Are We Facing a Housing Bubble?

Updated: Jul 22

There is so much talk in the world right now about the potential of a housing bubble burst. Watching the news, social media, and talking to friends can cause a lot of fear for anyone looking at potentially buying or selling a home. But is this fear valid? Is there really a housing crash coming? While no one truly has a crystal ball, our intention is to address the facts surrounding this fear so we can all be better prepared and knowledgeable on the reality of the housing market in Phoenix AZ.

Here are the facts;

1. Housing inventory is increasing in Maricopa County.

Available inventory is a key driver of price growth in the housing market and has been at record-lows for much of 2021 and 2022. Research data from the Arizona MLS shows inventory is climbing faster in the average price point of $400,000 and higher than it was at this point last year, and may be headed for year-over-year growth for the first time since 2019.

The additional inventory is likely from the furious pace of new construction. In March, there were more than 1.6 million housing units under construction – more than any time since 1973.

It’s important to note that this includes all housing units, not just single-family homes, and that construction is slow and expensive due to shortages in lots, labor, and materials.

2. Prices are decreasing

In 2020 and 2021 it became common knowledge that houses were being sold for much higher than listing price. Love letters from buyers to sellers became popular and bidding wars pushed sale prices as high as $80,000 over asking. It felt like a huge frenzy and buyers couldn’t swoop up houses fast enough! In addition, the amount of listings were becoming more and more scarce driving the active listing prices higher and higher month over month. In Spring of 2022 we are seeing a shift in the sold prices. For the first time in a couple of years houses are being sold for less than the asking price. See the chart below from the MLS May 2022.

The question you may be asking yourself now is “Does this information indicate a housing market crash”. The answer to this is no, it does not necessarily. What we are truly seeing here is simply a slow down in the market to get back to what we consider a typical sellers market.

We have experienced a long expansionary period in terms of economic growth. But what goes up must eventually come down, or so that’s the thinking of 70% of economists surveyed by the National Association for Business Economics, who predict an economic recession will occur before the end of 2021. The stock market has been flat and wildly fluctuating since early 2018. Uncertainty about Trump’s trade war with China, the Federal Reserve lowering and then increasing interest rates, don’t help the creeping feeling of instability.

While every recession is different and hard to predict, the good news is that many experts agree that housing won’t play as big a role in the next recession. In fact, analysis from ATTOM Data Solutions showed that recessions don’t always spell doom for the housing market. Home prices only decreased in two out of the last five recessions—the one in 1990, and 2008—and increased during the other three recessionary periods.

To put this in context, lets look at the data from the 2008 housing crash and compare it to what is happening in our market now.

1. Lending practices and products are very different now than they were in 2008

The 2008 housing crash was caused by the subprime mortgage crisis. Lending standards were much more lax at the time, and there were a large variety of loan products to choose from. Because of a surplus in housing, banks were driven to give mortgage loans out to unqualified buyers. We have even heard stories of the family dog being the primary name on mortgages, although we cannot verify the accuracy of this statement. But the ridiculousness of this (hopefully joke) reflects on how truly lax the lending standards were at the time.

The most infamous loan product of all was the adjustable-rate mortgage (ARM), which would keep payments low for the first two years. Then, the monthly payments and interest rate would skyrocket. That left homeowners saddled with an expensive mortgage payment and pushed them into foreclosure when they couldn’t afford to pay it.

Thankfully, the lenders learned a hard lesson and today’s standards are very different. The risky loan products have been replaced by basically two options—fixed rate, or an ARM that meets Qualified Mortgage (QM) standards set forth by the Consumer Financial Protection Bureau. The interest rates are capped so they can’t go up too quickly. Buyers are required to make at least a 3.5% down payment, and if their credit score is below 760, they will pay a higher interest rate. If the buyers credit score is below 620, they probably won’t qualify for a mortgage at all. So no canines getting mortgages these days!

2. There is a shortage of housing, not a boom in building.

Realtor magazine recently reported that homebuilding activity is half of 2005 levels. Which is really no wonder considering the high cost of building supply, and well known labor shortages. Cost for building supplies causes increases at every step of the way and has pushed home prices to a point where home builders find it very difficult to build homes priced $250,000 and below in high demand markets like Phoenix.

3. People still have equity in their homes

Since there has been a longer stretch of growth in the last economic boom (versus the buying frenzy in the early 2000’s), homeowners have had more time to acquire equity in their homes. CNBC reported in August 2021 that Americans are sitting on a record amount of “tappable” equity totaling an unbelievable $6.3 trillion in the US. Tappable equity is money homeowners could pull out of their home and still have 20% equity leftover. Which means even though the pandemic caused a lot of people to lose their jobs, they still have enough equity in their home to prevent foreclosures.

4. Companies, and their employees, are moving to Arizona

Arizona’s job and economic growth forecasts over the next five years are among the best in the nation. Population growth through 2022 is expected to be the third-fastest in the country and employment growth is expected to be equally strong.

