IN-DEPTH
ANALYSIS
September
2008
What does the Phoenix Area Real Estate Market
have in store for us in 2008, 2009 and 2010?
Hopefully, the material presented here will stimulate your thoughts in
that area.
The premise underlying this analytical approach
is that there is a relatively constant long term real estate appreciation rate
in a particular market, if you exclude outside influences acting upon that
market. Some examples of outside
influences would be:
1.
A significant increase or decrease in interest rates
2.
A significant increase or decrease in the unemployment rate
3.
A significant change in the net population migration to that market
4.
A significant change in availability of credit
5.
A significant increase or decrease in investment buying
6.
A significant over or under building of new homes relative to the long term
demand
When there is a significant, but temporary
change in one of these variables, it impacts the short term appreciation rate
but does not have a great impact on the long term rate unless it becomes a fundamental
change, e.g. a significant increase in interest rates that remains in place for
a number of years.
Factors #1, #2 and #3 have been relatively constant
since 2001. Variable #4 has been going through major turmoil for the last few
months, and this is having substantial negative impact on short term home
buying demand, which in turn is putting additional downward pressure on sales
prices. Item #5 spiked in 2004 and 2005,
and the building industry responded to that increased short term demand by
overbuilding (#6).
Even though there has been huge exposure in
the media about the “credit crunch”, I do not believe that factor #4 will have a
major long term impact. Most of the changes being made in the mortgage process
are to rectify unwise practices which became widespread in the real estate
mania years of 2004 and 2005.
Factors #5 and #6 raise the real
question. The building industry is making
adjustments in their construction rate to compensate for the excess building that
took place in 2004 and 2005. In addition
to the reduction in building rate, many builders have been using price
incentives for most of 2006 and 2007 to draw more buyers. More recently outright price reductions have
been substantial. How long will this inventory
adjustment take? That is the $64,000
question (probably more like $64,000,000 question)!
In an attempt to get more insight into the
question of how long, we created the graph below which projects the historical
median resale price appreciation rate in two ways:
1.
Equal to the rate of appreciation from January 2002 through February 2004 (4.2%)
2.
Equal to the rate of appreciation from January 2002 through February 2005
(12.2%)
The market will not return to a balanced
state until the median price line moves back to near the normal appreciation. When will that happen? In the growing
Copyright® 2008 - This information is
compiled and written by Ultimate
Information Systems, Inc. Use of this article, in part or in its entirety,
is expressly prohibited without written permission. Click
here to request limited rights to reuse this information.