Let the housing market prognosticators commence their prognostication…. It’s all the rage lately to discuss the status of new home construction forecasts, using tools like the National Association of Home Builders (NAHB)/Wells Fargo Index, or existing sales based on pricing and interest rate trends (together, these can help predict affordability). I’ve heard it said that the housing recovery is over and pricing is eroding due to ASTRONOMICAL interest rates (!!!), which translates into “the sky is falling” in the Phoenix market.
The word on the street is that interest rates continue skyrocketing; it’s already bad and it’s getting worse…. Not only is no one buying anymore, but the builders might as well quit building! And then I look at our market (believe it or not, I’m “looking at” our local market for several hours each day in some manner). As I try to reconcile my daily observations of (successful) pricey new construction projects in my neighborhood as well as what looks like continued pricing appreciation in most neighborhoods where I work, despite our typical seasonal slow-down (aka, “it’s too damned hot to look for houses”), I turn to the local gurus at the Cromford Report. Thankfully, Michael Orr has seen some of the same articles that I have, including this one that actually predicts that the Phoenix market will crash. Here’s what Mr. Orr had to say:
August 21 – Another “bubble” scare story was published yesterday which took particular aim at Arizona. This time it appeared in the usually sensible Bloomberg News. The author seems to rely heavily on a quote from Karl Case (yes he of the famous Index) in which he said “They’re [Nevada and Arizona] clearly in bubbles. What can go up can go down – real quick”.
I would like to point out that Karl Case was also 100% wrong last year in September 2012 when he said “Housing Prices are Unlikely to Come Roaring Back.” Last year his coauthor Robert Shiller also said he wasn’t ready to call a bottom and believed that homes prices would stay essentially flat for the next five years. You can hear in the following recent audio interview how Karl Case is clearly astonished about the Californian house price action and doesn’t really know what is going to happen next.
From a long term perspective, annual median home prices in Central Arizona have appreciated at an annual rate of just 2.05% over the last 13 years. This is less than inflation. Sorry, I cannot accept that prices going up slower than inflation is compatible with a housing bubble. If they were to continue to rise at the 2012 and 2013 rate for 2 more years then the suggestion would clearly make more sense, because by then we would have appreciated faster than inflation. Right now the chances of significant price decline from the current level is small. Bubbles cannot be correctly termed bubbles unless they pop. It is much more likely that prices will continue to increase but at a more moderate rate. This is what was suggested by Dennis Smith, CEO of Home Builders Research when interviewed for the original article. What he had to say made a lot of sense.
One of the things I love about the Cromford Report is that, not only can I read excellent commentary, but they also give me all kinds of shorthand methods for statistical market analyses (I know what you’re thinking — I should be blogging more with such a resource available, but I’ve been busy!). Here are a couple of current pricing charts for the Phoenix market, which I ask that you review and remember momentarily…. No test required, but it really helps explain my next chart, which I created with blatant disregard for infographic style.
Hmmmm, looks like we had a “hiccup” in that steep trend in pricing per square foot this June and July — less severe than last year, but certainly more frightful for the doomsday folks. We also saw an expected seasonal drop in median pricing last month that looks a little more severe than last year. So there’s your justification for the impending crash: we aren’t likely to see 20-30% annual appreciation any longer, which obviously means that the opposite must be true, right? Eh, I prefer a more moderate and reasonable world.
So now back to the national story for a moment…. After reading a handful of articles online about the end of the housing recovery, I decided to see what the typically level-headed folks at the Motley Fool had to say on the subject. I couldn’t help but groan about the article’s headline, “Housing Market Recovery May Be Short-Lived” (the word “may” is operative here). In all honesty, I thought it was a mostly fair article, with attention to supply and demand fundamentals as illustrated in this screenshot:
The author, Travis Hoium, then goes on to provide another quite useful illustration of fundamental affordability, based on mortgage rate changes on a typical $200,000 loan:
While I don’t share in the belief that this is all pointing toward negative news, I do appreciate the additional data points for further consideration. I also wonder why all the hoopla about interest rates and whether we’re really giving enough credit for fluctuating prices and sales volume where it’s due. For instance, why isn’t anyone looking at the negative effects of recent changes to the FHA loan program (HUD increased FHA mortgage insurance on April 1st and then eliminated the 5-year removal option on June 3rd)? And then there’s the question of cash buyers — they don’t care about interest rates (but they do care about prices). So here’s a quick look at sales volume in the greater Phoenix market from April to July, with month-month and year-year comparisons:
I wanted to make a nicer chart for you, my beloved reader who has made it this far, but I have a fantasy football draft this afternoon. So we’ll have to settle on a simplistic comparison of red vs. black (negative vs. positive), without any price stratification. And guess where I see the most red…. Oh yeah, you see that too. It’s cash sales! Not so strangely, it appears that we lost a lot of cash transaction volume as prices increased. But then you can also see that conventional and FHA sales more than made up for the lost cash sales volume from last year to this year. Oh, and then there’s the fact that FHA sales tend to drop off as the spring buying season continues to drive prices and competition upward. And look at that completely uncharacteristic drop in June 2013 sales (both MoM and YoY). There’s your combined impact of increased FHA loan costs and May’s steep rise in interest rates. But…. July bounced back — presumably as buyers successfully renegotiated with sellers and/or found new places they could afford after recalculating their loan costs. I would investigate further (like breaking out the numbers by price point), but this is a really long post already and I need content for the next one. If you still need more food for thought at this point, please feel free to scroll back and forth between the above pricing charts, interest rate chart, and sales volume chart. Then please let me know what kind of assumptions/hypotheses you can make from all that info. I’ll do what I can with the feedback.