Southern Arizona’s housing market, especially around Tucson, has experienced an "extreme makeover" in five years. Within this time, the market has experienced the highest ever sales volumes, followed by the most dramatic of decreases seen in a long, long time.

The volume run up in 2004, 2005 and 2006 was an anomaly. It was brought into play by low interest rates, a good economy and reasonable product pricing, all coming together at the same time. Add to that the heavy investor interest that drove the market even higher.

Home inventory in 2003 was very low. When this occurred, segments of the market came into play that are absent in a normal market. One of these is the phenomenon of apartment-to-condominium conversions. In the 2005 market, there was a large amount of this activity, some carrying over into today’s market.

During early 2006, home inventories started to increase. There were several reasons for this, including:

ân¶ Investors put homes on the market

ân¶ Residents putting their homes on the market due to increasing prices

ân¶ Condo conversions

ân¶ Spec homes by builders

ân¶ Product put on the market due to an increased default on mortgages

This rush of product coming on the market quickly caused an oversupply of homes. Resale homes went to a 10-month supply – the normal being about four months. Condo conversions were selling at about 1,000 per year, where previously this was virtually a non-existent market.

The current excess inventory of homes has a major effect on the market. With a large selection of product, prices are being forced downward in order to make sales, fewer new homes are being built, and the economic health of the community – that depends greatly upon homebuilding – is beginning to suffer.

Population drives home sales and new home construction. Recent indications are the rate of population increase in the Tucson area has slowed. The current inventory of new construction homes is less than two months, which is the only bright spot in the existing market’s conditions.

There is a perception that most new home sales are made to outsiders moving into the Tucson community. That is not true. Over 70 percent of all new homes sold are to people who give Arizona as their previous address, and over 65 percent who give Pima County as their address.

One consistent factor of Tucson’s housing market has been the number of retirees who settle here. Sales in age-restricted communities have been in the range of 16% of new construction home sales. It is estimated that close to a like amount settle in non age-restricted communities, therefore making up close to 30% of today’s housing market.

Since many retirees do not need financing and are determined to settle here, it creates a buffer in the housing market that prevents it from hitting the low lows that may be experienced in other areas of the country.

In order to return to a normal housing market, the inventory problem will have to be alleviated. At the current rate of absorption, this could take as long as four years.

Consequently, we will see a flat volume of new home sales for the foreseeable future. For all of 2007, there will be around 6,000 permits issued, that’s half of what was issued in 2005. Through 2010, the volume of new construction permits will continue at a rate of 6,000 to 6,500 per year.

These are volumes that were previously seen in the late 1990s. Resale volumes will continue at the present rate as existing homeowners wanting to sell will have to price their homes considerably lower than the levels of 2005.

The market has changed from a "sellers" market in from 2004 to 2006 to the current "buyers" market. This "buyers" market will continue for the foreseeable future.

This makeover in the market creates a silver lining: It is a great time to buy a home.