By: Robert Kavcic, Senior Economist, BMO Capital Markets
The Phoenix economy, and Arizona more broadly, is expanding again after an extremely difficult recession. However, growth will likely follow a much more modest pace than seen during the mid-2000s boom, especially with the housing market settling in to a more moderate recovery track.
Arizona’s economy has geared down from earlier in the recovery, with real GDP expanding a modest 1.1% in 2013. A downshift in the housing market recovery has taken some steam out of construction and real estate output, but still-favorable fundamentals should support continued growth in the years ahead—recall that Arizona was among the states hardest hit by the housing bust. Real GDP growth is expected to improve to 2.5% this year, and gain further momentum to 3.5% in 2015.
In metro Phoenix, growth also downshifted in 2013 to 1.2%, as construction activity levelled off and manufacturing output slipped. The soft patch will likely prove temporary as the housing market recovery progresses, U.S. business investment improves and the region continues to attract well above-average population growth.
But the torrid growth rates of the mid-2000s will likely remain just a memory.
Real Estate/Construction...
Phoenix was one of the major cities most severely impacted by the housing bubble and bust. According to the Case-Shiller index, prices in the city exploded more than 75% in just two years before peaking in mid-2006. They subsequently plunged nearly 60% before finding a floor in late-2011. As broader U.S. housing market momentum began to improve, Phoenix was one of the leaders. However, since mid-2013, as mort gage rates have risen and the Ability-to-Repay/Qualified Mortgage Rule took effect (January, 2014), momentum has softened. Investor appetite also appears to be waning.
Still, home prices in the city were up almost 6% y/y in July, but that marks a significant downshift from 20%-plus growth earlier in the recovery. The cooler price momentum comes amid a softening in sales and a modest increase in the months’ supply of homes available for sale, to around 5 through the first half of 2014 versus 3.1 in early 2013. The good news is that the foreclosure rate across Arizona has tumbled to below 1% (now among the lowest in America), while higher home prices have reduced the share of mortgages in a negative equity position. While the pace has slowed, fundamentals support a continued, albeit more modest, housing market recovery in the city.
With the resale market improved, construction activity continues to grind higher. The number of private housing permits totalled just under 20,000 in the twelve months through August, the best level since late-2008. Single-family building activity has held relatively steady at around 12,000 units/year over the past two years, but multi-unit activity is surging. Permits in this sector topped 7,000 units in the past year, back to pre-recession levels.
Business sector...
Phoenix boasts a diverse economy with exposure to a wide range of industries in high-tech manufacturing, construction, finance and professional services. The finance and insurance sector employs more than 125,000 people in the city (a record high) including the likes of American Express, State Farm and Charles Schwab. The fast-growing biotechnology sector also has a strong presence in the region, with two new structures recently approved at the Phoenix Biomedical Campus, including a $136 million investment by the University of Arizona. There’s no doubt that Phoenix was hard-hit during the recession, with real GDP plunging more than 11% peak-to-trough (annual data) versus 4% for all metro areas, largely because it was one of a few major U.S. cities at the epicenter of the housing bubble. However, economic diversity has helped the city recover at a solid clip. Almost three-quarters of the 250,000 jobs lost during the recession have now been recovered, while office and industrial availability rates, though still quite high at 22% and 13.5%, have been grinding lower.
To read the full report https://www.bmonesbittburns.com/economics/reports/20141023/cu141023-phoenix.pdf