Arizona 5 Chart Comparison

Looking at 2020 so far, all of the volatility in the stock market and the unknowns about the Coronavirus (COVID-19), some are concerned we may be headed for another housing crash in Arizona. Like the one we experienced from 2006-2008. The feeling is understandable. Ali Wolf, Director of Economic Research at the real estate consulting firm Meyers Research, addressed this point in a recent interview:

“With people having PTSD from the last time, they’re still afraid of buying at the wrong time.”

There are many reasons, however, indicating this real estate market is nothing like 2008. Here are five visual charts to show the dramatic differences in 2020.

1. Mortgage standards are nothing like they were in 2005.

During the Arizona housing bubble, it was difficult NOT to get a mortgage. Today, it is tougher to qualify. Most homes are purchased with a down payment. Most homeowners have skin in the game. The Mortgage Bankers’ Association releases a Mortgage Credit Availability Index which is “a summary measure which indicates the availability of mortgage credit at a point in time.” The higher the index, the easier it is to get a mortgage. As shown below, during the housing bubble, the index skyrocketed. Currently, the index shows how getting a mortgage is even more difficult than it was before the bubble.

Housing Bubble vs 2020 Chart

2. Arizona prices are not soaring out of control in 2020?

Below is a graph showing annual house appreciation over the past six years, compared to the six years leading up to the height of the housing bubble. Though price appreciation has been quite strong in 2020, it is nowhere near the rise in prices that preceded the crash.

2020 Home Price Appreciation Chart by year

There’s a stark difference between these two periods of time. Normal appreciation is 3.6%, so while current appreciation is higher than the historic norm, it’s certainly not accelerating beyond control as it did in the early 2000s.

3. We don’t have a surplus of homes on the market. We have a shortage.

The months’ supply of inventory needed to sustain a normal real estate market in Phoenix Arizona is approximately six months. Anything more than that is an overabundance and will causes prices to depreciate. Anything less than that is a shortage and will lead to continued appreciation. As the next graph shows, there were too many homes for sale in 2007, and that caused prices to tumble. Today, there’s a shortage of inventory and rates are low which is causing an acceleration in home values.

Months Inventory of Homes for Sale

4. Houses became too expensive to buy.

The affordability formula has three components: the price of the home, the wages earned by the purchaser, and the mortgage rate available at the time. Fourteen years ago, prices were high, wages were low, and mortgage rates were over 6%. Today, prices are still high. Wages, however, have increased and the mortgage rate is about 3.5%. That means the average family pays less of their monthly income toward their mortgage payment than they did back then. Here’s a graph showing that difference:

Chart of Median Income Need To Purchase a Home


5. People are equity rich, not tapped out.

In the run-up to the Arizona housing bubble, homeowners were using their homes as a personal ATM machine. Many immediately withdrew their home equity once it built up, and they learned their lesson the very hard way in the process. Prices have risen nicely over the last few years, leading to over fifty percent of homes in the country having greater than 50% equity. But owners have not been tapping into it like the last time. Here is a table comparing the equity withdrawal over the last three years compared to 2005, 2006, and 2007. Homeowners have cashed out over $500 billion dollars less than before:

Total Home Equity Cashed Out Chart

During the crash, home values began to fall, and sellers found themselves in a negative equity situation (where the amount of the mortgage they owned was greater than the value of their home). Some decided to walk away from their homes, and that led to a rash of distressed property listings (foreclosures and short sales), which sold at huge discounts, thus lowering the value of other homes in Arizona. That can’t happen today.

We still have a lot of unknowns, being optimistic about real estate right now is okay, as long as you buy a home that fits in your budget.  Buying a home in 2005 outside of your budget was easy.  Don't go there and you can easily ride out the ups and downs of a market. 

Bottom Line

If you’re concerned we’re making the same mistakes that led to the housing crash, take a look at the charts and graphs above to help alleviate your fears.