Glen Creno
The Arizona Republic
Dec. 28, 2005 04:35 PM

Metropolitan Phoenix’s new-home business is poised to set another record this year despite a second-half slowdown that is removing the hysteria from what had become a runaway market.

Requests for new-home building permits in the area fell 6.53 percent in November compared to the same month a year ago, said analyst RL Brown, publisher of the Phoenix Housing Market Letter. But barring a December collapse, the Valley is positioned to beat last year’s record without breaking a sweat.

Through November, 58,491 new homes had been permitted in the Valley. And with monthly permit numbers typically exceeding 4,000, it’s clear that last year’s stunning-at-the-time milestone of 60,872 is about to become the old standard.

Valley housing is driven by population gains, job growth and comparatively affordable prices. Brown says the formula still holds though a spin up in prices may finally be eating into demand.

But he believes the big reason for the drop-off in permits is overloaded cities that can’t process them fast enough and delays getting approvals for and installing subdivision basics like water and sewer lines and streets. He thinks the market will stay strong but said builders are under more pressure to deliver homes at sharp prices with the right mix of amenities than they were during the buy-anything boom.

Larry Seay, executive vice president and chief financial officer of Scottsdale-based Meritage Homes, said 2006 might not be another record for Phoenix-area housing. But he said home builders could live with that.

“That doesn’t mean the market is bad,” he said. “It just means it has cooled. It gives us time to catch our breath, let production catch up with sales.”

THE ASSOCIATED PRESS
PHOENIX — Several small cities in Arizona are facing housing affordability problems that could hold back growth and hurt their economies.
While the problem of housing affordability has been well- documented in metropolitan Phoenix and Tucson, it has been mostly anecdotal in other parts of the state until a report this fall from the Arizona Housing Commission tracked incomes, home prices and rents statewide.
The study found that police officers, nurses, teachers and firefighters can’t afford to buy a home in half of Arizona’s biggest communities. Retail and restaurant workers can’t even afford to rent in any of the 30 areas tracked, ranging from Safford to Phoenix.
NAU seeks to build housing
The problem is severe in Flagstaff, where Northern Arizona University wants to build its own affordable housing to try to attract and retain workers. The university wants to team with a developer to put up 600 homes and apartments on school land.
“Unless the university can build housing and control prices, it will have little ability to compete for the best professors and staff,” said John Haeger, NAU’s president.
Universities in pricey housing areas of California and the East Coast have built similar developments. Northern Arizona University’s residential project would be the first for the Southwest.
Many live outside Flagstaff
Northern Arizona University might join other big employers in Flagstaff to develop housing with below-market prices and rents.
Firefighters, police officers, government employees and service workers can’t afford the area’s housing, either. Many live in small towns outside Flagstaff, where housing is less expensive.
“People in Phoenix and Tucson aren’t the only ones making long commutes to find housing they can afford,” said Sheila Harris, director of the Arizona Department of Housing. “It’s not uncommon for people to live in Williams and work in Flagstaff. But that commute can be long and hazardous, particularly when roads are icy.”
The Housing Commission’s report was based on 2004 data, and the problem has worsened in 2005 as most Arizona communities have seen double-digit jumps in home prices.
People working in Lake Havasu are living in Mohave Valley and driving 100 miles round-trip to their jobs.
Second-home mecca and resort community Sedona has the highest home prices outside metro Phoenix. Much of the work force needed to run the town doesn’t earn enough to afford a home there. Employees at Sedona resorts and restaurants had been buying homes in Prescott, almost 70 miles away, but now housing prices have soared there, too.
Second-home buyers, investors and transplants from California and other high-priced housing areas have helped push up home prices across the state.
Developable land shortage
Another big part of the problem is that there is little available land for development around many of Arizona’s smaller cities and rural areas, housing advocates said.
Most of the land is owned by the government or is part of American Indian reservations. Only about 13 percent of Arizona’s land is privately owned.
Metro Phoenix has had one of the most affordable housing markets in the West for decades because of its abundance of developable land. People have long been able to drive farther out to find housing they can afford.
Even so, home prices in the Phoenix area jumped 55 percent in the past year, and incomes climbed less than 3 percent.

By RACHEL PETERSON
Sun Staff Reporter
12/05/2005

Carlton Conrad of Phoenix started investing in Flagstaff’s housing market in 1965, long before the market was the hot item it is today.

He sort of fell into it when his parents’ rental home of 15 years was about to be sold, and Conrad wanted to spare them a move, he said.

Today, Conrad is among a growing number of property owners in Flagstaff who have purchased properties as investment and live out of town. Based on 2003 property tax reports, about 20 percent of property tax bills are sent out of town. The number of out-of-town owners is expected to continue to rise as about 50 to 60 percent of the new construction is going to investment buyers and second-home owners, said Michael Kerski, Flagstaff community investments director.

