As we embark on the fourth quarter of 2006, predictions continue to vary widely about the future of the Phoenix real estate market. There have been multiple predictions of a nationwide slowdown, including yesterday's published report from Moody's Economy.com predicting a "correction" and "trough" lasting through 2009 for areas as disparate as California, Arizona, Florida and Danville, Illinois.
The driving force behind the predictions is the disappearance of the flippers - speculators who would purchase a home and sell quickly, claiming a sizable profit in the process as their artificial demand combined with the traditional buyers' need to sell pushed prices ever higher. The flippers aren't gone. Like locust, they simply have descended on the next location - Texas primarily, but other mid-America states as well.
As I said, Arizona is lumped into the category of markets primed for a fall based on last year's extreme appreciation - roughly 50% from the second to the fourth quarter 2005. And in some areas, prices definitely have declined - not across the board by any means, but in some areas. Inventory continues to hold steady while sales decline slightly; I'm about three weeks behind on posting absorption rate figures, but the number has been creeping up over the last month while inventory has remained the same.
Yet there are factors which I believe will keep the Arizona market from declining significantly, factors which might not be true of other areas. The National Association of Realtors recently published market analyses for dozens of metropolitan areas across the nation. In Phoenix, NAR has found:
- "A recent cut-back in new home building has reduced the risk of overbuilding in the region. Homebuilders evidently are responding to reduced housing demand. Low new supply betters helps support home prices."
- "Local job growth has been exceptionally strong. The three-year job growth of 12% is nearly five times as fast as the national increase [emphasis added.] The local unemployment rate of 4.1% in the first quarter implies full employment in the region. Not surprising, the mortgage delinquency rate in the first quarter for the state was well below the national average."
- "Job growth and strong net positive migration in the region brought additional potential homebuyers to the market and limited the number of "forced-home sales" associated with job losses. This suggests that any price decline likely will be short lived given the additional buyers ready to enter the market [emphasis added].
The report also says interest rates present the biggest risk of a drastic slowdown in sales: "Should the 30-year average fixed rate approach 7.5% (from its current 6.8% [sp]) as a result of too much monetary tightening by the Federal Reserve, home prices in the region could well decline. Clearly, the percentage quoted is dated. And as the Associated Press story on the Economy.com report notes:
The Fed has kept rates unchanged for the past two months and many economists believe the central bank has finished its rate hikes as long as inflation pressures keep falling.
The belief that the current economic slowdown is restraining inflation has helped push mortgage rates lower with the 30-year mortgage now at a six-month low of 6.31 percent, an improvement that is expected to help put a floor on housing's fall.
So those waiting for interest rate pressures to lead to a substantial increase in foreclosure properties to flood the market may be waiting longer than expected, especially if rates remain flat or continue to decline slowly.
From there, the analysis falls into a "Fiddler On The Roof"-style debate.
On the one hand, quoting the NAR research, "because home prices have risen faster than income, the ratio of price-to-income is currently above the historical norm."
On the other hand, "home prices are affordbale compared to the neighboring California markets. So part of the recent years' increases are attributable to the 'catch-up' effect."
Some will doubt the information provided in the NAR report on its surface because of the source. And who can deny the National Association of REALTORS has a vested interest in a robust housing market. But as I've told my sellers, I don't determine the market. I just work in it. NAR operates much the same way. And any spin that is applied to the data is no different than the spin that appears daily in newspapers around the nation and on the blogs of the Bubble Boys.
The difference between the two is because of its vested interest, NAR has invested considerably more time and effort into researching every aspect of the market - a somewhat more solid base of information than the Chicken Little-ism passing as journalism or the oft-misguided sandwich-board "end is near" musings of the bubble set.
Or, to quote a movie (if I remember the title, I'll add it - amazingly enough, I can't recall.) An ex-husband tells his ex-wife she can't marry a particular man. She says his opinion is clearly biased given his position. And he says, roughly, "Just because I'm biased doesn't mean I'm not right."
The same can be said for information about the current real estate market - just because I have a vested interest in seeing consumers buy and sell doesn't mean my interpretation of the data is wrong.
Ultimately, though, that will be for my readers and the general public to determine.
(c) Jonathan Dalton, 2006 / Jonathan Daltons Arizona Homes
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