Lately I have been getting more and more questions about foreclosure data and defaults and what we could potentially see coming in the next several months. Even more recently I am hearing about conversations Realtors are having with sellers who plan to sell and then rent because they are afraid to lose equity, like in 2008. These conversations inspired me to research the similarities and differences between the Phoenix metro area real estate markets during 2005-2007 and 2020.
The intensity of today’s market is somewhat reflective of the 2005 housing market giving many people 2008 PTSD. Although the market may feel similar, in reality, it is very different. You must ignore the headlines and remember the media’s goal is to increase eyeballs for advertisers. Shocking stories sell.
Every market is different. The Phoenix market is one of extremes, making it easy to use for comparisons over time.
In 2005 lending was loose. If you could fog a mirror you could get a loan. Lenders went as high as 120% loan to value. People bought houses with $0 out of pocket costs and were over-leveraged. Today’s lending requirements include higher credit scores, minimum down payments, and a job.
Today’s historic low-interest rates are driving demand higher as properties are more affordable now than they were in 2005 when the average interest rate was roughly 6%. Ivy Zelman with Zelman & Associates, a major national housing research and consulting firm, said low-interest rates are more important to the American consumer than is an economic recession.
Supply, Demand, & Appreciation:
In 2005, the easy loans drove up demand quickly. However, demand started decreasing in April 2005 and inventory started increasing in June 2005. Demand hit bottom in October 2007 when supply hit its peak. Demand was 43% below balance and inventory was 114% above balance, meaning we had 57 buyers for 214 listings. Today demand is nearly 23% above balance and inventory is 64% below balance, meaning we have 123 buyers for 36 listings.
In August 2005 we hit an annual appreciation of 45%. In August 2020 we hit an annual appreciation of 15%. With the appraisal the regulations implemented in 2010 the guidelines prevent collusion and steady the pace of appreciation. This is why appraisals often come in low during times of significant price increases.
Prices are a lagging indicator and it took about two years for prices to start decreasing, which happened in 2007. We hit 20.6 months of supply in January of 2008. As of yesterday, our supply is 1.4 months.
Nationally, inventory has been decreasing since 2018 and demand has been increasing since mid-April. Existing home sales increased by 25% in July 2020. June saw an increase of 21%. Based on these increases Dr. Lawrence Yun, NAR’s chief economist, revised his 2020 forecast to 5.4 million existing home sales, a 1.1% increase over 2019’s 5.34 million sales. He also expects 800,000 new home sales this year, a 17% increase over 2019. (NAR)
True Demand versus False Demand:
There is a significant difference between true demand and false demand. True demand is when a property is purchased for the purpose of being lived in, whether is it owner occupied or renter occupied. Given the out of control appreciation in 2005 people purchased properties for the sole purpose of parking money to appreciate and resell. There were a number of fraudulent schemes created that took advantage of the appreciation as well. These properties were never lived in. Today properties are purchased to be lived in or rented, i.e. true demand. According to the US Census Bureau, rental vacancy rates and homeowner vacancy rates in 2005 were double what they are today.
Another way to illustrate true versus false demand is with rent prices. In 2005 rent prices actually decreased due to lack of demand. Today’s rent prices are appreciating about as quickly as sales prices. This is especially true in the single-family market.
Today’s demand increase is due primarily to #1 low interest rates and #2 people want bigger homes to accommodate working and teaching from home. Commute times are a much lower priority. (NAR)
A recent Zillow study shows that upwards of 2 million renters could afford a typical starter home just outside of their current metro area. With an increase in remote working, these renters could turn into buyers in the near future.
New home construction boomed in 2005. Builders built even when they knew they were over building for the market. In 2007 new construction came to a near standstill and last month was the first time new home sales compared to the volume in 2005. In the past 10 years new construction has not kept up with household formation. We currently have a national housing shortage of about 5 million houses. (NAR)
Phoenix is the fastest growing city in the country. From 2010-2019 more than 234,300 people moved to the valley. (US Census) During the time of large population growth we had minimal home building.