Here is a list of some (not all) of the companies moving to the Valley of the Sun:

• Airobotics, a leading Israeli automated drone startup, launched its North American headquarters in Scottsdale, Arizona, where they will run all North America, South America and Central America operations. Airobotics plans to grow the Scottsdale team to 80 employees by the end of 2019.

• Andersen Corporation, a window and door manufacturer, plans to build a new manufacturing and distribution campus in Goodyear. Andersen plans to invest more than $105 million and create more than 415 jobs during the first phase of this expansion.

• Bull Moose Pipe Company announced plans to grow its Casa Grande manufacturing operation with a $5.3 million capital investment and plans to create 16 new jobs.

• Cambridge Senior Living will construct a new facility, creating 88 new jobs with a capital investment of $20 million.

• Cives Steel, one of the largest structural steel and plate fabricators in North America, is expanding its presence in El Mirage and creating 50 new jobs with a capital investment of $19 million.

• Creighton University is constructing a new, nearly $100 million health sciences campus at Park Central in midtown Phoenix, which will eventually house nearly 800 Creighton health sciences students in Arizona.

• Deloitte announced an expansion of its Arizona footprint with a new U.S. delivery center for technology solutions in Gilbert. The initial $34 million investment will result in the occupancy of 102,000-square-feet of space at The Commons at Rivulon. The project is expected to generate 2,500 jobs over multiple phases.

• EdgeCore Internet Real Estate invested more than $150 million in its Mesa Data Center Campus, which broke ground in March and will help EdgeCore offer cloud-connected data center solutions to the world’s most demanding customers. EdgeCore’s Mesa Data Center Campus is part of the City’s Elliot Road Technology Corridor.

• Facebook has announced plans to build a data center in Mesa, its first significant investment in Arizona and one the company said it will sustain largely by solar power and efficient water use. The new facility will employ about 100 workers when completed in a couple years. It will house routers, switches, servers, storage systems and other equipment to keep important applications running and data secure. Facebook's 2.5 billion global users exchange messages, share photos and interact in other ways.

• Gorbel, a leading manufacturer of overhead material handling cranes and fall protection products, expanded into Greater Phoenix with the addition of a manufacturing facility in Goodyear, which will add more than 20 projected jobs during the first phase in addition to a sizable capital investment.

• King Koil opened a new 90,000-square-foot factory in Avondale. The company plans initially to employ 50 people at the site, which will service retail partners in Arizona, Alaska, California, Colorado, Hawaii, Idaho, Montana, Nevada, Oregon, Utah, Washington and Wyoming.

• Nationwide Insurance announced it will establish a regional headquarters in Scottsdale, creating more than 500 new jobs and investing $139 million.

• Nikola Motor Company’s hydrogen-electric semi-truck manufacturing headquarters facility will bring more than $1 billion in capital investment and 2,500 jobs to the region by 2024.

• Oscar, one of the country’s fastest growing health insurance startups offering consumer-focused, technology-driven healthcare, announced that it will expand its presence in Tempe, leasing an additional 46,000 square feet of space at The Circuit. This new contract will enable Oscar’s creation of 400 new jobs in Tempe by 2020.

• Prenexus Health announced Gilbert as the location for its prebiotic ingredient manufacturing and corporate headquarters. The facility will occupy 39,000-square-feet at AZ|60 in Gilbert’s Northwest Corridor and will create 45-50 new jobs created over the next two years.

• SeaCa Packaging announced its expansion to Greater Phoenix with the groundbreaking of a manufacturing plant in Surprise, creating 65 phase one jobs and bringing a $17 million capital investment.

• Scheidt & Bachmann USA, Inc. picked Phoenix as the site for its Western Region Innovation & Testing Center of Excellence, which will create an estimated 20 new high-tech jobs.

• Sendoso announced that it is expanding its company’s presence with a new office in Scottsdale. Sendoso creates the technology that leading companies use to personalize moments at scale using direct mail.

• Voya Financial, Inc. announced it will open a new office in the metro Phoenix area, creating more than 1,000 jobs and making a capital investment of $60 million.

AZ Big Media

In conclusion- we will likely see the US hit a recession in the coming months. The writing is on the stock market wall. However, due to the facts as we have listed above it is highly unlikely we will see a dramatic change in the housing market. We do anticipate the market to slow down as interest rates increase, but feel confident in saying the sellers’ market in Arizona should remain steady for the next few years.

If you are thinking about buying or selling a home now may be the best time. The feds have promised to continue to increase interest rates up to 8% in 2022. As rates increase, and home values increase, buyers may find themselves priced out of the market quicker than they anticipated. Please reach out to us for more information, and assistance on purchasing your new home.

Original Google Doc

22 views0 comments

Recent Posts

See All