Is Market Data Obscuring Real Trends for Tucson?

We all rely on a monthly parade of housing reports to get a sense of the state of the U.S. housing market, thinking that the data offers some-instantaneous insight in much the same way a stock market index does while trying to extrapolate conditions for our own local housing market.

But the information available is hobbled by the very nature of the market itself. Building houses is a slow, lumbering, inefficient process that takes years to complete entitlements before dirt can be moved and a house constructed on the site.

There can also be a significant lag time from a meeting of the minds between a builder and a developer to when the sale gets reported to the public, not to mention the platting process through the local authorities. Yet market experts hang on each report and try to predict whether or not there will be an adequate supply of lots to handle the demand in the Tucson market.

Some market experts speculate that national builders entering the Tucson market, some for the first time, are changing the supply and demand for lots. It’s true our local market has dropped 84% from the peak of 12,627 permits in 2005, but is the pipeline for new lots adequate?

During the first 6 months of 2014, 71% of a total 1,129 building permits issued were to 8 public builders. Interestingly, the top three publics account for almost 50% of the market. These overall permit totals seem to be tracking on the same level as last year.

But, with KB Homes' resurgence, and LGI, Toll Brothers and Mattamy Homes newly joining the market, and with all aggressively pursuing land purchases, a growing demand is apparent. Homebuilders buying pre-platted land instead of finished lots is not an ideal situation for them, but that’s what they are having to do, and with more public builders looking to add Tucson to their portfolio.

We spoke with Randy Bury, President of Randall Martin, a Scottsdale-based land developer with significant holdings in the Tucson market at Rancho Marana and Sanders Grove in Marana.

“Whether there already are lot shortages or not depends on whose perspective you take,” Bury told us. “From a public homebuilders’ perspective, whose business it is to build houses, there are already shortages of finished lots in such locations as Northwest Tucson where builders want to be. From a developers’ perspective however, we feel good about our holdings and can wait. In fact, we are looking for more land deals in Tucson.”

Bury continued, “The housing industry could use some help with job growth, but it’s just a matter of time before we start seeing the 2008 – 2010 home foreclosures and bankruptcy homeowners coming back after the 4 to 7 year wait period with FHA eligibility restored.”

“Tucson hasn’t experienced the drastic number of foreclosures as Phoenix and Las Vegas, but on the other hand Tucson hasn’t seen the ‘big money’ come in to clean up foreclosures like Phoenix and Vegas either, that’s the trade-off,” Bury went on to say.

Will White of Land Advisors Organization in Tucson says, “We’re experiencing an anomaly, you have homebuilders in Tucson with very large market shares and new homebuilders expanding to this market to gain market share. Either way you look at it requires more land to be purchased than normal. The market is steady and we have not experienced too many situations where homebuilders are competing directly in the same project which has been good.”

White believes we have about an 18-month lot supply. With less than 3,500 finished lots remaining and only a small amount of re-zonings on the horizon, a lot shortage is inevitable. To put it into perspective, the UA estimates permits by the year 2019 to be close to 6,000 per year. In order to deliver this many homes, there will need to be approximately 21,000 – 26,000 lots delivered over the next 5-years. Making that task even more daunting is the 10-year projections of approximately 8,500 permits per year. This will require approximately 60,000 lots to be delivered over this same time period. White points out that since the mid-90’s, Tucson has averaged about 27,000 permits every five years. Due to poor conditions, there has not been enough lots put into the pipeline over the past 5-years. “The market is going to be playing Catch Up for the next 24-36 months,” says White.

White says, “One can be as conservative as they would like about these forecasts, but the trend is going higher over the next 10-years. To get back to a supply balance the homebuilders will need to do what they did in 2013 and purchase 3,500 lots annually. If permits make a run up like they did in the late 90’s then it becomes even more critical. Adding to this challenge is the fact that very little lot inventory was put into production this year and it won’t be ready for selling season 2015. The rush will soon be on for 2016!”

If there’s one thing the market data does agree upon, it’s that we can look forward to land sales increasing over the next few years.