What Crash?

In bellwether Phoenix, real estate is back. Will the turnaround spread?

By Susan Berfield

Eastmark is scheduled to open this summer.

Photograph by Michael Friberg

At the sales office for a new development southeast of Phoenix called Waters at Ocotillo, the PulteGroup representative says she’s too busy to talk. It’s a Monday afternoon. One customer is signing a contract in her office, she explains, and another is due soon. The model for Pulte’s Yucca home is open, though. The price starts at $392,990. It’s two stories and 2,688 square feet, designed for four bedrooms and three cars. It’s stucco — as is nearly every home in every subdivision in Phoenix — high-ceilinged, and energy-efficient. The model is completely furnished, with fake iPods, iPads, and family photos. There’s a real foosball table and Whitney Houston’s Greatest Love of All streams through built-in speakers. The Yucca is part of what homebuilder Pulte calls the Cactus line; there’s also the Majesty line, which is bigger and has courtyards.

The 28-acre subdivision is one of 309 developments in the metropolitan Phoenix area with new homes for sale. It opened in December 2012, with 96 lots, and Pulte has been releasing them in batches: 16 are already under contract, and the company is raising prices. One buyer, Marc Victor, a lawyer, lost out on a home the first time. Potential buyers can bid on premium lots, and he was outbid. In the second round he offered $156,500 for a lot listed at $120,000. He’s hoping workers start pouring the foundation soon.

Pulte is the largest homebuilder in the U.S. by market value and, like most builders, had a very good year. Its revenue was $4.8 billion in 2012, with a profit of $206 million. That’s well below the $1.4 billion it earned in 2005 but far above its $2.3 billion loss in 2007. Last year, Pulte was the best-performing stock in the Standard & Poor’s 500-stock index, nearly tripling in value. Its rivals, among them Lennar, Toll Brothers, and D.R. Horton, all were profitable, too. In December builders broke ground on more houses than expected. Tri Pointe Homes went public in January, the first homebuilder to do so since 2004, and in February Taylor Morrison said it was doubling the amount it aims to raise in its planned IPO. “The management teams at the homebuilders are thrilled,” says Ivy Zelman, who runs her own real estate research firm and is one of the IPO’s lead underwriters.

Metropolitan Phoenix sprawls across the Sonoran Desert, some 2,000 square miles of stucco subdivisions and new highways stretching beyond land protected by the government or reserved for American Indians. At the height of Phoenix’s excess, in 2005, homebuilders were constructing 4,000 homes a month, bulldozing one acre of land every hour. By 2008 the city was the epicenter of the country’s housing market crisis. Prices rose more precipitously and fell faster than most anywhere else. It was among the most overbuilt of the overbuilt sand cities, optimistic right up until the collapse. Home values fell by 55 percent from 2006 to 2011.

Today the city finds itself in a more encouraging situation, one that’s becoming more common around the U.S. Housing prices in metropolitan Phoenix climbed 22.9 percent in 2012, the highest in the nation, according to research firm CoreLogic. Homebuilders are rushing to buy land for new subdivisions or resume construction in ones they had abandoned.

Phoenix’s nascent boom has many causes. The city has long counted on jobs to lure home buyers: The population of the Valley of the Sun has nearly doubled since 1990 and is now close to 4.3 million. Job growth was 3 percent last year, almost twice the national rate. There’s another reason prices are going up: Inventory is low. During the bust, foreclosures went on the market quickly, and eventually prices fell enough that investors with cash came in. They turned many homes into rentals, which meant fewer for sale. Meanwhile, underwater owners are hoping for prices to rise before they sell.

The housing market in Phoenix presaged and magnified the collapse in real estate. Now its recovery could reveal much about the prospects for a nationwide turnaround. Mortgage rates are low everywhere. In many places, so too is inventory. Home prices increased in 88 percent of metropolitan areas around the country in the last three months of 2012, including Las Vegas, Miami, and even Detroit, according to the National Association of Realtors.

