Smart SpendingSmart Spending

The surprising architects of the Phoenix 'miracle'

This city has risen from the ruins of foreclosure. Now, prices are up and there's a housing shortage. And the heroes aren't hedge fund investors or government regulators.

By Marilyn Lewis Jul 11, 2013 11:15AM

Home exterior in Gilbert, Az. © Paul Hill, AlamyNot long ago you'd look like a fool for buying real estate in Phoenix. Today, you'd be entitled to feel like a genius if you purchased devalued property back when every fourth home was in foreclosure.


How did one of the nation's biggest real estate sinkholes become among the hottest real-estate markets? There are several answers. One, especially, might surprise you: Phoenix has developed a housing shortage, which is helping to drive up prices.


From the city's low point, in June 2011, home values have risen 35.4% -- far more than in any other U.S. city, according to the National Association of Home Builders/First American Improving Markets Index, released Monday. The median price for a Phoenix home was $266,523 at the top of the market, in June 2006. It hit a low of $118,500 in September 2011 and reached $193,085 last month.


Behind the recovery

Only Bismarck, N.D.'s oil-boom-infused 28.5% growth (from a bottom on Jan. 31, 2010) comes close.


The biggest reason for Phoenix's spectacular rise is that its price collapse was so severe. "Prices sank so low that the percentage increases are large because they're coming off of a small base," said David Crowe, chief economist at the National Association of Home Builders, in a phone interview.


Until recently, Phoenix was dominated by foreclosures, the legacy of lax lending practices, overbuilding and speculation, all of which contributed to a boom-era housing glut. Between 2008 and June 2013, one in four homes was foreclosed or sold at a loss in a short sale in Phoenix and surrounding Maricopa County, says Tom Ruff, analyst for the Information Market in Phoenix.


Investors bought up lots and lots of the cheap distressed homes. Painful as foreclosure was to owners, eliminating those mortgages helped heal much of Phoenix's negative equity. Two years ago, nearly half of Arizona mortgages were underwater, according to CoreLogic. By March of this year, negative equity was down to 35%.


Amateur investors

The buyers of the foreclosures weren't Wall Street investors, by and large. Big institutional investors have purchased just 3% of the former foreclosures, said Ruff, speaking by phone.


It's been mom-and-pop investors who, buying one or two rental properties, have put Phoenix back on its feet. For example, Ruff points to a colleague, a condo owner. He met and fell in love with a woman who also owned a condo. The couple married and bought a home together. Their condo mortgages were underwater so, rather than sell at a loss, they became landlords. Now they own three properties, two of them rental investments.

The cumulative effect, says Ruff, is that "our market is returning to normal." "Where 75% of the sales were distressed, now, 75% of the sales are normal.


The shortage

Now, there's a shortage of homes in Phoenix. "We went from this massive supply of distressed homes down to a shortage," Ruff says. "Right now we have a supply issue, a housing shortage. That's really hard for people to fathom."


The reasons:

  • Homebuyers and investors have bought up most of the foreclosures. Banks currently hold only 3,500 properties and foreclosure rates now are below normal.
  • Demand is high. The market for vacation homes stayed strong in the downturn, especially from Californians and buyers from northwest and north-central U.S and Canada. And the city's population kept growing, too.
  • Home builders and developers aren't building enough homes.

In 2004, builders made 4,000 new homes a month in Maricopa County. That was 1,000 homes a month over normal, says Ruff.


Only 16,000 new homes were built in Phoenix last year -- twice the number in 2008 but a fraction of what's needed now. Builders made 69,000 new homes at the peak, in 2005, says Crowe, the NAHB economist. Normal years, like 2000, saw 46,000 new homes built.


Today, are rising fast in part because construction isn't meeting the demand. Homebuilding collapsed so violently that resources disappeared. National manufacturers of housing components shut down and laid off workers. Some were sold.


In Phoenix, laborers left to work elsewhere and few lots are ready for building, with city permits, sewer, water, streets and utilities in place. "The pipeline is long and it's going to take some time to have houses coming out the other end," Crowe says.


Some worry new bubbles are building in Phoenix and elsewhere. Not Crowe. "This is just returning demand. It's people saying, 'I would have moved three years ago but I didn't and now I am, and I need a place to live.'"


More from MSN Money:










Jul 11, 2013 4:54PM
We'll see what happens to these hot markets when interest rates go up a few points.
Jul 11, 2013 5:15PM

I was transferred to Phoenix in 1977 from the Mid west, love the weather, shopping, low property taxes great health care and very nice people, actually the Phoenix Metro is one great place to live.


We are now retired and summer in Prescott Arizona for three months, play golf etc enjoy the sunny weather and the out doors.

All you people that talk about the hot weather in a negative way, its the desert of course it gets hot,  there are very few days that we have to stay indoors because of weather, we also have several large beautiful lakes for boating,  fishing, skiing  with in a 40 minute drive that you can use year around, enjoy wherever you live but don't bad mouth our town

Jul 11, 2013 5:28PM
And you would be a complete Idiot to Buy today. Banks and Hedge funds have created this "False" market yet once again... Fool me once.....

