Top 10 reasons why we are NOT in another housing bubble...

Ten reasons why there is NOT a bubble in Phoenix housing right now:

1. The population of Maricopa and Pinal Counties is growing much faster than the housing stock - this is fundamental, yet is hardly ever mentioned.
2. Prices are being driven up by a chronic lack of supply, not by excess demand. Demand is close to normal. Bubbles always have excessive demand from foolish trend followers.
3. Prices are still at the same level as 9 years ago (**see below). They still have a lot of room to increase yet.
4. Most buyers are putting their own money in with cash or large deposits, not borrowing it all from foolish lenders as in 2004 and 2005.
5. Lenders are still being ultra cautious. Demand could increase if they ease up.
6. Investors are mostly buying to rent and filling their homes quickly with tenants - if and when these landlords sell it is a neutral event for the market - one extra home becomes available and one extra family needs a home to live in.
7. If investors started to sell off the small number of empty rentals it would slightly improve our market balance, not create a glut of supply.
8. There are several major long term obstacles for developers trying to increase the supply of new homes. Shortage of labor and affordable, accessible land are just the first two.
9. We have a low vacancy rate both in homes for rent and for sale. Multiple generations and even multiple families are sharing single homes.
10. No bubble has ever occurred in the same market twice in the same generation. However after a recent bubble everyone is hyper-sensitive to every price increase and numerous false cries of "bubble" are par for the course.

Given the unprecedented imbalance we now have between population growth and new home building, we have several years of rising prices in front of us. How fast and how high they rise I cannot tell, but the idea that prices could fall significantly in the near term because of excess supply is foolish. The only circumstance that could unravel things is a sudden collapse in demand caused by people leaving Central Arizona in droves. Far more likely is a surge in demand from both people and companies deciding to migrate from California. Compared to most of California, housing in Central Arizona is still ridiculously affordable even if interest rates were to double.

Nobody has a good track record of predicting mortgage interest rates, but in any case multiple studies have shown no significant statistical correlation between homes prices and interest rates. So when interest rates eventually rise, as they surely must one day, this is as likely to increase demand as it is to decrease it. This event would definitely decrease affordability, but we note that one of the times of highest demand (February 2005) was also a time of very low affordability. In fact large numbers of people signing up for mortgages they could not afford was the key characteristic of the February 2005 market. Cromford Report - Daily ObservationApril 11

Case in point, taking Mike Orr's comment today that the monthly average price per sq. ft. for all areas and types since 2001 is $119.79, that is NOT to say that today's average price per sq. ft is what it was 13 years ago, but rather, it's the average across those 13 years. He also points out in those 'Ten Reasons...' that today's prices are about where they where 9 years ago.

**The Tableau Chart below shows that todays average price per sq. ft. is about where it was in July of 2004.

Will Home Prices Keep Going Up??? And Why....

This is not a basic read in that it requires getting a bit of understanding of real estate trending. Having said that, this is the best and most succinct explanation I've seen for understanding the dynamics behind the housing market price trends over the last 10-years and perhaps most importantly, as a viable tool (Cromford Index) for projecting forward.

July 19 - Price is a trailing indicator, meaning that it is one of the last thing to respond to shifts in supply and demand. The first thing to respond will be the Cromford Market Index. As long as values are above 110, prices typically rise, below 90 prices typically fall and between 90 and 110 they typically stabilize.  Prices have peaked or bottomed out approximately 6 months after any major crossover of the 100 mark.  This is due to time delays between contract acceptance and actual closing, delays in reporting final sales prices by the Maricopa County Recorder’s Office and slow moving consumer reactions to market shifts, or any combination of these.

The overlay below proves this point. The Cromford Market Index (in blue) peaked in April 2005 and sharply dropped. However prices (red) continued to rise until peaking 6 months after crossing over into a Buyer’s Market. Sellers who saw this shift (which were few) had 7 months to sell their property while prices were still rising and demand still outweighed supply.  After crossing into a Buyer’s Market, prices started to gradually fall, but the sharp decline occurred just as lending froze. As foreclosure inventory rose exponentially, lending became so strict that few buyers could qualify to absorb it (especially those luxury buyers over $500K since Jumbo financing went away almost entirely). This sharp increase in inventory, followed by a sharp decrease in buyers, resulted in the price collapse of 2008. The first-time home buyer credit acted as a speed bump to this decline, but it had little influence for the end result overall.

Today, the Cromford Market Index has been solidly in a Seller’s Market for two years. As long as it’s above 110 we can expect prices to continue rising for 6 months after measurement.  Once it gets closer to 100, that will signify that the peak of price is near, but that day is not today.

Cromford Daily Observation

Why do you think home prices are going up?? Don't over think it, it's not that complicated.

July 12 - According to most of the media. the housing market in the USA is currently "dominated by institutional investors". The largest of these (by far) is Blackstone (BX) which has about $60B in real estate assets under management. It currently owns about 31,000 single family homes in the USA with a total book value of about $5 billion. $5 billion sounds like a lot of money, but everything is relative. The total value of all homes in the USA is roughly $20 trillion. So Blackstone's rental inventory represents approximately 0.03% of the housing stock value. Foreign buyers as a group are more than 13 times as significant as Blackstone. According to NAR's reports, for just the 12 months ended March 31, 2013 foreigners spent $68.2 billion on US homes. The Chinese accounted for 18% of that number or $12.3 billion. Nobody (including me) is claiming that the Chinese are dominating the market, yet they spent more than twice as much as Blackstone's entire inventory. Blackstone represents about 30% of all the institutional ownership, so the total value of all the single family homes owned by institutions is roughly $17 billion. This is only 25% of the value of all homes bought by foreigners in the period April 2012 to March 2013.

Large numbers seem to cause some people to lose their sense of proportion and form completely false impressions of reality. Many of them write blogs on housing and articles for news outlets. Many of these are misrepresenting the state of the housing market right now. Their conclusions are bogus.

Home prices are NOT going up because of institutional investors. It is the other way around. Institutional investors are buying homes because their prices are going up. In other words - they are not stupid and can recognize an opportunity to own an appreciating asset and have their holding costs paid for by a third party - their tenants.

Home prices are going up because of chronic low supply. It is as simple as that.

Chris Tiller MBA

Russ Lyon Sotheby's International Realty

17207 N. Perimeter Dr. Suite 120

Scottsdale, AZ 85255
Office: 480.502.3500

Cell: 602.561.1346
Fax: 480.624.3795
chris.tiller@russlyon.com