QUESTION: Is there a “bubble” right now in Arizona housing prices?
ANSWER: No one wants to buy at the top of a market. We all want to see the price we pay for a home trend upward in the years ahead so the value of our nest egg will at least keep pace with inflation to give us security and peace of mind.
It is no secret that Maricopa County (which includes the greater Phoenix, Arizona area) became the fastest growing county in the US in 2017. In our country, the average price of a single-family house or condo rose 5.4% last year. While this is less than the average price increase of a home in the Phoenix area (an 8.9% price increase), the Phoenix area increase is far less than other cities across our nation like Boston (16.8% increase), Las Vegas (13.6% increase), Memphis (12.7% increase), Salt Lake City (14.5% increase), Seattle (13.1% increase), and many of the largest California cities which had double digit percentage increases in the past year. In fact, the price of housing in the Phoenix area is still 18.1% below its peak at the top of the bubble in 2006.
On an affordability scale of 1 to 10, the Phoenix area ranks as a 5 according to the April 2018 issue of Kiplinger’s magazine. Kiplinger’s affordability scale is based on the percentage of wages required to buy a median-priced home including principal, interest, taxes, and insurance. Given the rate of population growth in Arizona and especially the Phoenix area plus the current affordability of housing, we are definitely not in a real estate bubble!
Let’s look at the numbers in a different way to compare the real estate housing bubble of 2006 to today’s housing market. Historically, as interest rates rise (like they are doing now), housing prices will not rise as quickly compared to when interest rates are lower because mortgages will cost more so people need more income to qualify for a mortgage and to pay the monthly mortgage expense. This will cause demand for housing to decrease and therefore the price of houses will not rise as quickly compared to when interest rates are lower. This correlation is not always true (and that is when bubbles occur) but it is true most of the time.
The important thing to remember about the housing bubble in 2006 is that it was caused by abuses in the financial sector. These abuses have now been corrected by government regulation. Twelve years ago people could by houses with no money down and payments on only the interest. This meant they had no equity in the property they bought and if they got one of those adjustable rate mortgages with the rate set low for 5 years, they could get a good profit using other people’s money by selling the property before an increase in their mortgage rate as long as the value of the property increased. If the value of the property didn’t increase in this shell game, they could let the bank foreclose on the property and walk away without any loss. They would consider what they paid on their mortgage as “cheap rent” because they would have paid less in mortgage payments than they would have paid renting equivalent housing. Today, down payments along with mortgages that include both interest and principal mean people have equity in their property so they have something to lose if they stop paying their mortgage. This prevents bubble-like conditions from happening.
[above graphic used with permission of David Deatrich, Loan Consultant at Caliber Home Loans in Scottsdale, AZ]
As you can see, the situation is much different today than it was 12 years ago and the regulatory changes in banking enacted by congress have introduced protections so we can avoid another bubble in housing prices. Since 1986, I have seen conditions that can cause a bubble in the real estate market come and go and in my opinion, we are not experiencing a bubble in Arizona housing prices at the present time.
— Posted May 2018