Is the Housing Boom in
Phoenix Creating Another Bubble?
This past year marked a
dramatic turnaround for the housing market in Metro Phoenix. Just two years ago
prices were down 56 percent of their peak values of 2006 and 2007, and
foreclosures plagued the city. Speculation was that banks were holding shadow inventory
and were slowly releasing it, which made it uncertain how much inventory was
available. Additionally, the U.S. was barely crawling out of a severe economic
recession, so many were weary of putting money in real estate.
But seemingly overnight
the housing market improved. Suddenly, the Phoenix area had limited
inventories, while the number of foreclosures continued to be reduced.Banks
claimed that their distressed sales had been flushed out. All of a sudden there
was actually a shortage of housing. Prices have soared in Metro Phoenix this
year, climbing nearly 30 percent over the past year based on a report from
Arizona State University.
What caused this drastic
turnaround nearly overnight?
The primary reason is
the fundamental principal of economics: demand finally met supply. During the
recession there was an excessive glut of housing on the market. Due to the weak
economy people were afraid to buy, causing a high supply and low demand.
However, banks worked through all the foreclosures and returned homes to the
market. With additional sources of capital in the Phoenix area, investors are
purchasing homes and creating new business models, which include rentals. Now,
as the recovery continues, there is a major lack of supply in the Phoenix area.
A healthy month’s supply
of homes is around five to six months; currently in Phoenix there is a
two-month supply. The prices have risen rapidly in response to this lack of
supply. Furthermore, the Phoenix area is attracting investors from all over the
world. It has become a modern day gold rush. Large investment firms are
investing large amounts of capital in purchasing vast quantities of homes,
fixing them up, and then marketing them as rentals. For years they have been
buying homes at auctions.
Over the last year Wall
Street hedge funds with high levels of cash have been coming into the Phoenix
area market and buying homes. Adding to this, new prospective homebuyers,
families and individuals, have been rushing to purchase homes before it’s too
late. They want to get in before prices go even higher and they are priced out
of the markets they are interested in.
Finally, the population
of Phoenix is continuing to increase. Earlier this year Forbes Magazine ranked
the Phoenix area as the eighth-fastest growing city in the nation, behind
Austin, Houston, Dallas, Raleigh, Salt Lake City, Seattle, and Provo. The
population of Phoenix is forecast to increase 2.7 percent in 2013. Research
shows that given this growth rate, homebuilders are not building enough homes
to keep up with the increasing population.
A New Bubble?
While the increase in
home prices comes as a huge relief after almost five years of a severe
recession, people are worried if Phoenix is poised yet again for another
housing recession. While it is human nature to worry about losing money again,
based on the available data, Phoenix is not headed for another bubble.
Michael Orr, the
Director, Center for Real Estate Theory and Practice at Arizona State
University, described what is happening right now in Phoenix as “a fast
bounce.”
“If prices can go
down fast, they should be allowed to go up fast as well,” he said.
One of the primary
reasons for the recession was investors pulling out of the market
simultaneously and defaulting on their loans. This is not the case now, since
the buyers represent large investment groups, which are backed by Wall Street
in several cases. These groups have the holding power to stay in the market and
are looking at the Phoenix market from a long-term perspective. Finally, these
houses have been purchased with cash, making it impossible to default on any
loan payments, forcing these investors to stay in the market for the long haul.
Furthermore, investors are actually renting out the homes they are purchasing,
thereby, not adding to the overextended supply pool.
Another huge
contributing factor of the housing recession was banks that were extending
loans at very low rates to people that otherwise would not have qualified. That
is certainly not the case now. Banks are only providing financing to buyers
that are well qualified and are typically not purchasing as an investment.
According to Michael
Orr, “The idea that there is another bubble in the real estate market is
absurd. We are just seeing a normal reaction to lack of supply. Prices are
still below the long-term trend line and none of the conditions that define a
bubble are currently in existence.” He also adds that bubbles rarely occur
in the same market where they just burst.
There has also been an
increase in employment, which is allowing people to re-enter the housing
market. Furthermore, the Phoenix market is continuing to grow. Recently, Apple
announced the opening of their new manufacturing facility in Mesa. Several other
large companies are looking to relocate to Arizona as well due to the lower
cost of real estate and labor.
The current market
portends a promising future for growth in Phoenix. We have survived one of the
worst real estate recessions of all times, and now we are moving into time of
expansion for housing. In a state that sees sunlight 85 percent of the year,
the future of Metro Phoenix’s housing market is just as bright.