I bought in march of 2012, brand new home in Maricopa and got in at the bottom . now the same home is going for 25% more . I told everyone what I was doing and they thought I was an idiot , but ......

 the only thing a buyer today has to worry about is buying on such an up swing. we all have seen how fast the bubble can burst

Jul 11, 2013 4:58PM
Is it still snowing in the Midwest,,,,?  If so Arizona will continue to grow.
Jul 11, 2013 6:40PM

Im 29 years old and a blue collar worker, Bought my first rental in Phoenix area right after my 27th birthday for 107K, Since then have bought 2 more, Wish I could have bought more but prices have risen and inventorty is gone, One of the smartest things I have done and probably will do in my lifetime.


All my friends thoght i was crazy for working an extra job and watching every penny to buy these homes, I thought they were crazy for blowing money on new cars, trucks and booze.

Jul 11, 2013 5:32PM
Our "friend" Ben Bernanke at the Federal Reserve is creating another housing bubble.

The lucky ones are the ones selling real estate.

The unlucky ones are the ones buying real estate.

When interest rates go up, real estate prices go down, because fewer people can afford higher interest payments when salaries are stagnating or going down, and the unemployment rate continues to be high.

Jul 11, 2013 6:38PM

Is it hot? In the summer. Is it cold in Minnesota? In the winter. Strange how many folks from Canada, California, Wyoming, Utah, Illinois, Indiana, Ohio, Pennsylvania, New York and many other states  including Minnesota have moved here or own a second home. Golf all year round, minimal population (six and a half million) in 114,000 square miles, two, three and four lane surface streets (not highways), High retirement population ( wife and I) although we left Chicago in 1970.

On the property and what it is worth. Wife and I do not care about home equity or worth. We are not moving. Home purchased in 1970 and outlived it's life. Paid off in 1995. In 2008 at the beginning of the downturn we tore it down, built a new one on same property and now own a 2009 custom home. Eighty-three percent of Arizona can not be developed. Phoenix nor Arizona is not for everyone however it is better year round than most other places.

Jul 11, 2013 6:02PM
An automatic way to turn a town or  neighborhood into a slum.  Have a substantial amount of the units or houses as rentals.  It may have jumped the prices now, but it will drop all property value in the long run.
Jul 11, 2013 7:03PM
Oh, supply and demand works?  What a surprise.   There was a shortage of houses, so prices went up.

If there aren't enough workers for a job, wages go up too.   If there are too many workers, wages go down-------see 11 million illegal immigrants.
don't be a hater because we were smart enough to buy on the low , remember don't blow a second chance.
Jul 11, 2013 6:45PM
All I can say is it was a blessing to get rid of Janet Napolitano as our Governor before she totally bankrupted Phoenix. 

The said Part is she is now in charge of Homeland Security.      
Jul 11, 2013 3:24PM
and fools are laughing to the bank. Real estate is crazy there now!!!
Jul 11, 2013 5:45PM

I purchased a home in {Phoenix in 2001.  I had to move due to job in 2011. I could not give the house away. They told me the 152k 4br, 3 car, 2000 sq ft home with a pool was worth 90k.

I had little choice but to walk away, do not let this surge fool you

Jul 11, 2013 2:19PM
Sounds like the fat cats bought them up and we will be renting from them forever.
Jul 11, 2013 6:01PM
I am loving all the negative comments about the Phoenix area. Hopefully this will keep more people from moving here. I've lived in the valley since '82. I love it and would not live anywhere else. Weather wise, the only thing we have to put up with is the heat for a few months out of the year. I would not trade it to live in areas with hurricanes, tornados, earthquakes, flooding, snow storms, etc. So yall can just stay where you are. We have enough to deal with in the illegals in our state crossing the border that the US gov't won't do anything about. We don't need you here congesting our traffic more than it is. Our economy is just fine, so don't do us any favors by moving here.
Jul 11, 2013 6:50PM
I grew up in Mesa (just outside Phoenix).  I live in the Intermountain West now, but if my husband got a job in Arizona making $1,000,000 per year...I would miss him.
Jul 11, 2013 9:07PM
Prices are up because of speculators, big and small, are believing the lies of Real Estate Agents who get their money and then stand back for the next fall.
Jul 11, 2013 7:44PM

Good luck with Phoenix. The wages don't come close to the costs of living there. I guess if you have about three familys in one house you can swing it. The summer electric bills are really swell also.

 You can thank the large amount of cheap labor from down south for the lousy wages.

      Anyone who buys a home right now is nuts. The article is BS.

Jul 11, 2013 9:10PM
Ya, and no the same problem that killed the market before is coming on again.  Rich idiots wanting to FLIP houses for quick profit are flocking to AZ to make money.  The bubble is already growing and will pop again.  Any bets they will try to blame it on ordinary people getting loans for homes they will live in again?
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.