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Is the Housing Market Normalizing?

Harrison Stowe
2 min read
Is the Housing Market Normalizing?

Considering the relative speed of the post-2012 housing recovery, there remain persistent fears that the property rebound might be so sharp that it encourages a sort of second bubble. As I noted in a prior post, these apprehensions are most pronounced throughout housing markets where property value gains have been especially dramatic- with California in particular drawing investor concern. The crux of regional bubble worries rest on anticipation that prices may rise so sharply that they suppress consumer demand- yielding a sharp drop off in new purchases and potentially dangerous local market fluctuations.

That being said, new reports indicate that certain housing markets are showing clears signs of price stabilization. As relayed by a recent Wall Street Journal report, the Phoenix metro area shows multiple signs of persistent market health. To encapsulate the Wall Street Journal disclosures, sales inventory levels have risen while remaining stable, and home sales have increased simultaneous to a decrease in investor purchase. The latter element is particularly important, as there has been widespread concern that property purchase by hedge funds might produce spikes in portfolio gains at the expense of sustainable market growth. Considering that Phoenix-regional homebuyers may continue to act upon interest in new purchase, one of the engines for sustained growth remains intact.

Additionally, foreclosure activity continues to drop as well. The sustained rise in property values has helped local homeowners slough off toxic equity, which has only further encouraged regional home sales. As the Wall Street Journal noted, the April foreclosure rate had plummeted to 60% of that recorded in 2012 right before the housing recovery began in earnest.

What’s the Takeaway?

Taking all this into account, it appears that the Phoenix housing market is sustaining a cocktail of economic factors particularly suited for sustainable growth. A similar equation – dwindling foreclosure rates, minimal hedge fund intervention, stable sales inventory – seems to be the best means of predicting a metro region’s ongoing real estate stability. While nationally comprehensive real estate trends or policy changes (including elevation of the mortgage rate) can impact local markets universally, there is a range of metros beyond the Phoenix area that seem promising areas for both purchase and property investment.

Comprehensively speaking, these areas typically include areas that were either hard hit by the bubble bursting (such as phoenix), or have shown much less dramatic property value increases throughout the past year. Geographically speaking, these regions are settled throughout the Midwest and upper South. Metropolitan Chicago, for example, remains a particularly appealing metro in light of its stalwart economy and persistent demand for new property. Conversely, both the West Coast and even wealthier metros throughout the Northeast and Mid-Atlantic might be less promising targets for property investment.

Ultimately, real estate speculators keen on making new (yet stable) home investments might do well to gauge metro regions for both their current market activity as well as their performance immediately following the 2008 crash. Areas that recovered without catalyzing drastic price increases tend to yield gradual value gains while sidestepping the risk of a precipice effect where homebuyers shy away entirely from overvalued homes. Additionally, regions where sales inventory remains stable while homebuyer demand has risen gently tend to produce sustainable real estate price gains as well.

Photo: A. Strakey

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.