Local real estate expert, Jim Belfiore says new home sales peaked last month as it was the highest new home sales month since late 2005. He expects a strong housing market through 2021 based on low interest rates, low inventory, and population growth. Belfiore said, “The growth of sales has slowed.” He expects prices to continue to rise due to limited supply and continued demand. Remember when you are going 180 MPH and slow down to 120 MPH, it feels like you hit a brick wall. It may take a moment to realize you are still going 120 MPH.
According to CoStar, Phoenix may have an over-supply of new industrial real estate. So far this year 9.6 million square feet has been completed with another 10.6 million square feet under construction.
A single-family new construction home has an impact on the economy of $327,681. Of that number $188,962 goes into wages and salaries. (National Association of Homebuilders)
Today’s Underlying Fragilities:
Our current environment does not come without its complications. The 2005 bubble and bust were caused by real estate. Today, real estate is bolstering the entire economy and is a big part of the solution. Regardless, we will face significant hurdles in the coming months.
The vast majority of people who lost their jobs are under 25 years old and make less than $50,000 a year. According to NAR, only 3% of homeowners are under 25. The unemployment rates have impacted renters significantly more than homeowners. About 10.5 million of the 22 million jobs that were lost have come back and our unemployment rate now stands at 8.4%. Unsurprisingly, unemployment rates are inversely proportional to education level. The unemployment rate for those with a college degree or higher is 5.3% and the rate for those without a high school diploma is 12.6%. Homeownership rates for those with at least a college degree are 23% higher than those without a high school diploma. (US Bureau of Labor Statistics)
Last week initial unemployment filings hit 884,000, the same as the week prior. Those on continuing unemployment increased by 93,000 to 13,385,000. (US Department of Labor)
The chart below shows the past 10 years of unemployment and our unemployment rate today is lower than it was in 2010.
Mortgage & Forbearance:
About 3.6 million mortgages or 7.16% are in forbearance, a 5-month low. There is a lot of misleading information surrounding forbearance. There are many different programs ranging in length of 3-12 months. Not all mortgages in forbearance are behind on their payments. Since this is not public data, I cannot confirm but have read that 25%-67% of mortgages in forbearance remain current. (MBA) Additionally, about 90% of loans in forbearance have at least 10% equity. The average American homeowner has $177,000 in equity. It is unlikely we will have a large wave of foreclosures. (KCM) From 2008-2010 there were 8.8 million foreclosures nationwide.
Often used for first time home buyers, FHA loans make up about 10-12% of loans in forbearance, which is the largest group of any one loan type. (MBA)
Mortgage applications increased last week by 2.9% after 3 weeks of declines. (MBA) The application increase is likely due to the new all-time low-interest rates hit last week at 2.86%. (Freddie Mac)
Presidential elections tend to decrease buyer demand from about October 15-November 15. Then demand fully recovers by January. There is very little indication of price changes due to elections. (KCM)
A study done by Kiplinger shows that during election years from 1980-2016, average appreciation is 4.15%. During off years from 1978-2014 the average appreciation is 4.37%. With 2020’s national appreciation pushing 9% those averages may adjust. (NAR)
Ivy Zelman also said, “Our home is our castle, more so than ever before.” We are living, working, and teaching our kids at home. And for the 160 million working Americans, during this time of change and uncertainty finding the right home is more important than ever before. She believes that our housing market will stay strong throughout the pandemic because of this. She expects a cooling, not a drop, once there is a widely used vaccine and regular life has resumed.
Local economist Elliott Pollack states that the Phoenix metro housing market will remain strong. Between the strength of our job market, affordable prices, stability, and good weather people will continue to move here from other parts of the country.
Based on this data, homeowners who sell and then rent will lose the additional equity we are likely to gain in the coming months.
Please share this with your colleagues and clients.
Copyright 2020 by Sarah Perkins
Sarah has been with Lawyers Title of Arizona since 2004. As an award-winning sales executive, Sarah’s role is to bring transactions to Lawyers Title. To do this, she focuses on supporting her clients and helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.