Summary
Despite Pulte Homes', Toll Brothers', and D.R. Horton's (as well as others) decisions to walk from land, homebuilding remains profitable in the Desert Ridge area.
Analysis
As the residential real estate market softened in early 2006 and declined more significantly into 2007, developers and builders remained confident in the value of Desert Ridge. Home prices had declined but only minimally compared with much of the metro area. The number of new home offerings was limited, as was speculative inventory, although both were increasing. Pulte Homes opened Fireside at Desert Ridge in February 2007. In October 2007, homebuilder D.R. Horton opened its Cielo community. And, at the end of 2007, the highly anticipated CityNorth, a Thomas J. Klutznick development subsidized by the City of Phoenix, opened. Although the number of bidders thinned considerably, land purchases also continued. In early ’06, Toll Brothers put $2 Million down on an 81-acre parcel in Desert Ridge. Rightpath Development put another $15 Million down on 269-acres in April 2007.
An extended decline in demand and values, though, has caused developers and builders to re-think their Desert Ridge positions. Five, including Toll Brothers (developers of Aviano), D.R. Horton (developers of Cielo), Pulte, Gray Development, and Rightpath have walked from purchase contracts, as cited in the subject article, leaving behind hard fought land purchases in which they have invested millions of dollars.
Selling homes within the Northeast Phoenix Submarket (Desert Ridge is located within this custom market area) has become challenging, as it has throughout the Phoenix metro area. Builders have averaged less than one sale per month per active subdivision during the last four months.
New home prices are now declining rapidly. During the last four months, new build prices have declined 4.2% and inventory home prices have declined 5.8%. Over the last twelve months, new build prices have now fallen 9.1%, and inventory home prices have fallen 13.2%. Inventory is the primary reason for declining prices. In December 2006, builders had an average of 4.3 speculative units to offer per subdivision. Today, builders have an average of 12.6 units, of which 10.9 are complete or nearly complete.
While residential real estate conditions have deteriorated in the Submarket, particularly in the last 12 months, the Submarket area remains much stronger than most other metro area submarkets. Consider:
-Metro area inventory home prices have fallen 42.3% since the beginning of 2006. Prices in the Submarket are down only 21.5%.
-Subdivision traffic levels have fallen dramatically in most submarket areas. Most builders are reporting seeing fewer than 10 potential buyers per week. Northeast Phoenix builders are reporting higher traffic levels than one year ago- 23% higher. Notably, CityNorth figures, which were substantially higher in early December due to promotional events, are not included in this analysis. Builders are still making profits building homes.
-Average offering prices, less incentives, range from a low of $148 / square foot to several hundred dollars per square foot. The average production builder is offering homes at nearly $170 / square foot. In most Valley submarket areas, builders are unable to sell homes for more than $100 / square foot, making profits minimal to non-existent.
Undoubtedly, near-future conditions will remain challenging for active Northeast Phoenix homebuilders, as builders struggle to convince buyers that now is the time to purchase a new home. However, the developers should consider the submarket for future developments. The Submarket’s location (adjacent to North Scottsdale and State freeway Loop 101) and its location relative to jobs (10 minutes from Scottsdale Airpark, one of the largest Phoenix metro area employment centers) will allow it to remain viable for homebuilders, albeit those purchasing land at the “right” price.
