27% Appreciation?! You read that correctly.

 Annual appreciation (measured using the monthly average price per sq. ft.) has exceeded 27% today and is clearly going higher still. If we compare 2021 with 2005 we see the following chart:

Both years started around 17%. In 2021 we are almost but not quite keeping pace with 2005, which had reached 30.2% by week 16. We have reached 27.9% at the same point.

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What some are worried about is remembering what happened in 2006:

Two words should always be on the tip of your tongue in any conversation where there's fear of history repeating itself:

Supply and Demand.

Demand is steady, but not extraordinary. 

It's about Supply. 

This you know. Painfully! 

However, Supply is the factor that's not going to change any time soon. And it's not just local. It's national and international. 

A primary reason: New construction fell way behind the population growth during the 'bad years' and now in housing 'golden age' new home construction can't keep up.

The resale story is compounded by seller fears of not finding that next abode in this hyper competitive market.

That's your message. 

Considering Demand: It's primarily about demographics, with the largest segment of the population, the millennials, chasing the dream of homeownership, albeit a little later than historic norms, exacerbating the frenzy. 'My clock is ticking, ticking, ticking...' from My Cousin Vinny!

Price range matters:

Keep in mind the traditional maxim that up to a 6 month supply is a sellers market. The chart below tells you everything you need to know:

We can remember a 5-year supply in the uber luxury segment. Today we see less than a 2-month supply under $1.5M.

Stunning!

Sustainable?

Collateral Analytics bank grade 5-year forecasts for every area we run statewide shows another 2 years of the same, after which it only moderates to the historical 'norm' (around 5% per year long term).

Note: The top gray line is the Phoenix-Mesa-Chandler (Core Based Statistical Area) representing the greater metro.

So that's the story. It's epic, which is why we keep slicing and dicing.

Another small crack...

There was a change in the nature of the demand during March. We can see this by examining the intended use recorded on the affidavits of value. For Maricopa County single-family and townhouse / condo sales:

• unit sales were 29.3% higher than in March 2020
• sales for owner occupancy as a primary residence were up 12.7%
• sales for use as a rental property were up 52.1%
• sales for use as a second or vacation home were up 36.2%

March 2021 had 4.5% more closing days than March 2020, so all of these high numbers should be shaded by that fact.

It is clear that compared to last year, far more sales are going to investors and those buying second homes. The primary residence buyer seems to be the segment that is losing out. Perhaps the rising prices and interest rates are having a greater impact on these buyers (who probably have less financial resources than investors and people buying their second or third home).

By itself, this is not a huge development, but it is a new sign that the market may be starting to get a little frothy. Primary residence purchases are the backbone of the market and we do not want to see a market dominated by other buyers when we are looking for signs of good health. In other words, we do not want enthusiasm to morph into euphoria.

This small crack in the "legitimacy" of the market is worth noting.  Investor/Second home purchases are riskier and often leveraged higher than owner-occupied.

Some questions to ponder.

Did owners refinance cash out of their primary house to purchase a second home/rental?

What appetite do borrowers have these days to hold property if a decline is seen?

These questions will play a part in how this market proceeds.  After the 08' crash, very little moral attachment is seen to the obligation of a negative equity house.  If buyers are over-leveraged how quickly do they "walk away" given how the last crash went.  If these numbers continue we could have a huge inventory of property owners with no shame or "need" to keep a house with any sign of pull-back.  That could be the snowball people are worried about.  

It's still very early to make any prediction.  We are at least a year from any crack gaining traction but keep your eye on this one.