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« Arizona Schools ECA Tax Credit | Main | Desert Ridge Expansion » Sunday, December 04, 2005Understanding The MarketThere is an accelerating increase in the inventory of homes for sale. Open house signs are popping up, classified advertising is increasing, days on the market are getting longer, and fewer transactions are a product of multiple offers and counter offers. Home price declines are very rare. The national median home price has not declined since the great depression of the 1930’s. We have survived stock market collapses, the OPEC oil crunch, and even a couple of major wars since the 1930’s. But, the rate of price increases can, and really should, slow to bring us into the healthier, balanced market we all desire. Many economists point to the ratio between home price and income as evidence of this market boiling over. At present, the median home price in the Phoenix market is 2.9 times the median income. This is only slightly higher than the national average of 2.3, and well below the 3.8 ratio of the top 20 metro markets. But the ratio of home price to income can be really deceptive. Most people, after all, do not purchase for cash, but pay by the month. The ratio of mortgage debt servicing costs to income is more valuable in testing whether the market is overheated. The mortgage debt service on the median home in Phoenix is 21% of the median income. Again, though this is slightly higher than the national average, it is well below the 30% ratio for the top 20 metro areas. The current median home price in Phoenix is about 20% above the national average. But Phoenix prices are still quite affordable in relation to other top metro areas, especially when related to Phoenix median incomes, which have tended to grow with solid job creation. Mortgage rates declining to 45 year low have been a major force in boosting home prices in recent years. Nearly everyone expects rates to increase slightly and that, along with the fact that price appreciation is ahead of the five year trend, should move the Phoenix market to more normal levels of supply and demand, coupled with more gradual median home price increases. Over a period of time the median home price will be approached by the five year trend line and our markets will be considered, even by the economic skeptics, as being in a healthy balance. As of November 28, 2005, there were 19,583 re-sale homes for sale in the Multiple Listing Service. This is up 238% from a low of 5,800 units earlier this year, but still below the more normal levels of around 25,000 units. Hurricanes, gas prices and other uncertainties have contributed to an increased rate of inventory growth. Though this is faster than expected, I still expect, as a result of the factors noted above, a gradual return to a more normal market without excessive supplies and price declines. It is too much to expect that inventory levels will stop at 25,000 units, but we expect the excesses in supply to be modest and short lived. The Phoenix market is powerful. Job growth, favorable affordability and positive net in-migration will combine, I believe in methodically returning the market to normal levels of activity.
Posted by Aaron Freeman on December 4, 2005 | Permalink Comments
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