By Mike Bodeen · 26 July 2021
Been there. Done that. Bought the Tee shirt!
In January 2005, following a 4-year runup from January 2001, the Phoenix metro residential sales market had risen from a monthly median sales price of $127,000 to $189,000 – a 49% gain, or 12% per year. From there, the market rocketed up to $262,000 in August of 2005. A gain of $73,000 in 7 months, or more than 10% per month! (See chart)
In June 2020, following a 9-year runup from 2011, which was the bottom of the 21st century market, prices rose from $109,000 to $305,000 – a 180% gain, or, 20% per year! Then, prices soared from $305,000 to $397,000. A $92,000 gain in one year.
Clearly, meteoric rises are nothing new in Phoenix, and in many parts of the U.S.
So, what followed the spike back in 2005 when the market catapulted? Did values immediately begin dropping? No, median prices leveled out for two years hovering just above the $250,000 price range. They then dropped like a rock to April 2009 where they remained flat for two years till 2011 where they began their current 10 year ascent which is still increasing to this hour. Following the drop, a similar leveling out occurred. In both instances of the rise and fall, there was a two-year leveling out period before significant increases or decreases occurred.
Does this suggest that we are approaching a peak to be followed by a leveling off period? I think it could, however with one, perhaps two “major” differences. First, the two-year leveling off period could be much shorter. Secondly, rather than a falling off in pricing, as in 2007, it’s quite possible, based on current and continuous state and local trends, that the upward trajectory commences again.
The reasons for this are more than not. In 2007 the market crash was due to:
A combination of rising home prices, loose lending practices, and an increase in subprime mortgages pushing up real estate prices to unsustainable levels. (Note: We could be nearing the unsustainable level)
Foreclosures and defaults crashed the housing market, wiping out financial securities backing up subprime mortgages. (Note: This is not currently in the cards. Phoenicians, and Arizonans, have significant equity in their homes, demand remains consistent, and supply has still not caught up)
We are in two very different markets compared with 14 years ago. Normal market forces of supply and demand are at work. Low supply coupled with ongoing demand has increased prices, both in rentals and single-family sales. The extreme rates of appreciation are ceasing. Moderation will return, perhaps by year end, but for how long? And does this include skyrocketing rental rates?
Stay tuned.