“Phoenix is the most advanced market,” says Stan Humphries, the chief economist at real estate website Zillow. “It was one of the first to go into recession, and one of the first to emerge from recession. Phoenix has been a lab where we’ve gotten to see the effects of a high foreclosure rate and high negative equity,” which is when homeowners owe more on their mortgage than their houses are worth.

For decades homebuilding has helped the economy recover after a recession. In the spring of 2011 residential construction began to contribute, ever so slightly, to economic growth. It accounted for 0.36 percentage points of the economy’s fourth-quarter growth rate, according to the U.S. Department of Commerce’s Bureau of Economic Analysis. The bigger impact is from homeowners themselves. They buy furniture, appliances, electronics, paint. They hire gardeners and plumbers. They support local businesses. They keep real estate agents and mortgage brokers busy. Wellesley College economist Karl Case estimates that consumption will be boosted $80 billion this year by the rise in house prices that has already occurred and the expectations among homeowners of more to come. “Housing touches everything. As investment kicks in it will contribute faster to economic growth than anything else,” says Zelman. “It creates jobs. It creates confidence.”

Richard Dugas, the chief executive officer of Pulte, sees opportunities in “the Southwest, the Northeast, parts of California, Florida, Las Vegas. We’re optimistic.” Nowhere is that optimism about a recovery more palpable than in Phoenix, which has always been as much a bellwether of national fortunes as a place to live. Tempered by painful memories of the bust, the area’s buyers, sellers, builders, and investors are coming back into the market warily — but they’re coming back.

The Broker

Agents in Phoenix have a name for buyers who lost their homes early on, have had three or four years to repair their credit, saved some money, and are ready to get back into the game: boomerang buyers. Kristin LaVanway, a broker at Realty ONE Group, says she and other agents are starting to hear from more of them.

LaVanway, like so many in Phoenix, has her own story of the ups, the downs, the upside downs, and the recovery. “We wrote contracts on the hoods of our cars,” she says of the heady times. By the spring of 2007 “you couldn’t run fast enough, you couldn’t chase the market down, it was like trying to outrun a tsunami,” she says.

LaVanway, now 52, got caught, too. A former mechanical engineer, she received her real estate license in 2005 and planned to flip homes with her husband, a subcontractor. Instead, they divorced, and she was on her own raising four boys and selling homes in a market that was about to hit its breaking point. In 2006 she bought a $370,000 home in a subdivision called Val Vista in Gilbert, about 25 miles southeast of downtown Phoenix. “It didn’t seem like a lot then. I didn’t think I overpaid,” she says. As her income shrank in 2008, she went through her savings, then her retirement account, to keep paying her $2,100-a-month mortgage. In 2009 she sought a loan modification that brought her payments down to $1,600. After temporary approval, the loan modification was denied, and the lender demanded back payments. Soon it began foreclosure proceedings. “I paid my mortgage all those months, and then they kicked me to the curb.”

LaVanway declared bankruptcy in 2010, thinking that would stall the foreclosure. Instead, in June a real estate agent drove up in his Denali SUV, knocked on her door, and told her an investor had purchased her home. She had five days to leave. The next morning, he planted a “For Sale” sign in her lawn. The investor paid $161,000 in cash. A couple of months later, he resold the house for $210,500.

For now, LaVanway isn’t buying. She rents in nearby Mesa for $1,300 a month. She began handling distressed homes in 2008; up until last year they were the majority of her business. In 2012 she did as well as she’s ever done, selling $6.7 million worth of homes.

LaVanway’s move from engineering to real estate isn’t unusual in Arizona. “There are more real estate agents in Arizona per population than any other state and a history of making money out of real estate,” says Mike Orr, the director of the Real Estate Center at Arizona State University and publisher of the Cromford Report, a detailed analysis of the Phoenix housing market. “Everybody’s got their eye on the market. Everybody wants to be a real estate investor. It kind of makes the whole place more volatile, like a dot-com on the stock market.”

