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The Cromford Report “Daily Overview”

THE CROMFORD REPORT:: “Daily Overview”

APRIL 11th –
It’s hard not to notice the plethora of silly articles suggesting the Greater Phoenix housing market is in another bubble, or that prices are soon going to fall. There are a variety of theories but they can all be seen as bogus when examined carefully.
Ten reasons why there is NOT a bubble in Phoenix housing right now:

The population of Maricopa and Pinal Counties is growing much faster than the housing stock – this is fundamental, yet is hardly ever mentioned.
Prices are being driven up by a chronic lack of supply, not by excess demand. Demand is close to normal. Bubbles always have excessive demand from foolish trend followers.
Prices are still at the same level as 9 years ago. They still have a lot of room to increase yet.
Most buyers are putting their own money in with cash or large deposits, not borrowing it all from foolish lenders as in 2004 and 2005.
Lenders are still being ultra cautious. Demand could increase if they ease up.
Investors are mostly buying to rent and filling their homes quickly with tenants – if and when these landlords sell it is a neutral event for the market – one extra home becomes available and one extra family needs a home to live in.
If investors started to sell off the small number of empty rentals it would slightly improve our market balance, not create a glut of supply.
There are several major long term obstacles for developers trying to increase the supply of new homes. Shortage of labor and affordable, accessible land are just the first two.
We have a low vacancy rate both in homes for rent and for sale. Multiple generations and even multiple families are sharing single homes.
No bubble has ever occurred in the same market twice in the same generation. However after a recent bubble everyone is hyper-sensitive to every price increase and numerous false cries of “bubble” are par for the course.

Given the unprecedented imbalance we now have between population growth and new home building, we have several years of rising prices in front of us. How fast and how high they rise I cannot tell, but the idea that prices could fall significantly in the near term because of excess supply is foolish. The only circumstance that could unravel things is a sudden collapse in demand caused by people leaving Central Arizona in droves. Far more likely is a surge in demand from both people and companies deciding to migrate from California. Compared to most of California, housing in Central Arizona is still ridiculously affordable even if interest rates were to double.
Nobody has a good track record of predicting mortgage interest rates, but in any case multiple studies have shown no significant statistical correlation between homes prices and interest rates. So when interest rates eventually rise, as they surely must one day, this is as likely to increase demand as it is to decrease it. This event would definitely decrease affordability, but we note that one of the times of highest demand (February 2005) was also a time of very low affordability. In fact large numbers of people signing up for mortgages they could not afford was the key characteristic of the February 2005 market.

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