Bubble Looming? Metro Phoenix Home Prices Near 2006 Record

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https://www.azcentral.com/story/money/real-estate/catherine-reagor/2018/05/26/metro-phoenix-home-sale-prices-rebound-2006-record-recession/634028002/

“Could June be the month metro Phoenix home prices rebound to the record they hit in 2006?

A new analysis of pending sales in the Valley shows prices are nearly there.

In May 2006, metro Phoenix’s median home price hit $259,900. Then in June, it set a record at $264,800, according to Arizona Regional Multiple Listing Service data.

Then the recession hit, and prices tumbled. We've been watching them slowly work their way back up since 2011.

The forecast is for the area’s median to reach $260,000 in May, according to housing analyst Tom Ruff's latest report for ARMLS. And then it's only a few more thousand dollars to bust the record.”

At the bottom of the Phoenix Metro market back in 2011, some government reports claimed that it would take a whopping 50 years for housing prices to recover.

Luckily, we were able to pull it off in only 12 :-)

But anytime housing prices approach record highs, the doom and gloom of “bubble talk” is surely not too far behind.

Especially when you consider the recent surge in new real estate licenses as new agents look to make a fortune in the booming economy:

https://www.azcentral.com/story/money/real-estate/catherine-reagor/2018/06/05/number-metro-phoenix-arizona-real-estate-agents-grows-housing-market-booms/674280002/

Bad Real Estate Deja-Vu

We all remember just a short decade ago how the market came all crashing down on our heads and totally leveled the economy.

Phoenix’s housing boom was fueled by subprime mortgage and real estate speculators looking to make a quick buck. It all started in 2004 and hit the peak right about the summer of 2006.

If you want to know how it all got really frickin’ bad really frickin’ fast, watch this short clip here from The Big Short (2015):

https://www.youtube.com/watch?v=xbiDrzTd8fE

Metro Phoenix’s housing market hit bottom in 2011, and investors (like you!) snatched up a record number of bargain foreclosure homes that year. The median price then plummeted all the way down to a measly $110,000. 

Ouch.

But since then, we’ve seen a major recovery. Home prices in some neighborhoods, have already rebounded to 2006 record levels. Especially in the more affordable neighborhoods (more demand).

In nearly 30 Phoenix-area ZIP codes, prices have climbed back to 2006 levels or even higher in some cases.

Values in another 40 Valley neighborhoods are within 10 percent of recovering.

But with home prices so high again, some may be speculating that we’re in a bubble. Are we?

Housing Bubble? Or Genuine Boom?

In my opinion, as long as we don’t make a sudden move to automated appraisals (ha!) and underwriting standards remain strict, we’re not headed into bubble territory.

Why?

Too much genuine demand.

Who?

Millennials.

See more here: http://www.businessinsider.com/millennials-turn-30-housing-boom-demographics-2018-4

Because?

Over 4 million of them are turning 30 every year. And the average age a woman has her first child is 28.

And while living in downtown LA or San Francisco in a cramped apartment with 5 roommates is cool when you’re young and single swiping on Tinder, there’s one situation where it’s certainly not cool at all…

When you’re pregnant.

I noticed this trend back in California when I had several clients back to back that were all late twenties / early thirties with either a bun in the oven or a baby already here and they were looking to escape the high prices of the Bay Area and move into more affordable markets like Sacramento and Stockton in California’s Central Valley.

Just take a look at Phoenix’s population pyramid to notice how it swells right in the sweet spot of people about to have their first kid and want to buy their first home shortly afterwards:

And not only do you have the millennials here in the Phoenix Metro Area, you also have them moving from Los Angeles and greater southern California:

https://la.curbed.com/2016/5/23/11753840/los-angeles-migration

And can you blame them? Who wouldn’t be lured by $260k homes compared to $650k in Los Angeles?

I remembered when I moved here from Northern California I realized I could spend the same amount I did to buy my home in Sacramento and get a house that was 50 years newer, totally remodeled, and in a much safer area.

"Yes please!"

I can only imagine how peeps from SoCal are blown away by the much greater value offered here in the Phoenix metro area compared to where they’re from.

Even better? It’s only a 6 hour drive back home to see Grandma on Thanksgiving and Christmas. And if you book your flights far enough in advance it’s less than $100 each way.

Far enough away to avoid your grandmother’s nagging about your pink hair, but not too far to visit and still get a piece of that famous pumpkin pie she makes every year :-)

Boomers Add To The Boom

What’s more, Baby Boomers make up a significant percentage of new Arizona homeowners. After all, there are 10,000 of them turning 65 every day:

http://www.thefiscaltimes.com/2017/05/09/10000-Boomers-Turn-65-Every-Day-Can-Medicare-and-Social-Security-Handle-It

And where do retirees move once they hang up the gloves for good?

Florida and Arizona. #1 and #2. Anyone surprised? Must be all that sunshine :-p

Perhaps that’s why the Arizona Sun Corridor (Prescott to Nogales) is set to DOUBLE in population by 2050 and reach over 12 million.

https://en.wikipedia.org/wiki/Arizona_Sun_Corridor

That just means more and more and more demand over time. And as long as lending is kept in check then we should be alright.

But Remember – We Are A Cyclical Market

Now, I’m not saying that there won’t be another recession. Of course there will be. It has happened before, and it will happen again. It’s human nature. It’s unavoidable.

The big question is WHEN will the next recession happen? And since the real estate crystal ball is only accurate about a year out (too much can happen in the economy), opinions varying from next week to next millennia are abound out there on the internetz.

The one model I believe in is the 18 year cycle. I’ll let you do the research for the sake of brevity, but just use history as your guide for when the next peak in land value is set to occur (see below):

Therefore, if the last peak in land values was 2006, that would place the next peak around roughly 2024. That’s a whole ‘nother 6 years away.

