Bubble 2.0 and Public Perception

Good insight from local Phoenix housing analyst at The Cromford Report…

Bubble 2.0

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:

1. The population of Maricopa and Pinal Counties is growing much faster than the housing stock – this is fundamental, yet is hardly ever mentioned.
2. 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.
3. Prices are still at the same level as 9 years ago. They still have a lot of room to increase yet.
4. 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.
5. Lenders are still being ultra cautious. Demand could increase if they ease up.
6. 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.
7. 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.
8. 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.
9. We have a low vacancy rate both in homes for rent and for sale. Multiple generations and even multiple families are sharing single homes.
10. 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.

Public Perception

A good example of how long it takes for the population at large to acknowledge a real change in the housing market is to be found in a survey recently reported by Hart Research Associates. During February and March 2013 the1,433 interviewees were asked the question:

Thinking now about the housing crisis that started in 2008 when many people and families defaulted on their mortgages and lost their homes, do you think the housing crisis is pretty much over, that we are still in the middle of it, or that the worst is yet to come in terms of the housing crisis?

• 58% think we are still in the middle of the housing crisis
• 20% think the housing crisis is pretty much over
• 19% think the worst is yet to come
• 3% were not sure

Of course the facts are very clear, but 80% of the public have not yet accepted those facts. The housing crisis actually started in 2006 but the public did not really notice until 2008. By April 2009 homes in the City of Phoenix had pretty much lost all the value they were going to lose. From reputable analysis sources we can see that most (but not all) parts of the country were well into recovery during 2012. The majority of the general public will probably not really acknowledge the recovery until 2014 or maybe even 2015.

The housing recovery is obvious to a large majority of the economists and analysts who look at the housing numbers and draw conclusions from them without filtering them through a political lens. You can still find plenty of doom-laden articles in publications like Forbes and Yahoo, presumably because forecasts of impending financial disaster attracts readers and editors seem to set a low standard for accuracy and logic when selecting opinion pieces to publish. These articles are almost without exception based on wild theories and/or extrapolations of incorrect or misinterpreted data. The most popular negative opinion pieces are currently based on the unsubstantiated claim that “the market is dominated by large investors”. They typically quote Phoenix as a prime example. This claim is not supported by examination of the sales volumes, especially if we use dollar values rather than unit volumes. When we examine the percentages of single family housing units sold in Greater Phoenix, the market continues to be dominated by owner-occupiers, followed by second-home buyers (including snowbirds), followed closely by small investors (who are very numerous in Phoenix) with institutional or large investors coming in a distant fourth. Large investors’ market share has grown fast in the last 2 years but they are still the least of the four groups of buyers.

The idea that these institutions “buy in bulk” is also popular but simply wrong. They buy large numbers compared with small investors. After all, that is what makes them large investors. However they almost always buy homes one at at a time just like everyone else, at least in fast recovering markets like Greater Phoenix. The difference is that they have deeper pockets and are not afraid to bid high if it suits their business plan. This is what makes them scary to other competing buyers.

On several occasions we see bulk deals between one large investor and another, where a collection of say 50 rental homes is traded between landlords. However these transactions are not part of the open market and do not change the nature of the ownership. Almost always, the tenants stay in place with their leases and continue to occupy the homes paying their rent to a new landlord. Though it is interesting to see who is getting out and into the market, these purchases are of no great significance to the rest of the market.

Another fallacy is that all cash buyers are investors. Not true. There are a significant number of owner occupiers who pay cash, especially when they are buying expensive homes. This is also true of second home buyers. In particular Canadians are likely to be recorded as cash buyers, even if they borrowed money in Canada and moved that money into a US dollar bank account to buy a home here.