Home Builder Opportunities Will Mean Steering Clear of Distress'

This year and next, Phoenix's new-home narrative will be about random submarket successes amid a broader-swath of pain and drudgery. Perhaps the biggest unknown from a timing standpoint has to do with Phoenix as a destination for domestic migration once the broader economy gains a bit of traction, and people who may want to move there are able to sell their homes, shift their jobs, or just plain up and head to Phoenix. An untold story is what has happened to Phoenix's population as construction jobs evaporated, the services economy became a shadow of itself, and people ready for their days in the sun got snagged in real estate's big freeze starting back in about 2007-2008, halting the stream of people and money toward this Sun Belt mecca. One little shift in the direction of household formations toward normalcy, and Phoenix's story will be closer to the classic plotline of rising from the ashes. Meanwhile--taken for what it is at the moment--Phoenix represents a Harvard Business School case study in the dislocation of people, resources, and capacity. The metrics to keep an eye on for inflection, obviously, are inventory and months' supply. Absolute inventory combined with implied inventory--severely delinquent home borrowers--is elevated. Absorption will occur, either slowly or not. The take-away for home builders has to do with both pace and margins. With prices under pressure, many assumption on land base costs from even 18 months ago are wrong. They're wrong now, but they may be right again if absorption rates pick up if the broader economy gets traction and people start migrating again to this city ... most knowledgable analysts have 2013 as the timing for this phenomenon to take hold. It could be sooner. If existing home sales pick up in other locations, Phoenix could be a beneficiary.

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