Arizona: AfterThe Housing Boom

Arizona: AfterThe Housing Boom

ACMA ConferenceJuly 24, 2008

Lee McPhetersProfessor of Economics

W. P. Carey School of Business

• U.S. EconomyU.S. Economy• Arizona EconomyArizona Economy• Housing Slump Housing Slump

Economic Update & Economic Update & OutlookOutlook

What to Worry About: 2008

Worry Meter

• Energy/Food Prices Up• Job Growth Down• Unemployment Up• Home Values Down• Stock Market Down• Debt Levels Up

6041

-83-62 -62-67

-88-76

Nov. Dec. Jan. Feb. March April May June

Job Growth/Loss, ThousandsJob Growth/Loss, Thousands U.S. Economy Losing Jobs U.S. Economy Losing Jobs

Consumer Credit as Percent of Disposable Income

GDP Growth Weak in 1st Quarter… More of The Same Still to Come

2007 2008Blue Chip Consensus, July 2008

Fiscal StimulusFiscal Stimulus

Package isPackage is

Adding AboutAdding About

1% to GDP1% to GDP

Growth inGrowth in

Quarter 2 & 3Quarter 2 & 3

2007Real GDP 1.6%

Employment 0.3%

Inflation (CPI) 4.2%

30 yr Mortgage 5.5%

2009 2008

2.2%1.1%

2.9%

6.3%

Outlook for the U.S. Economy

Forecast subject to change as new information is available

1.7%

0.6%

2.9%

5.8%

-6

-4

-2

0

2

4

6

8

10

12

14

1970 1974 1978 1982 1986 1990 1995 1999 2003 2007

Arizona & US Move Together

(Nonfarm Employment Percent Change 1970 - 2008)

ArizonaArizona

USAUSA

(Percent Change June 2008 vs June 2007)

2

41

48

1

40 6

7

U. S. Bureau of Labor Statistics

10

11

27

Arizona Now Ranks In TheBottom 3 for Job Growth

46

3

5

9

13

20 StatesLosing Jobs

Arizona Jobs:12 Mos.Sector Job Growth/LossOverall -33,000Health Care + 10,600Government +9,400Leisure/Hospitality +3,400Trade -3,900Prof/Biz Services -5,300Financial -7,300Construction -33,100

190

200

210

220

230

240

250

260

JAN JUL JAN JUL JAN JULY JAN JULY

Thousands of Jobs

Arizona Construction JobsPeaked In Summer of 2006

2005 20072006 2008

Source: US Bureau of Labor Statistics and AZ Dept of Commerce

Region Unemployment Rate

USA 5.5% (June)

Arizona 4.8%

Phoenix Metro 4.3%

Tucson Metro 4.7%

Flagstaff Metro 4.5%

Unemployment Creeps Up

Annual Percent Change In Arizona EmploymentAnnual Percent Change In Arizona Employment

ForecastForecast

3 Year Slowdown 2007 – 2009?3 Year Slowdown 2007 – 2009?

Source: Arizona Blue Chip Forecast

AZ Housing Slump AZ Housing Slump ContinuesContinues

Permits - 30%Resales - 31%Prices (Phx) - 4.1%Source: National Assoc Realtors; US Census

Single Family Q1 08 Permits - 57%Resales - 31%Resale Price - 15%Source: US Census, NAR (vs. Q1 07)

Housing Market DriversHousing Market Drivers

• Low mortgage ratesLow mortgage rates• Population & job growthPopulation & job growth• Creative home financeCreative home finance• Move-up buyersMove-up buyers• Boomer second homesBoomer second homes• Investors Investors

Every time the Arizona population increasesby 2.5 people, a new housing unit is needed.

1

7

2

3

5

4

6

US Census BureauUS Census Bureau

13

25 8

1217

9

Arizona Ranks 2Arizona Ranks 2ndnd in inPopulation GrowthPopulation Growth

(Percent Change 2007 vs 2006)(Percent Change 2007 vs 2006)

10

11

Arizona In-migration From California Still Strong in 2008

2003 93,1942004 111,3972005 117,000 2006 113,7912007 105,402

2008 (Est) 102,600 Source: Driver Licenses turned in to AZ Dept of Motor Vehicles

Percent Families That Can Afford Median Priced Home

Affordabilityup 58%from lowpoint in2006

Source: Phoenix Metro data from National Assoc. Home Builders

Arizona Housing More Affordable

Housing Affordability EffectsHousing Affordability Effects

• Outer urban fringe developsOuter urban fringe develops• Retailing follows consumersRetailing follows consumers• Cross commuting increasesCross commuting increases• Infrastructure needs increaseInfrastructure needs increase• Roadway construction increasesRoadway construction increases• Population & jobs still growingPopulation & jobs still growing

Metro Phoenix Construction Single family Permits

Greater Phoenix Blue Chip Forecast, 2008 Q1

42,423

31,172

17,62222,278

2006 2007 2008 2009

Economic Outlook, University of Arizona, April 2008

Metro Tucson Construction Residential Permits

Source: US Bureau of Labor Statistics and AZ Dept of Commerce

Category 2000 2008*

Regional Mall 13.2 14.7

Power Centers 27.2 52.7

Neighborhood 36.3 46.5

Strip 10.6 13.6

Total 87.3 127.3

Metro Phoenix Retail Space Millions Sq. Ft.

*8.8 million sq ft now under constructionSource: Realty Studies, ASU Poly Campus

Source: US Bureau of Labor Statistics and AZ Dept of Commerce

Category 2000 2008*

Regional Mall 13.2 14.7

Power Centers 27.2 52.7

Neighborhood 36.3 46.5

Strip 10.6 13.6

Total 87.3 127.3

Metro Phoenix Retail Space Millions Sq. Ft.

*8.8 million sq ft now under constructionSource: Realty Studies, ASU Poly Campus

• Resale prices fall through 2008Resale prices fall through 2008

• New sales, starts up in 2009New sales, starts up in 2009

• Population growth is criticalPopulation growth is critical

• Tighter lending standardsTighter lending standards

• Non residential will slowNon residential will slow

Construction Outlook SummaryConstruction Outlook Summary

2007 2008 2009Annual Percent Change

Personal Income 6.3 4.6 4.9

Employment 1.2 0.3 1.4

Single Family Units -29 -24 1.1

Retail Sales 0.5 0.7 3.1

Population 2.8 2.3 2.4

ARIZONABLUE CHIP ECONOMIC FORECAST

1.3

5.3

9.0

13.2

7.9

0.5 0.7

3.1

2002 2003 2004 2005 2006 2007 2008 2008

Annual Percent Growth

Source: Arizona Blue Chip Forecast Forecast

Arizona Retail Sales Outlook:Recession Level Growth

• Consumer in retreatConsumer in retreat

• Stagnant job growthStagnant job growth

• Lots of housing inventoryLots of housing inventory

• 170,000 new residents?170,000 new residents?

• Weak – but not yet bleakWeak – but not yet bleak

Arizona Outlook SummaryArizona Outlook Summary