When I grew up, we spoke of bubbles… These wispy balls of soap and water that caught our imagination. Now when we generally speak of a bubble, we are referring to a real estate market that is truly unstable. We heard quite a bit about these bubbles during the 2004-2006 market. It kind of left us fatigued and not wanting to get too close to the heat in the kitchen.
Is the Phoenix Real Estate Market Currently in a Bubble?
Someone called me the other day and said a “flipper” told him that the market was in a bubble. If you look at the charts below, you can see how the market has leveled out and there is not much room for the cash investor to… scarf up inventory at ridiculously low prices, flip the property, and then take advantage of market value. When a market adjusts, as you see below, there simply is less opportunity to quote “flip” a property. If my client’s source had reviewed the charts, they would truly see that the market is leveled out.
Homeownership: The Investor Versus the Homeowner
History shows that a market goes up and down and that homeownership is not based on this premise. Homeownership is purchasing a home and yearning to pay it off in 30 years or less. Back when I was young and we were having our children, there was a one-time exemption at the age of 59. But now capital gains exemption is based on a two-year period, and thus it created movement from the average Joe as there was money to be made.
The same two-year exemption still exists today (for the moment), and yet the active movement that we saw in years past has been quite evaporative due to the fear that 2008-2011 created. For the investor, I get the dilemma. For the homeowner, however, they would just ride out the market and wait for its return to stability.
Highlights from the Annual Appreciation Market Overview for 2017
Below is some interesting – and certainly visual – data that I collected from The Cromford Report‘s Annual Appreciation Market Overview. Read through and really find comfort that, indeed, we are not in a bubble.
October 13 – Changes in the annual appreciation rate (measured using the annual average $/SF) give us a good indication of whether the market has been heating up or cooling down. This is using closed sales prices, so it is a trailing indicator rather than a leading indicator. By using the annual average, we get a non-volatile reading. The trends tend to stay in place for quite some time. By looking at the weekly chart for annual appreciation, we can detect when those trends change direction.
Here is what we have seen so far:
- Appreciation was below 2% and weakening in early 2002, but the trend turned around in the second quarter and reached 4% by the end of the year.
- The appreciation continued to increase slowly during 2003 reaching 5.6% by the end of the year.
- Appreciation started to go crazy as the market heated up during 2004 – thanks to the widespread availability of easy credit. It exceeded 12% in December 2004.
- The bubble was in full expansion mode during 2005, with appreciation exceeding 36% at the end of 2005.
- Appreciation peaked at 37.2% in March 2006 and then collapsed down to 11% by the end of the year, as the bubble burst.
- The bubble continued to deflate reaching -5% in December 2007.
- The foreclosure wave took depreciation to new depths reaching -28% in December 2008.
- The appreciation rate hit a historic low in the summer of 2009 at -36.5% but then started rising again.
- During 2010, the appreciation rate climbed by to slightly positive at 0.6% but this trend ran out of steam during the fourth quarter of 2010.
- 2011 saw appreciation slide back down to -9% by 3Q but signs of new life emerged at the end of the year.
- In 2012 appreciation charged from -9% all the way up to 20%.
- Appreciation peaked at 25% during the spring of 2013 and started to drift slowly down again.
- 2014 saw appreciation drop from over 20% to less than 9%.
- In 2015 the downward trend stopped in September at 4.1% and started rising slowly again, reaching 4.4% by the end of the year.
- During 2016 the appreciation rate improved to 5.4% by the end of the year, though all of that improvement occurred during the first 3 months of the year.
- In 2017 appreciation hit a maximum of 6.5% in September and has drifted slightly lower since then, currently at 6.3%.
Curious how these influencers have impacted the real estate market in each region within Greater Phoenix? Read all about Phoenix Market Statistics on Discover Scottsdale.
Mackey Martin, PLC