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In Depth projections for the market 2008-2010
Saturday, September 13, 2008
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August 2008
Phoenix Area Real Estate Market in 2008 through 2010
What does the Phoenix Area Real Estate Market have in store for us in 2008, 2009 and 2010? Hopefully, the material presented here will stimulate your thoughts in that area.
The premise underlying this analytical approach is that there is a relatively constant long term real estate appreciation rate in a particular market, if you exclude outside influences acting upon that market. Some examples of outside influences would be:
1. A significant increase or decrease in interest rates
2. A significant increase or decrease in the unemployment rate
3. A significant change in the net population migration to that market
4. A significant change in availability of credit
5. A significant increase or decrease in investment buying
6. A significant over or under building of new homes relative to the long term demand
When there is a significant, but temporary change in one of these variables, it impacts the short term appreciation rate but does not have a great impact on the long term rate unless it becomes a fundamental change, e.g. a significant increase in interest rates that remains in place for a number of years.
Factors #1, #2 and #3 have been relatively constant since 2001. Variable #4 has been going through major turmoil for the last few months, and this is having substantial negative impact on short term home buying demand, which in turn is putting additional downward pressure on sales prices. Item #5 spiked in 2004 and 2005, and the building industry responded to that increased short term demand by overbuilding (#6).
Even though there has been huge exposure in the media about the “credit crunch”, I do not believe that factor #4 will have a major long term impact. Most of the changes being made in the mortgage process are to rectify unwise practices which became widespread in the real estate mania years of 2004 and 2005.
Factors #5 and #6 raise the real question. The building industry is making adjustments in their construction rate to compensate for the excess building that took place in 2004 and 2005. In addition to the reduction in building rate, many builders have been using price incentives for most of 2006 and 2007 to draw more buyers. More recently outright price reductions have been substantial. How long will this inventory adjustment take? That is the $64,000 question (probably more like $64,000,000 question)!
In an attempt to get more insight into the question of how long, we created the graph below which projects the historical median resale price appreciation rate in two ways:
1. Equal to the rate of appreciation from January 2002 through February 2004 (4.2%)
2. Equal to the rate of appreciation from January 2002 through February 2005 (12.2%)
The market will not return to a balanced state until the median price line moves back to near the normal appreciation. When will that happen? In the growing Phoenix metro market it may happen sooner than you think. There has be a substantial move in the resale market in that direction over the last three months and the price of new spec homes has been coming down for the last twelve months (see our article on Spec Home Pricing).
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