but one of the Valley’s major trackers of the Valley housing market says that’s not what’s driving home prices through the roof.

“New home developers do not set home prices based on the cost of building a home,” the Cromford Report said last week. “They price it based on the competitive alternatives available to home buyers. The most important one is the price of a similar re-sale home.

“Obviously, the price of building materials has absolutely no relevance to the market price of a re-sale. The laws of supply versus demand control re-sale pricing. It therefore follows that the laws of supply and demand also drive new-home pricing.”

In some ways, the lack of ready availability of lumber and other supplies has created more of a headache for developers than price increases have.

Earlier this month, Fulton Homes gave customers who had plunked down a down payment for a new home a one-week info to get a full refund, telling them because of lumber, window and roofing shortages, it was impossible to give a completing time for construction.

Cromford noted that re-sale home prices are rising so fast that new home prices appear too cheap, so developers up the prices of their homes “repeatedly to avoid selling homes too cheaply.”

“Builders also have to pay more for their supplies, but this presents little problem when their headline prices are rising even faster,” Cromford added.

“If homes were easy to find, the high cost of building supplies would squeeze gross margins for builders and their profitability would suffer,” it added.

It noted that buyers are so desperate that there are even lotteries when new tranches of lots are released.

Cromford noted that broken supply chains stretch the completion times for homes and consequently create a greater imbalance between supply and demand in the market.

“And of course, when the cost of building supplies comes down again, will house prices go down as a result?” Cromford rhetorically asked. “Don’t be silly.”

Cromford also called attention to the overall “craziness” in the Phoenix Metro housing market.

To wit: A house in Scottsdale that was bought for $825,000 in 2013 and resold six years later for $1.3 million was listed recently at 1.5 million and sold for $1.7 million – in cash!

“So it rose by $412,500 in just 16 months, or almost $26,000 a month,” Cromford said. “It also went under contract after just three days.”

A home in Peoria purchased a year ago for $520,000 sold for $810,000. It was built in 2014 at an original listing of $379,275.

A property “coming soon” at $565,000 went under contract within 24 hours at $620,000 with a fully waived appraisal.

Looking at all three transactions, Cromford remarked, “These things would have been unbelievable just six months ago, but are becoming commonplace today.”

Ironically, Cromford said, demand is not much above average.

“It is the supply situation that is extraordinary,” it said, noting “increasing supply can take a long time unless huge numbers of homes are already vacant, as was the case in 2005.

“Homes lying vacant in Greater Phoenix are unusual today, so any increases in supply are likely to be gradual.”

Cromford also noted a new trend in recent sales.

According to its review of Maricopa County transactions in March, sales of homes overall were up 29.3 percent – but there was a difference between those representing primary residences and those involving rentals.

Sales of owner-occupied as a primary residence were up 12.7 percent but sales for use as a rental property were up 52.1 percent and sales for use as a second or vacation home were up 36.2 percent.

“Far more sales are going to investors and those buying second homes,” Cromford said. “The primary residence buyer seems to be the segment that is losing out.”

Cromford also said competition remains steep and is getting steeper for re-sale homes.

“Every re-sale is effectively an auction with fervent bidding by desperate buyers,” it said.

All of this prompted Cromford to remark, “We are living through an unusual period in housing history.”