Of the 400 new building permits for residential development issued this year, about 200 had out-of-town tax addresses, Kerski said.

“I’m hearing from Realtors that they’re showing 60 percent to second-home (buyers) now. When you blend them with all of the existing homes, it’s probably about 23 percent” of the overall stock.

If building and buying continues at that rate, by 2050 almost half of the housing stock in Flagstaff will be owned by out-of-towners.

MIXED IMPACTS

The impact of that trend will be mixed. It means that many more people will be paying property and school taxes on second homes without actually using the schools and city facilities. It could also mean that the quick turnaround speculators will raise the already high cost of housing in Flagstaff and create a community of renters, who are less likely to care for the properties.

The lack of ability to own a home also could drive out some of Flagstaff’s needed workforce — nurses, teachers, police officers — possibly contributing to an overall decrease in the quality of life here.

The 2000 census found that just 48.2 percent of Flagstaff’s housing units were owner-occupied, compared with a statewide average of 68 percent. The difference is likely due to the high number of college-student renters in the city, but Kerski contends that even full-time residents have a hard time owning a home — he puts the figure at only about 50 percent.

The city’s housing staff is working to develop housing programs for the city’s low and middle-income workforce. One approach is community infill and redevelopment, which has targeted neighborhoods such as Southside, but also raises fears that the new construction and renovation will increase property values to a level that existing owner-occupied units will be converted into investment buys for high-profit flipping.

NOT INTERESTED IN SELLING

A few, though, might have other ideas for their properties, if the city and neighborhood residents would cooperate.

Since his original investment, Conrad, a Phoenix resident, has continued to purchase homes on Grand Canyon Avenue and nearby streets. He now owns 26 properties in that neighborhood, including one that is his summer home.

“I feel that particular neighborhood is actually choice view property. The land is very valuable in that neighborhood,” he said.

While Conrad acknowledges he “could make a bundle by selling now,” he said that unlike other investment buyers, he’s not interested.

“I’ve had offers from people who were actually interested in buying homes. Offers from a few investors. Some I think were more interested in land than actually in the houses,” he said. “I’m interested as much in trying to do something for the neighborhood as I am making a fast buck.”

Conrad said he’d like to see his neighborhood revitalized, and to do so in a way that it could provide more housing.

“I’m a control freak. I have the idea that I know what’s best for that old neighborhood. If I begin to sell, I lose control,” he said. “I can work toward the betterment of the neighborhood if I continue to own what I have there.”

AFFORDABILITY VS. AESTHETICS

Conrad may be an anomaly in today’s red-hot housing market, but part of that is due to the painstaking and costly building process in Flagstaff, he said. Despite the city’s desire for more affordable housing, the reality is that affordability must compete with aesthetics and historical preservation.

“Everyone talks about affordable housing in Flagstaff, but it’s a political football. It isn’t just city government. Building in Flagstaff is very expensive because the building season is very short and land is scarce,” he said. “Getting something new built in Flagstaff is not a pleasant experience. I think it will take a real change in attitude before much of Flagstaff’s housing problem is settled or improved.”

In Conrad’s neighborhood, he built one fourplex before he was confronted by concerned citizens, and ultimately blocked from building more like it in the historically single-family housing district, he said.

“The zoning in the neighborhood (now) permits nothing larger than duplexes. Many people feel that the older part of Flagstaff should remain some sort of a village feeling.”

Conrad said he can understand that attitude, but the small lots on which those older houses are built don’t work for single-family residences today. So his only remaining option is to continue to rent the somewhat dilapidated housing while slowly working on revitalization through duplexes.

“I won’t live long enough to redevelop everything that I have. I do hope eventually someone will pick up on this,” he said.

When his property is sold, those houses could be completely leveled and replaced with far fewer units.

“It’s one of the reasons that I think rents are high in Flagstaff,” Conrad added. “Investors are competing for the available real estate in Flagstaff, apparently believing the housing investment will continue to boom as it has in the past few years.”

Then, they sell to other investment or vacation home owners to do the same.

“I think it’s very significant that the average house in Flagstaff now sells for more than the average house here in the Valley,” he said.

Rachel Peterson can be reached at rpeterson@azdailysun.com or 556-2253.

The out-of-towners are moving in

Year/Total residential properties/Out-of-town tax address/Percent out of town

2003/16,678/3,322/19.9

*2005/17,078/3,722/21.8

*2020/20,078/6,722/33.5

*2030/22,078/8,722/39.5

*2040/24,078/10,722/44.5

*2050/26,078/12,722/48.8

*Projected based on current-year building permit statistics