National Association of Realtors Phoenix Market Report, Part 3

December 7, 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 third in a series of posts explaining some of the NAR’s findings.

One of the most commonly cited housing market statistics is price.  Recent attention has focused on the divergence of incomes and home prices in the Phoenix area since 2004.  The graph below, from the NAR, illustrates that trend.

But according to the NAR report,

“However, such a reliance solely on price and income growth is inappropriate. For a homebuyer, what is relevant is not home price in relation to income, but rather the mortgage payment in relation to income. Since 1990, interest rates have generally trended down, thereby permitting more purchasing power with the same level of income. Furthermore, the fees associated with taking out a mortgage have fallen from about 2% to less than 0.5%. As such, any home price analysis needs to taken into account the lower overall mortgage borrowing costs.”

The best way to evaluate affordability, the NAR says, is mortgage servicing capacity, which compares the mortgage payment amount (including all fees and the interest rate) to income.  The historical average mortgage service capacity in the Phoenix area is 19.8% (shown in pink in the graph below). 

For most of the 1990s and the fist half of this decade, mortgage servicing capacity has been below average.  Since 2004 it’s crept up, and is now slightly above average.  “There could be some correction required on prices,” the report says.

But the report also says:

“However, what is not captured but relevant in the local market is the wealth factor. Wealth -- or lifetime savings -- plays big due to higher than normal retiree population and due to higher concentration of international homebuyers. Such a condition may imply that the current mortgage debt load for homeowners in the region may indeed be well manageable.”

The question of affordability is an important one: if home prices in the Valley are too high to be affordable, they’ll eventually come down to a price the market can bear.  If they are affordable (for enough buyers) then we could see prices rising in the near future.