Orr, the Nate Silver of Phoenix real estate, saw the warning signs of the collapse earlier than most. He first noticed in April 2005 that the number of homes for sale had shot up. In September of that year he decided to sell his own home, purchased in 2002 for $521,336. He received two bids in the first two days, and sold it for $940,000. By early 2006, the market began to slide. He says prices are about back to where they were a decade ago. “Now people feel it’s safe to buy a home again. Everyone thinks it’s a good time to buy,” he says.

The Flipper

In the plaza in front of the Maricopa County Courthouse in downtown Phoenix, foreclosed houses are auctioned off every day at 10:00, noon, 12:30, and 2:00. For much of the downturn, a couple of hundred homes were sold in a day. Now 60 might be available. A dozen or so people show up daily; some work for bidding companies, which came into being in 2008 to scout out properties (potential buyers can’t go inside) and send representatives to the auctions for investors and flippers.

One essential, and controversial, element of the housing recovery is foreclosures. Nationwide, 5 million people have lost their homes since 2006, says RealtyTrac, an online marketplace for foreclosed properties. Arizona uses a nonjudicial foreclosure process, which means foreclosures don’t go through the court system. That’s allowed banks and other lenders to sell homes quickly, often to investors who plan to manage them as rentals. It’s good for the housing market, a boon for investors, but it can seem abrupt and unpredictable to homeowners. In metropolitan Phoenix, foreclosures were down 78 percent in January from their high in 2010, according to RealtyTrac. The decline is also a result of an improving economy, and maybe better household management, which is enabling people to keep up with their mortgage payments.

Some of those at the courthouse one recent afternoon have appeared in the reality show Property Wars, which is about Phoenix and is in its second season on the Discovery Channel. It’s a fairly civil war today. No one is shouting or pushing; they all know each other by now. A half-dozen homes are auctioned off between 12:30 and 1:00; each winner hands over a $10,000 cashier’s check, and everyone heads off to lunch.

“Bidding is much less stressful these days,” says Alex Montoya, 23, who’s been buying homes at the courthouse for the past two years as an employee of one of those bidding services, PostedProperties. com. He was on Property Wars last season. During the 12:30 auction, he bought two homes for about $550,000 altogether. On average, he says, he buys between 50 and 75 houses a month and pays about $125,000 for each.

One of his clients is Brandon Hunt, who’s been flipping houses since mid-2008, when he was 28 and bankrolled with $600,000 from his father-in-law. Since then he’s bought and flipped about 60 houses a year and has made some $4 million. If Hunt has one regret, it’s that he didn’t start his own bidding company. Instead, he pays a $2,000 commission for every home he wins.

He’s learned to approach the business like a homebuilder: standardize. “We use the same granite for all the countertops, the same fixtures, the same cabinets, the same flagstone for the patios. We know what the remodeling is going to cost and how long it will take,” he says. To figure out which houses to bid for, Hunt had a computer algorithm created that filters data on all of the homes up for auction or available through a short sale, which is when a homeowner owes more on the mortgage than the house is worth and works with the lender to get what he can.

That’s how Hunt found a 1,484-square-foot house built in 1983 in Scottsdale and listed as a short sale. The owners had paid $310,000 in 2006. Hunt got it for $192,500 in October and sold it in December, usually a slow time, for $256,000. If it were on the market now, he says he could get an additional $10,000. “One of the things I learned early is not to get greedy,” he says. “You make your margin and move. That’s the key to flipping — move fast.”

