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Permits Dip Helps Balance Supply

Catherine Reagor
On real estate
Oct. 28, 2007 12:00 AM

Last month's dramatic drop in building permits for homes across metropolitan Phoenix may look like one more piece of bad news for the already struggling real-estate market.

But actually it's a good sign, as long as new-home sales are holding steady. And they are. There were 1,391 single-family permits issued from Casa Grande to north Peoria in September, while new-home sales or closings were more than double permits for the month at 2,991.

The result of the two market indicators should mean fewer speculative-built houses languishing on the market unsold. RL Brown, publisher of the Phoenix Housing Market Letter, estimates there are 6,000 to 8,000 spec homes in the Valley now. That compares with an estimated 15,000 to 20,000 spec homes sitting idle and empty earlier this year.

Still dragging down the market is the number of existing homes for sale. Listings are still hovering in the mid-50,000s.

Resales continued their slide in September, as did the median price of existing homes sold.

Lower prices are helping the new-home market now. Brown said most Valley builders finally have realized they need to drop prices to sell homes.

Instead of offering the hefty incentives of last year, many builders have cut base prices and are now offering smaller homes with fewer amenities to attract buyers. It appears to be working.

David Seiders, National Association of Home Builders chief economist, said last week that these four areas will be most vulnerable to the subprime-loan fallout: California, coastal Florida, Phoenix and Las Vegas.

The speculator-driven housing boom is to blame. All those areas saw the huge run-ups in prices prompted mainly by speculators, often using subprime loans. Regular home buyers then often had to take out subprime loans to afford the higher prices.

"With many of these mortgages scheduled to reset to higher rates in the remainder of 2007 and through 2008, additional weakness in housing markets is likely," Seiders said.

He said the potential for a vicious cycle of defaults and price declines will depend on the level of exposure to subprime loans, the current house-price environment and the strength of the local economy.

Metro Phoenix is adding more jobs to its economy than Florida and many parts of California, which hopefully will buffer the Valley from some of the subprime-lending fallout.

And the Valley's median home price is $40,000 higher than Atlanta's, so it's not because the Georgia city has pricier foreclosures driving up the total.

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