Catherine Reagor, Glen Creno and Ryan Konig
The Arizona Republic
Oct. 22, 2005 12:00 AM

Metro Phoenix's housing market led the nation for price jumps during the past year. Investors, move-up buyers, new residents, second-home buyers and first-timers all jumped in and paid high prices.

The run-ups have come at a price. For the first time, Valley housing costs have surpassed the national median, but Phoenix incomes haven't climbed at nearly the same rate as the area's home prices. The resulting affordability crunch is knocking a growing number of buyers out of the market and causing others to find roommates or creative financing.

So a slowdown in home-price increases is warranted for metro Phoenix to entice new residents and home buyers, real estate analysts say.

Appreciation gains slow

In the 1990s, Phoenix-area homeowners were happy with annual 10 percent price jumps.

A slow down in price inflation is good news for many important players in metro Phoenix's workforce, nurses, firefighters, retail workers, police officers, who are struggling to afford to buy a house in the cities where they work. The price hikes have threatened metro Phoenix's image as an affordable-housing mecca.

Phoenix crossed over to the wrong side of the affordability index this year. The national median price for a resale home was $220,000 in August. In metro Phoenix, that house sold for $258,700. A year earlier, the national number was $190,000 and metro Phoenix stood at $177,500. Rachael Ruiz, 25, who works at an insurance agency, was ready to buy a house in late May and was approved for a $225,000 loan. She house-shopped before going on a two-week vacation and saw several homes she liked in her price range. But by July, those East Valley homes were selling for $275,000. "I couldn't believe it. A month later, everything I saw in my price range was totally run down," she said.

Ruiz was able to buy a remodeled Mesa home for $275,000 by taking in three roommates. "It works great, now I don't have to spend every penny on my house," she said.

Buyers needing roommates to afford a home is a new trend for metro Phoenix, though it's a common practice in the nation's priciest home markets in California and on the East Coast. It's one more sign of some of the extreme measures being taken by players on both sides of the market and an indication of how runaway demand and rising prices have changed the rules of the Phoenix-area housing market.

"Buyers have had to sacrifice a lot to get into houses they want," said Stacey Akers of Keller Williams Realty East Valley. "They had to make decisions quickly, put their contract in fast and promise sellers a lot."

Earlier in the year, bidding wars were common in the resale market, and houses sold for thousands of dollars above asking price. Real estate agents talked of contracts written on car hoods and houses bought sight-unseen by out-of-state investors hoping to cash in on soaring prices.

Returning to normal pace

Akers says the Valley's housing market is starting to return to a more normal pace, which is good for buyers and sellers.

"Some buyers were promising sellers the moon and then backing out of deals," she said.

On the new-home side of the business, builders still are holding drawings for the limited number of lots they release. Some buyers camped out overnight at subdivisions hoping to get lucky one of the drawings. Builders also banned or restricted buying by investors, who then poured into the resale market and began pushing up those prices.

The Phoenix area surged ahead of Atlanta last year to become the country's top home building market. There were 60,872 homes permitted in the Valley last year, a 27.5 percent jump from the previous year. Analysts expect a similar performance from the new-home market this year. But the market is throwing out mixed signals and there are signs that it is beginning to slow. There was a summer sag in the number of permits issued for new homes. The number of permits for new homes issued in August fell 3.73 percent to 5,548 compared with the same month a year ago. That came after a more than 23 percent decline in July. The number of existing homes for sale is inching up and it's taking a few more days for homes to sell. Buyers also have more leverage to make deals without offering full price or a contract with an escalator clause that automatically raises a bid.

"Prices aren't climbing as high as they were. It's a mild correction the market definitely needed," said P.J. Dean, a real estate agent with Dean-Maldonado. "But people are still slugging it out for houses."

It's the homes selling for under $250,000 that move the fastest. Lucas Gotta returned from military service in Iraq early this year, and he and his fianc饬 Rachel Donelson, decided it was time to buy a house before prices climbed too high. They had been looking for a central Valley home costing less than $175,000 for a few months when their agent saw a $164,000 home in northwest Phoenix go on the market at noon on a Monday near the end of May. Bob Reed of Windermere Realty called the couple, and they were at the three-bedroom, two-bathroom house by 4 p.m. that day. They put in an offer of $169,000 for the house by 6 p.m.

The sellers' agent, Dawn Marie Bailey of Re/Max Integrity, called Reed the next morning to tell him she had 25 offers so far, and 10 of them were from investors who hadn't even seen the home. The young couple's offer had been the first one not from an investor, and Bailey, who wanted to work with them, made a counteroffer of $173,000. Gotta and Donelson jumped at the deal and closed on the house by June 30.

Investors came to Valley

Investors are making up at least 25 percent of all Valley home purchases this year. Many of them were attracted to the Phoenix area after buying and selling houses in other markets that boomed, like the Los Angeles area and Las Vegas. Some market watchers think investors are beginning to sell, not wanting to be caught owning too much property when price gains begin to cool.

Carol Ewig, an agent at West USA's Kierland office, said she has seen a slowing in the number of investor clients shopping the Valley market. But she also said she hasn't seen any signs that investors who have money in Valley housing are ready to cash out.

"Nobody has called me yet and said, " 'Carol, let's sell.' I do feel the market has slowed but it's not a bursting bubble. There are a lot more homes on the market."

In some areas, the market has slowed from overdrive to merely very, very fast. Jenny Chesnik and her husband, David, recently sold their house at an 83 percent profit to buyers who made them an offer, even thought it wasn't for sale. The buyers had been looking for nine months but couldn't find anything on Chesnik's street in north Central Phoenix. When their agent finally asked the couple which house they liked best, they pointed to Chesnik's home.

"The Realtor looked up our tax records, Googled our name and left a message for me," Chesnik said. "A few days later, the Realtor came for a tour and said her buyers must see the house. The wife was on a cruise but had left a signed contract. The husband toured the home the following day and said that he wasn't leaving until we had a deal."

Affordable to others

Even with rising prices, houses in metro Phoenix are still affordable by California and East Coast standards. Kim and Don Nottke and their four children owned a 1,200-square-foot townhouse in Orange County. They love the California lifestyle and didn't want to move from there. Their plan was to invest in real estate in Phoenix, so they could make enough money and move up in to bigger home in Orange County. But when the family visited Kim Nottke's mother last Thanksgiving, Don checked out a 3,700-square-foot new home in a gated development in Surprise.

"He saw a model and said he had to 'get it for his wife,' " said Kitty Pabich of Coldwell Banker Residential. "One look was all it took. They purchased it that day and moved in last month."

They made so much money on their California home that Kim Nottke doesn't have to find a job and is looking at opening a dance studio in Surprise. Don, a construction superintendent, had no trouble finding a job in the Valley.

Analysts think price gains will slow, a healthy change for an overheated market.

"The good news is that we've seen the decline begin in price increases and that's the most positive thing that could happen to this market now," said housing analyst RL Brown, publisher of the Phoenix Housing Market Letter. "We need to see that decline continue until we no longer face a potential crisis of losing our affordability advantage."