As the number of foreclosures in Phoenix start to dwindle, Hunt and his father-in-law have begun buying homes in Florida. They try to stay close to, if not ahead of, the big private equity firms that are snatching homes out of foreclosure by the thousands. Private equity firms have raised as much as $8 billion to buy as many as 80,000 homes, according to a report by Keefe, Bruyette & Woods. Blackstone, the largest investor among them, is accelerating its purchases because prices are increasing faster than it expected. So far, it’s spent more than $2.5 billion on 16,000 homes to manage as rentals, according to Bloomberg News. It’s buying in Atlanta, Chicago, Las Vegas, Phoenix, Miami, Orlando, Tampa, and throughout California. Look for places where home prices fell to crazy lows, and that’s where investors are.

The Homebuilder

PulteGroup has begun building in 15 communities nationwide that it abandoned and may resume in an additional 10 this year. It won’t disclose how many new developments it’s planning, but the company spent $925 million on land in 2012 and plans to pay out $1.2 billion in 2013. CEO Dugas says he’s shifted the emphasis from trying to be the biggest to trying to be the most efficient. “The downturn teaches you a lot if you’re humble enough to listen and use data,” he says. “It’s tempting in an improving environment to get giddy, but the minute we get giddy we chase volume and lose focus. ... There’s always a lot of enthusiasm and excitement about buying land. We want to have a healthy examination of the facts.”

Dugas says the main reason homebuilders did so well last year is pretty simple: low inventory. People in the business consider a market to be in equilibrium if there’s a six-month supply of homes, new and old. As recently as 2011, in an area like Phoenix, he says, there was an 18-month supply. Now there’s just two months’ worth of homes for sale.

Pulte is much smaller than it was in 2005. During the downturn, the company laid off 80 percent of its workforce and built 66 percent fewer homes. Even among homebuilders, Pulte was known for its aggressive land purchases. “People would have said we were obsessed,” says Dugas. Since 2005, Pulte has reduced the number of lots it controls from 380,000 to 120,000.

The company also has a different idea of how to build and sell homes. Pulte describes the houses in Ocotillo and its other new developments as “life-tested.” This is largely the doing of Deborah Meyer, the company’s first-ever chief marketing officer, who joined in 2009 after working at Chrysler and Toyota. “It’s been an industry where builders think they know how people want to live,” she says. “Now we’re looking at demographic information, trends, coming up with some hypotheses, then designing floor plans. We’ve completely transformed how we think about the customers. We’re building what they want.” Pulte has started constructing prototypes in warehouses around the country and inviting people to walk through. That’s how it found out that no one wants a powder room across from a dining room.

Other ideas have gone over better. Many of Pulte’s new homes have an owner’s entry, a space where the family can drop off backpacks, sports gear, all the stuff of daily life. It’s a mudroom but bigger. Then there’s the planning center, where mothers can organize the family’s activities. (Pulte dads get a “Gladiator” garage.) There are rooms that can be built as dens or bedrooms for grown-up kids or in-laws. Formal living rooms and dining rooms have pretty much disappeared. Common rooms are bigger. “Families want to be together now, amazingly, or in sight lines. That took us a while to get,” says Meyer. “Everyone wants more space, but I don’t see us going back to McMansions. People are making better choices, they’re more realistic. The whole industry is more realistic.”

The Researcher

Jim Belfiore and his team drove 25,000 miles last year to visit (and revisit) every one of the subdivisions in the metro Phoenix area that was selling homes. Belfiore provides market research for homebuilders, tracking their activity in Phoenix in obsessive detail.

In 2005 the area had some 400 different homebuilders and about 1,250 subdivisions. “That is far in excess of what would be considered normal,” he says, summing up the entire boom in 11 dispassionate words. “We think 700 to 750 subdivisons is normal if employment and population growth is normal.” There are other ways Belfiore measures normalcy: permits to build homes. Normal is between 35,000 and 40,000 permits a year, he says. Last year, 12,100 permits were issued. This year he expects the number to reach 19,500.

Last year, from March through July, prime selling season in Phoenix, home prices rose 6.6 percent. More than one-third of the subdivisions limited the number of lots they sold. Labor was a constraint. Many subcontractors had gone out of business, and many workers left the state because of its harsh immigration policies. There was another reason: “Homebuilders wanted to push prices up,” says Belfiore. “They recognized the opportunity.”

