Not a Bubble this time Arizona

Arizona home values have been steadily increasing in 2020, which is making it easier for people in Arizona to get a mortgage. They're expected to continue this trend and appreciate by about five percent this year. There are some concerns about a new housing bubble, but there are three key reasons why we're not in the same situation as 10 years ago.

1. The housing supply in Arizona is very limited and prices are climbing, ensuring a strong growth of the local economy with construction.

The price of any market item usually changes in response to supply and demand. If there is a surplus of supply and low demand, prices typically go down. If there's not enough supply and high demand, prices will naturally increase

In real estate, supply and demand can be measured by the number of months that are needed to sell all of the current homes in the market. The normal number for that would be 6 months.

Anything above a 6 month supply defines a buyers’ market, indicating prices will soften. A market in which there is a shortage of homes for sale and/or strong demand that causes prices to increase. When it comes to the real estate market, it is possible to identify the demand and supply of properties in a given area. For example, if there are more buyers than sellers in an area, you will notice that prices will rise. But when there are more sellers than buyers, then you will notice that prices tend to soften.

The number of months’ worth of inventory continued to increase from 2006-2008 and, in many cases, the amount increased exponentially. 

Months’ of home seller inventory has been under 5 months for the last few years, under 4 for 13 of the last fourteen months, The length of time to process a mortgage loan application has been under 3 months for the last six months, and currently stands at 1.9 months - an all-time low.

Keep in mind that when supply is low and demand is high, prices will naturally go up.

2. This time, Arizona housing demand is real

During the Arizona housing boom in the mid-2000s, there was what Robert Schiller, A fellow at Yale's International Center for Finance called 'irrational exuberance'.

The center for finance and economic policy has published an article entitled "Irrational Exuberance" which discusses the near record high of the Dow Jones Industrial Average. The article suggests that this surge of market prices points to a new wave of speculation in the United States.

It's natural to think that the market won't decline, but when you're looking at historic trends you'll see that it typically does. Many people got caught up in the frenzy and bought houses at prices they can't afford.

The mortgage industry exacerbates the problem by offering insanely easy loans.  As shown in the 2017 Mortgage Credit Availability Index, published by the Mortgage Bankers Association, it's getting a lot harder to find a mortgage loan.

The higher the index, the easier it is to get a home mortgage. The lower the index, the more challenging it is. The housing market appears to be picking up and this is a great time if you are a seller. 

For instance, back in 2006 when the economy was flourishing, the index was scoring all-time highs at 868. Compared to that time period, things are just now heating up and this trend seems poised to continue Again, just about anyone could get a mortgage. Today, the index stands at 122.5, which is below the previous high even during boom time.

The current real estate market is in strong demand and not just because of millennials. The largest generation in the country, millennials have come of age to marry and have children, which are two major drivers for homeownership.

The housing market is booming and it's not just because of millennials. The largest generation in the country, millennials have come of age to marry and have children, which are two main catalysts for buying a home.

The health crisis is also making people re-evaluate the meaning of home and whether their current home is meeting that new definition. I can think of so many reasons to buy a home. Because today’s mortgage rates are historically low, it makes sense for people to purchase a house sooner rather than later. Plus, the desire among buyers is very real right now

When supply is low and demand is high, the prices naturally go up

3. This time, Arizona households have seem to have plenty of home equity

The boom in housing led to a lot of changes for home owners too. Many of them started using their homes as ATMs. There were many people who took out cash-out refinances during the 2005-2007 time period. This enabled them to exploit the equity in their homes for different reasons. An estimated $824 billion dollars was pulled out of their homes for this purpose.

Many homeowners got into a negative equity situation because they had little or no equity left in their homes. With prices dropping, some of these homeowners found themselves with houses worth less than the mortgages they owed on them. Many defaulted on their payments and that led to a lot of foreclosures

The banking industry acknowledged the lessons from the housing crisis about a decade ago and they have taken significant steps to prevent this from happening again. All of us also took those lessons to heart and are making positive contributions.

Cash-out refinance volume in the last 3 years is less than a third what it was in the 3 years leading up to the 2008 crash.

The more conservative approach has led to unprecedented levels of equity ever before. According to data from the Census Bureau, over 38% is `free and clear´ (without a mortgage). ATTOM Data Solutions just released their quarterly report for the U.S. real estate market and it shows some interesting results!

Combining the 38% of homes that are owned free-and-clear with the 18.7% of all homes that have at least 50% equity, we see that close to half of all homeowners have at least a little money put away in their homes. (30.2% of the remaining 62% with a mortgage), 56.7% of US homes have more than 50% equity. The fact that we're in a much better equity situation than some time ago is reassuring.

Bottom Line

This time, there's a scarcity of housing like we've never seen before. The demand is there and it's what I like to call "rightfully motivated" Even if there were a drop in home prices, homeowners have enough equity to weather it. This isn’t 2008- instead, it’s shaping up to be the opposite. Buyers are buying homes that they can afford to weather through a downturn.