Wednesday, February 28, 2007

Population drives housing?

I’ve been thinking about some of my recent clients and their very different scenarios, and it’s brought to light an interesting idea. I’ve always thought about "the market" in terms such as:  How many homes are listed for sale? How fast are they selling? What’s the Days’ Inventory? etc. But now I’m thinking that these concepts are only showing half of the picture. Here’s what I mean:

Scenario 1: A person (or couple/family) moves to Phoenix (or has been renting) and buys a newly-constructed home from a homebuilder. The net result is either one less builder-spec home on the market, or one more new construction permit filed by the builder. Either way, the sale is not felt by the rest of the MLS. If the person bought a builder spec, there is one less home on the market competing for the other buyers, which helps the overall market by the same amount as any "one" buyer.

Scenario 2: A person moves to Phoenix and buys a home from a seller who is being transferred out of state. The net result shows as one home sold in the MLS. Inventory is reduced by one home, which helps the overall market by the same amount as any "one" buyer.

Scenario 3: A person moves to Phoenix and buys a home from Person B, who then buys from Person C, who then buys from Person D, etc. Eventually the chain will be broken because one of the sellers will not be buying another home here in Phoenix. The results show in the MLS as four transactions (in this example). The vibe in the marketplace is felt as four transactions. Four (or possibly eight) realtors, four mortgage lenders, four appraisers, four title companies, four home inspectors, and four handymen & termite inspectors will all feel the vibe of activity. And if all four houses were listed for sale at the time the chain reaction started, the net effect is that inventory is reduced by four homes.

The key to the market lies in "net new" buyers purchasing homes from the re-sale market. And while the builders don't control this directly, their willingness to price spce homes low enough to make them a better than normal value is having a large impact. From the scenarios above, a person buying a new home has a 50% chance of reducing the inventory by, at most, one home. A person buying an existing home will reduce the inventory by at least one home, and possibly by many more!  The bottom line is that people buying new homes (instead of existing homes) is a huge drag on our market.  If the average new home has a 0.5 home impact (50% chance of impacting by one home), and an average chain reaction consists of 3 sales (just an off-the-cuff guestimate), than buying an existing home helps the market 6 times more than buying a new home...

Our population has continued, and will continue, to grow - that hasn’t been an issue at all. But the increased inventory that the builders are currently holding means that fewer of the new buyers are causing the chain reactions from scenario 3. The more I think about this, the more important I believe the builders' inventories of spec homes has become. I want to continue to think about this - how can we use this to better track and predict the Phoenix real estate market?