Belfiore has done a little bit of math and makes a prediction that real estate people in Phoenix regularly cite: 67 percent of active subdivisions will be sold out by the end of the year. “There is going to be a tremendous number of subdivisions opening, but it still won’t be enough. Builders are purchasing land, there are so many deals right now, but it’s like trying to suck up a whole glass of milk with a straw in one gulp.”

Starting last March, builders realized they had a problem: Demand was growing faster than their supply. That’s provided opportunities for land brokers such as Nate Nathan, who’s been handling land acquisitions for investors, developers, and homebuilders in Phoenix for 36 years. Nathan has sold 14,000 lots in the past eight months, a billion dollars’ worth of deals. An acre in the southeastern part of the valley, where Intel and other companies are based, sold for $35,000 in 2010. Now, he says optimistically, a prime acre can go for more than $200,000. “I’ve lived through five downturns, and this has been the best goddamned eight months of my life,” he says.

The Owners

There was a saying in Phoenix during the boom: Drive until you qualify. That’s what Neil Green and his family did. They moved into one of the last houses built in Festival Foothills, a Pulte subdivision, in October 2010. Construction stopped at the end of that year, and since then Festival Foothills has remained half complete. It’s part of Buckeye, the westernmost Phoenix suburb. It’s surrounded by open desert and cacti for miles along Sun Valley Parkway; turnoffs for planned developments lead nowhere. Green paid $213,000 for his two-story stucco home, bordered on both sides by empty dirt lots. He says residents got an e-mail in January announcing that building will start again.

“We have been waiting a long time,” says Green, 27, who’s a college student and stay-at-home father with two toddlers and an infant. “We had no idea we would move here, and all of sudden construction was going to stop.” The neighborhood was supposed to have its own grocery store, but the site remains a dirt lot. Only a gas station and adjacent beauty salon were built. The grocery shelves at the gas station, where residents often pick up milk and eggs, were nearly empty on a recent Saturday.

His neighbor, John Kinnee, 43, isn’t excited about the new construction. “I would like to see the place develop, but ...,” Kinnee says. He’s worried that the smaller homes Pulte is planning will bring down property values. “And [let] the riff-raff in,” he adds. A spokesperson for Pulte says: “Our goal is restoring strong momentum and traffic to the community, which is perhaps one of the most important things we can do to support property values. As momentum builds, we’ll add different-size homes.”

The Developer

In the eastern part of the Valley, past Superstition Springs and Superstition Boulevard, on 3,200 acres where General Motors used to test cars, the beginnings of an ambitious master planned community are taking shape. Called Eastmark, it’s being developed by a private company based in Scottsdale, DMB Associates. Right now it’s rubble from the buildings and racetracks that GM left behind; it’s dirt; it’s palm trees so newly planted they’re still wrapped; it’s sidewalks scattered here and there.

The price of homes in metropolitan Phoenix could rise 8.5 percent this year, according to Zillow’s Humphries. Anything much higher than that would be worrisome, says nearly every economist who has looked at the city. Orr, the Cromford Report publisher, thinks people are still wary. “But knowing Arizona, we’ll probably build too much at some point.”

When Eastmark opens this summer, there will be model homes from seven different builders, blueprints and glossy maps showing the 775 lots planned for the first phase, parks, gazebos, and basketball courts. The debris will be hidden behind screens. DMB is also recruiting employers. So far, First Solar, a solar panel manufacturer, has set up an office.

DMB bought the GM Proving Ground in 2006 for $265 million. The land remained unused for five years. Now everyone working on the development has a countdown clock on their desk: fewer than 100 days to go. DMB President Charley Freericks says his company is trying to be responsibly optimistic. “It’s like any trauma,” he says. “You forget when it gets good again.”

— With reporting by Amanda J. Crawford and Peter Coy


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