Tuesday, January 30, 2007

Phoenix Real Estate Socioeconomics

The volume of new construction over the last decade, coupled with the rapid price appreciation over the last couple of years, has caused some confusion among buyers who might be comparing different neighborhoods.

Generally speaking, a $600,000 home in a neighborhood of $600,000 homes is going to cost $600,000 (without splitting hairs over today's market conditions, desperate sellers, etc.). This is a fairly expensive home - far above the Phoenix Median price of $277,000, and more than most families in Phoenix can afford. A 90% mortgage at 6.75% would have payments of $3,500 per month, and that doesn't even include taxes and insurance. Given those numbers, it's safe to assume that the person looking to purchase a $600k home either has a lot of money for a down payment or has a high-paying job. It's not unrealistic to think that person is going to want to live in a neighborhood with other homeowners of a similar socioeconomic status. This can present a challenging situation..

A home selling for $600,000 today might be in a neighborhood which was built 5-7 years ago. This neighborhood, at the time of construction, was on the edge of town, and prices were low. Today, construction has moved several miles past this area. This particular home may have cost $240,000 at the time of construction, a price much more affordable to the average Phoenician. Even more, there may have been smaller models available for $150,000 or $175,000 - a price point most families could afford, and well below the median price.

Those who paid $150,000 for their home probably still live there, even though the home is worth almost $400,000 today. So the person who wants to buy this $600,000 home drives down the street, and sees all the homes and cars owned by those who could only afford $150,000, and is upset with the lack of luxury brands he sees.

Eventually, this neighborhood will probably become more upperclass, as each new member of the neighborhood has to be higher than median to afford the prices. However, this process of change could take many years.

This is why the older, more established luxury home markets, and the newer luxury-priced-from-the-start neighborhoods are enjoying a level of price stability and market demand that some other neighborhoods can't match. This is also why some of the lower-priced neighborhoods are still selling quickly - they still represent affordable housing. The neighborhoods caught in the middle seem to have been hit the hardest - those who can afford them aren't positive they want to live there, and those who really want to live there can no longer afford them...

I'm going to keep my eyes on how this develops over the next couple of years, as this will have a big impact on the overall Phoenix real estate market.

-Chris