New home building in Tucson market expected to climb this year

The Tucson area may be better positioned to weather the gloomy home-building news being seen across the country.

While other parts of the country are expecting a major contraction from homebuilders and a dramatic drop in home prices, Tucson is holding its own, analysts say.

A combination of the continued housing shortage and recently announced business expansions is expected to keep homebuilders’ interest high in the local market.

Tucson-area new home closings in 2022, at 3,569, was a modest 2% increase over 2021.

And while new home permits dropped more than 30% from December 2021 to December 2022, builders continue to express optimism about the Tucson market.

“The second half of 2023 might see an increase in permit activity as the fed rate increases slow or stop and interest rates settle in the 5% range,” said Jim Daniel, a local housing analyst with R.L. Brown Reports. “A huge thumbs up should be given to the Tucson homebuilders who shepherded their new home closings through the last half of 2022 to end up with a 2.15% increase year over year.

“There were many obstacles in which builders maneuvered around (labor shortages, supply chain issues and interest rate increases) to get these closings to the finish line.”

Interestingly, he noted, build-to-rent projects had their best month with 75 permit issues in the Tucson market.

BTRs are communities of single-family homes that are exclusively for renters.

Some homeowners have hesitated to list their homes, so resales fell more than 19% in 2022 versus 2021.

Still, the resale median price inched up nearly 2% to $318,375.

Both the Phoenix and Tucson markets are challenged by a shortage of move-in ready new homes as well as resale listings, Daniel said.

The influx of out-of-state residents created an unprecedented demand for housing locally.

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And, investors snapping up existing homes to flip to rentals added to the run-up frenzy in home prices.

“Seemingly, buyers showed up regardless of the price or dramatically extended delivery date — little thought was given to the fact that a substantial portion of that demand was from investors, especially in the resale market,” Daniel said. “In fact, absent that investor-driven demand, the resale market would have looked substantially different, but few recognized that as long as that investor-speculator flow continued.”

The investor cash fueled national homebuilders’ interest in the Tucson market and created a shift from local homebuilders to national and regional powerhouses, he said.

“As we enter 2023 and beyond, the Phoenix and Tucson markets are experiencing a rebalance and will continue to work through this in 2023, at least as long as job and migration growth remain positive,” Daniel said. “It is really becoming clear that, to a substantial degree, the market in 2020 and 2021 was an anomaly driven by low-interest rates and investor cash pouring into the resale market and build-to-rent and new home markets and allowing builders almost unlimited access to capital.”

Big job announcements in the Tucson area, coupled with tight housing inventory will bode well for new construction of homes.

Last year, major battery manufacturers announced both new facilities and expansions with more than 1,000 new jobs.

A European laboratory services company announced a new site at the University of Arizona Tech Park, with two dozen jobs.

A California loan-servicing company expanded to Tucson with plans to add 150 jobs and Raytheon continues to hire engineers locally.

Homebuilders are expected to be drawn to the market because of such economic activity.

New homes are expected to have fewer standard features and be somewhat smaller with locations geared toward new job locations, Daniel said.

Nationally, homebuilder confidence rose this month for the first time in a year, according to the National Association of Home Builders.

“It is possible that the low point for builder sentiment in this cycle was registered in December,” the association said. “The rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023.”