By Jonathan Bodeen · 8 February 2021
That’s what most of our clients seem to want to know right now, and after the trauma many endured from the crash over a decade ago, who can blame them?
My first years in real estate (2009) was a short sale and foreclosure saturated market where prices were still on the decline. Selling a home was extremely difficult and was literally the opposite type of market than what we currently find ourselves in. So like everyone else, and perhaps more so, I keep a careful eye for the signs of an impending bubble.
Before my dad ever gives a market prediction, he usually says, “I don’t have a crystal ball, but…” Wise! We aren’t going to pretend to know the future, and 2020 reminded us how important that is. No one really knows what’s around the corner; all we can do is observe the data and make our best guesses.
Let’s start by what’s different between now and the crash. First of all, lending has become much more strict. You have to be genuinely qualified to purchase property. In the pre-crash era, they were handing out loans like candy. We called them the “fog-a-mirror” loans. If you could breathe, you could get a loan!” Our communities were littered with home buyers who bought homes they couldn’t afford. This was a recipe for disaster.
Another significant difference is the rate of owner occupancy vs investor purchases. In the pre-crash days, close to 50% of all the home purchases were made by speculating investors, spurred on by the euphoric price increases. Now, about 85% of buyers are primary residences or secondary residences, aka owner-occupied. This is indicative of a more stable market based on homeowner demand, not investor speculation.
The third point I’d make is that Phoenix keeps growing and growing. We had over 90,000 net increase in individuals migrating to the Phoenix Metro in 2020. To put that into perspective, the entire Phoenix metro has less than 4,000 single family homes for sale with out a contract on them. There simply isn’t enough homes.
To add to that, the rental market is in a similar place. This is a great divergence between were we were before the crash. If you look at rental prices before, during, and after the crash, they pretty much remained flat. In the last 3 or 4 years, they have been steadily increasing and in the last year, spiked at similar rates as home prices. In fact, in many cases, it’s cheaper to buy the same house than it is to rent it. This is indicative of a housing market that is genuinely experiencing shortages in almost all sectors.
The definition of a bubble is artificial value inflating prices. To our eyes, these price increases seem based in real market forces, not speculation and euphoria. That can change! Here are some signs we will be watching for that could indicate a coming bubble.
Net migration to slow down to the Phoenix metro area.
Builders building more houses than the valley needs.
Lenders giving out loans recklessly.
Over saturation of investors vs owner occupant buyers.
The most obvious sign would be a big change in the supply and demand for resale homes. This is why we pay such attention to the Cromford Market index (pictured above). When we see that market index dip into the red, below 90, we can bet that price reductions aren’t far behind.
Market data referenced in this article comes from The Cromford Report.