Arizona is definitely a hot spot. Who woulda thought the desert was the place to be?


Investing in 'Hot' Markets Like Phoenix Without Getting Burned Jun 01, 2006, 9:00 pm PDT
Investing in 'Hot' Markets Like Phoenix Without Getting BurnedBy June Fletcher
Question: I am looking to buy a couple of condominiums -- having them as rental units and then selling them. I am interested in areas that are up-and-coming and have good growth potential but where property prices are still reasonably inexpensive. From the little research I have done, Phoenix seems like a good place. What are your thoughts?
-- Shivanee Nadarajah, Oakland, Calif.
Shivanee: I certainly can see why you'd be interested in Phoenix. At a time when media chatter is all about how much housing is cooling, Phoenix has been as hot as a mid-summer day in the desert. According to the National Association of Realtors, in the first quarter of 2006, the largest single-family home price increase in the country was in Phoenix, where the median price rose to $268,300, up 38.4% from the same period a year ago. Phoenix topped the list in the condo sector, too -- the median price hit $179,600, up 38% from a year ago. Multi-Housing News says it expects Phoenix to be "one of the better performing markets in the nation," over the next year, with 8,000 new residents expected to come to the metro area each month in 2006, as employers add 71,000 new jobs, an increase over last year of 4%. The trade publication expects that over the rest of the year, vacancy rates will decline 70 basis points, to 7.4%.
But the city's housing heat wave may not last much longer. Arizona State University's Arizona Real Estate Center noted that the housing market in Phoenix and its suburbs slowed in April, with sales of existing homes falling to 5,980, a 32% drop from the year before -- the weakest April since 2000. Price growth is slowing, too, the center notes, since the rapid gains of the past year have made homes less affordable. The financial Web site Bankrate.com recently put Phoenix on its "bubble buster" list, partly because lot prices are rising rapidly and the area is being flooded with new homes.
So I'd suggest that you exercise some caution. While an influx of job-seekers and rising home prices will strengthen Phoenix's rental market in the short run, in the long term, supply may well outpace demand. If that happens, today's hot housing buys will be tomorrow's hot potatoes.
To hedge against that risk -- in Phoenix or any other potentially bubblicious city -- you may want to buy a property and then offer your tenants a lease with an option to buy. A lease option will attract renters who are serious about buying but are put off temporarily because of high prices, rising mortgage interest rates or other factors. No matter what happens to home prices in the area, your tenants will still have an incentive to buy from you, since you won't have to pay a real-estate commission and will be able to offer buyers a lower price -- and the place will already be their "home."