December 3, 2007
A recently released National Association of Realtors (NAR) market report for the Phoenix area talked about the housing market in the Valley. This is the second in a series of posts explaining some of the NAR’s findings.
According to the report, prices in the Phoenix region decreased an average of 2.7% in the second quarter of 2007 over the same quarter in 2006. But prices in the second quarter of 2007were up 59.9% over the same quarter of 2004. The moral of the story: if you bought in 2006, you’re down a little bit (which doesn’t really matter as long as you don’t have to sell or refinance a loan that you took out with no down payment); but if you bought in 2004, you’re still way, way up.
In the price forecast section of the report, the NAR shows four alternative forecasts. Three of the four show positive price growth in 2008.
Path 1
This scenario assumes that mortgage rates don’t change in 2007 and stay at a similar level on average in 2008. It also assumes that jobs and incomes continue to grow at the same average pace as they did in 2006. As income rises and mortgage rates stay the same, debt servicing capacity (mortgage payment amount at the prevailing mortgage rate as a percentage of income) stays at higher-than-normal levels. In this scenario, prices grow a healthy 5.7%.
Path 2
The second scenario makes the same mortgage rate assumptions as Path 1, but assumes that current levels of debt servicing capacity are not sustainable (perhaps because of cooling job and income growth). Instead, debt servicing capacity returns to the historic average. In this case, prices still increase – a modest 2.4%.
Path 3
In the third scenario, mortgage rates fall in late 2007 and return to near-current levels in 2008. Due in large part to more attractive mortgage rates, prices rise in 2008 by 5.7%.
Path 4
In the final scenario, mortgage rates fall in late 2007 but return to significantly higher levels in 2008. Due in large part to considerably higher mortgage rates in 2008, prices would fall by 5.6%.
|
| Mtg. rate 2007 | Mtg. rate 2008 | Debt svc. capacity | Comments | Price growth 2008 |
| Path 1 | 6.5% | 6.4% | 22.6% | 2006 debt levels were higher than normal, but can be sustained due to job gains and housing shortage | 5.7% |
| Path 2 | 6.5% | 6.4% | 19.8% | Debt level returns to historic average level | 2.4% |
| Path 3 | 4.6% | 6.0% | 19.8% | Same as above but at more attractive mortgage rates | 5.7% |
| Path 4 | 4.6% | 7.5% | 19.8% | Same as above but at less attractive mortgage rates | -5.6% |
Source: National Association of Realtors, Price Analysis for the Phoenix Region, October 2007
In the end, these are just forecasts. The National Association of Realtors doesn’t have a crystal ball (and I don’t either, though it’s on my Christmas list). The NAR ends on a cautionary note:
“There is always a possibility, however small, that the economy could suddenly turn for the worse. Oil prices -- assumed to remain at around $70 per barrel for most of the next two years -- are always a wild card. The weakening of the dollar or changes in foreigners' appetite for holding onto dollar-backed assets, including mortgage-backed securities, could suddenly and measurably push interest rates much higher. Also, homebuyers' confidence could remain weak despite solid gains in jobs, income, and wealth. In such cases, home prices could weaken measurably from what is assumed in the above cases.”
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