Are we in a housing bubble?

A housing bubble in Phoenix?

Answers may vary….here are the reasons I do not feel a housing bubble is afoot.

The most frequent question I’m asked lately is “are we in a housing bubble?”.  The Phoenix housing market was predicted to be among the hottest in the country in 2017 and now that we’re through the first third of the year, I’d say that prediction is on track to being right on the money. With homes appreciating at a nice clip and inventory shortages at some price points resulting in multiple offers, it would be easy to conclude that we’re in a housing bubble. Especially those who lived through the mid-2000’s bubble. I believe many of us suffer from a Post Traumatic Stress Disorder of sorts that creates a heightened sensitivity to market conditions and fear of another potential crash. So are we in a housing bubble? My answer is a pretty emphatic “NO”.  And the reasons have everything to do with what is different between now and 2005, when a housing bubble did burst:

First, there are certain regulatory changes that have been implemented in the mortgage lending world that are keeping the market from being artificially driven, as was happening in the run up to 2005. Down-payments are now a requirement for anyone wanting to purchase a home. No more getting a home with no money in the bank. Hinky loan programs that don’t build equity are, for the most part, gone. Interest only loans, adjustable rate mortgages, “no credit, no problem” mortgages are not nearly as common as 10 years ago. Basically, buyers who get approved for a mortgage are more stable, and increasingly, buyers are coming into the marketplace with improved credit.

Second, regulations have also curbed careless flipping in which a home is bought and sold simultaneously, running up the price of the property artificially. Lenders must follow guidelines that prevent that type of flipping and we’re seeing the vast majority of home purchases intended to be owner occupied or rented to a tenant.

Third, the requirements that resulted from the 2006 crash affect how appraisals are done. Gone are the days when an appraiser would poll the participants to determine the value everyone wanted. Appraisals are now managed much more objectively and are a true reflection of value, answering to an underwriter, and regulatory bodies, not the lender or the Realtors, whose commission depend upon the deal closing.

Finally, the economy in metropolitan Phoenix supports the appreciation we’re seeing in the housing market. While in 2005, most of our job growth occurred in cyclical industries (real estate, construction, tourism) much of our growth now is in the healthcare, financial and technology industries. And the number of jobs created in 2016 and the first quarter of 2017 certainly supports the increase we are seeing in organic buyer demand.

The chart below shows the growth rate in the housing market for Phoenix over the past 17 years. You’ll note that our rate of growth and appreciation mirrors that in the early 2000’s, long before the housing market began to overheat.

Phoenix housing market: 2005 bubble is not being repeated

Those who believe we are in a housing bubble should look to history, and what a normal growth rate looks like. Chart courtesy of Tina Tambour of the Cromford Report.

Barring any unforeseen political or economic upsets, or significant roll-backs of regulations, what we intend to see is a normal cycle of home appreciation and market activity.

 

Comments

  1. I disagree with second reason. Realtor are dipping homes. Not sure what guidelines are to be followed. Realtor and investors are buying homes and 3 weeks later selling them for up to 50k above purchase price..

    • There certainly is some flipping going on orchid6153@aol.com. I’m seeing it as well. What we’re not seeing is homes being bought and sold simultaneously driving up prices artificially at a pace that preceded the market crash. We’re also not seeing collusion between agents, appraisers, lenders, buyers and sellers. More and more I’m seeing appraisals come in under the purchase price due to regulations that are intended to curb artificial market inflation as we saw prior to 2008. I’m curious to hear more about your experience and what you are observing so feel free to share more.

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