BUT – like I said. No one can make that kind of prediction. Not even Nostradamus. There is simply too much that can happen between then and now:

  • America rips itself apart in the next Presidential Election
  • North Korea gets crazy one day and decides to nuke us
  • Another 9/11 type event… another war… in the Middle East… about oil
  • Robots may steal 800 million jobs by 2030
  • Interest rates could go way up and lower the ability to borrow
  • Ninja loans could make a comeback… automated appraisals let people overpay
  • And so on and so on…

But generally speaking, I think it’s safe to say you’ve got AT LEAST another solid two years before you even need to worry.

Things got a little cray-cray in the mid-2000’s that’s for sure. But I think you’ll see a return to the much smaller ups and downs we saw 80’s and 90’s this next time around:

Who thinks Phoenix is in a bubble? And when will it burst if we are?

T.M.I.D.R. (Too Much Information, Didn't Read)  < ;-)

I agree, we're not in a bubble.

the 18 year cycle is financial based, there is another component that is space based and runs 10 years.

I would like to remind you that the stated goal of the fed via artificially low interest rates is to "boost asset prices and encourage equities investment"

So have asset prices been boosted yet?

Would this 7 year run up in r.e. prices have been the same with much higher interest rates?

Lets see if this environment is real or not, and we will know when the 10 year hits 4%.

Not saying it a bubble that can "pop" but i suspect a lot of demand arises from low rates

I survived the meltdown, barley, so I'm always on the lookout for potentially bad news, much of which is covered here. So I'll give some positive things I see. We are now in a time of rising interest rates and after a long period of ultra-low rates, many homeowners who have locked in long-term low-interest mortgages do not want to sell and pay more money for less house, contributing to less inventory. Also, much of our building materials come from Canada, and with a looming trade war, prices are climbing which will result in higher new home prices. BUT this market is not being driven by demand, it is a lack of supply, and if demand starts to fall, look out.

Great post as always @Wes Blackwell

I love the bubble talk though, I would love for it to weed out the competition!

Great post as always @Wes Blackwell

I love the bubble talk though, I would love for it to weed out the competition!

Trump doesn't want rates to rise. If Fed concedes no Bust yet.

I think you are right. I have at least six peers (millennials) who I have been suggesting for years to buy who finally bought this year. I think Arizona having a much lower tax rate also gets people to relocate because they can keep making re of their hard earned income.

this idea that millinials will be forever renters I think is BS  they are a smart bunch and when they figure out paying rent is a fools errand those that have good credit and jobs will buy.. much smarter.. and then you have the family issues.   And who says real estate cant make new highs.. like what is happening currently in the SF bay area .. 

or most markets.. look at average prices in the 80s  then the late 90s   then in 2006 peak.. and now we are poised for new highs..  I think and that's OK its not a bubble its just that housing goes up.. cost to build rises land prices rise.. 

wages go up.. people chose to invest instead of rent.. all leads to new highs not a crash.. OF course I could be very wrong.. LOL

Interesting that you just posted this as I just got this email from my realtor:

With home prices continuing to appreciate above historic levels, some are concerned that we may be heading for another housing ‘boom & bust.’ It is important to remember, however, that today’s market is quite different than the bubble market of twelve years ago.

Here are four key metrics that will explain why:

1.Home Prices

2.Mortgage Standards

3.Foreclosure Rates

4.Housing Affordability

1. HOME PRICES

There is no doubt that home prices have reached 2006 levels in many markets across the country. However, after more than a decade, home prices should be much higher based on inflation alone.

Last week, CoreLogic reported that,

“The inflation-adjusted U.S. median sale price in June 2006 was $247,110 (or $199,899 in 2006 dollars), compared with $213,400 in March 2018.” (This is the latest data available.)

2. MORTGAGE STANDARDS

Many are concerned that lending institutions are again easing standards to a level that helped create the last housing bubble. However, there is proof that today’s standards are nowhere near as lenient as they were leading up to the crash.

The Urban Institute’s Housing Finance Policy Center issues a monthly index which,

“…measures the percentage of home purchase loans that are likely to default—that is, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.”

Their July Housing Credit Availability Index revealed:

“Significant space remains to safely expand the credit box. If the current default risk was doubled across all channels, risk would still be well within the pre-crisis standard of 12.5 percent from 2001 to 2003 for the whole mortgage market.”

3. FORECLOSURE RATES

A major cause of the housing crash last decade was the number of foreclosures that hit the market. They not only increased the supply of homes for sale but were also being sold at 20-50% discounts. Foreclosures helped drive down all home values.

Today, foreclosure numbers are lower than they were before the housing boom. Here are the number of consumers with new foreclosures according to the Federal Reserve’s most recent Household Debt and Credit Report:

2003: 203,320 (earliest reported numbers)

2009: 566,180 (at the valley of the crash)

Today: 76,480

Foreclosures today are less than 40% of what they were in 2003.

4. HOUSING AFFORDABILITY

Contrary to many headlines, home affordability is better now than it was prior to the last housing boom. In the same article referenced in #1, CoreLogic revealed that in the vast majority of markets,“the inflation-adjusted, principal-and-interest mortgage payments that homebuyers have committed to this year remain much lower than their pre-crisis peaks.”

They went on to explain:

“The main reason the typical mortgage payment remains well below record levels in most of the country is that the average mortgage rate back in June 2006, when the U.S. typical mortgage payment peaked, was about 6.7 percent, compared with an average mortgage rate of about 4.4 percent in March 2018.”

The “price” of a home may be higher, but the “cost” is still below historic norms.

Bottom Line

After using these four key housing metrics to compare today to last decade, we can see that the current market is not anything like that bubble market

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