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.
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