Is it a bubble, is a question I get asked almost daily. I would love to know the answer to be honest but all I can really do is look at the facts and make my best guess.
Like many reading this, I lived through 2008 in the real estate industry. It was brutal as we watched housing prices sink in days. The scary thing for me is in this market, I hear a lot of the same chatter, the scariest one I hear is about the housing shortage, that was a main line in 2005 in the Phoenix market. That said, this time around it seems like there are few investor buyers and many more first time home buyers so unlike 2005, people are actually in these homes.
I would like to believe the banks are adhering to the newest banking laws and remaining in check, meaning that most of the properties are secured with financially sensible loans, I have not personally seen any of the craziness like we did in 2005, with 1% teaser rates that would balloon to 7% and that is a good thing.
You can point to certain indicators which state our market is a natural growth, something that does not indicate a bubble but rather than simple supply and demand, which will eventually cool. Millenials are the largest economic group in history and are all coming to the age where home buying is relevant and looking toward future, marriage, retirement, stability.
Mortgage rates are the largest factor. We use to say, anything under 10% is free money, well at 3% it is like they are paying you. If you can afford the payment, it makes no sense not to purchase a home now. These low rates have induced some who never intended to buy to enter the real estate market as it is often less expensive to own than to rent.
The balance of the housing market must be looked at regionally. The first indicator if you are in a bubble is population growth, obviously if people are moving to your town then it is likely real estate prices will increase. Job growth in your area is also critical, if you live in a place like Arizona, job growth is on the rise and with the retirement of the baby boomers so is real estate growth in our retirement communities. These two factors have put addition strain on construction resources which can also account for rises in pricing.
I like to check the biggest market indicator in Phoenix, annual price increases over a 20 year period. In 2001, the median price of a home in the Phoenix market was $167,703. Average annual percentage of growth over 20 years is 4% per year which means Phoenix prices should be at $367,457.92. Today our prices are $345,000. This is an indication to me that our market is not endanger of “popping” anytime soon.
I personally believe the best question is when will the market cool and that depends on several factors, mainly growth in the Phoenix region. Should growth become stagnant, the market will cool. This could be a result in job growth or more likely a result of increases in mortgage rates. Despite the current rise in home prices, rates have kept the affordability index in line. Unless Phoenix sees a increase in annual wages (which is possible as higher tech jobs are being courted by our state), the affordability index will remain completely dependent upon rates.
Median household income in Arizona is $57,459 per year. This places the average household in line, provided other debts are controlled to approximately 6% APR or about double of todays market rates for those with good credit, low debt and fair down payment.
So is it a bubble? I tend to say no, however it is getting close to being maxed out in value. Another year of growth and we will match our 20 year average, lower our affordability index (provided income does not increase) which will begin to slow sales, stabilize the inventory and cool our local market.