A Quasi-Boom in the Phoenix Housing Market

Evidence is mounting that when home prices tumble by more than 50 percent and the Fed keeps mortgage rates at freakishly low levels, people will buy houses. This report from the LA Times talks of a resurgence in home buying where prices have fallen the furthest.

After four years of renting because they were priced out of the real estate market, Jamia Jenkins and Scott Renshaw concluded the time had arrived for them to buy.

They saw that home prices had dropped so fast here -- faster than in any other big city in the nation -- that mortgage payments would be less than the $900 they paid in rent. The city is littered with foreclosed houses, so the couple figured they could easily snatch up something in the low $100,000s.

Three months later, they're still looking. They have submitted 13 offers and been overbid each time. "It's just pathetic," said Jenkins, 53. "Investors are going out there and outbidding everyone."

While many now cheer the arrival of a housing market bottom this year - more likely in real estate sales than in prices paid - you have to wonder what's going to happen in another year or two when long-term interest rates are much higher.

For example, at today's artificially low mortgage rates, you can get a 30-year loan of $170,000 for about $900, similar to what the couple above is planning. But at the far more typical rates of seven or eight percent, that payment moves up by one-third to about $1,200.

Stated another way, that same $900 payment only buys $130,000 worth of housing - not the $170,000 as indicated above - absent the freakishly low interest rates, something that is a near certainty in the years ahead.

Naturally, that doesn't stop people from buying, as the 2006 fever seems to have returned...

Phoenix's housing bust has turned into a quasi-boom, a sign that its market may have hit bottom and a sneak preview of what a national housing recovery could look like.

More homes are selling than at any time since 2006. Prices are slowly stabilizing. Buyers are once again finding themselves in frantic bidding wars -- only this time over foreclosed houses selling at deep discounts rather than ranch homes listing for vast sums.

"The free market is at work," said Shannon Hubbard, a real estate agent and blogger here. "Prices got driven down so much that people said, 'I'm going to come out and play.' "
Home prices continue to plummet or tread water in much of the nation, but there have been tentative signs of life. Pending home sales rose 3.2% nationally in April, the second month of increases after a record low in January.

John Burns Real Estate Consulting in February identified Phoenix as "the most unique market in the nation," where affordability was better than at any time since 1981 and buying a house was once again cheaper than renting.

It should be an interesting summer as waves of new foreclosures battle waves of new buying interest from a bargain hunting public that is still fearful of more job losses.

Comments

[Kirill:]

Good, thank God we are seeing signs of rebound!

May 19 05:39 AM

[D. McHattie:]

It boggles the mind that these fools have learned nothing from this housing bubble.

The bursting of this bubble is 3 years old now and they still haven't figured out that you need to look at the ratios of average prices to average incomes and average price to average rents.

What homes once sold for is totally irrelevant to their expected future price.

They still haven't looked at what happens in all bubbles when they correct: they overcorrect to the downside.

I think I'll invest in plasma and sutures because there will be alot of severed digits and lost blood from all the knife-catchers in Phoenix.

May 19 09:23 AM

[HardwoodFlo...:]

McHattie- Good Comment. The overhang of houses is just astounding. The fact that we are still working through existing inventories in many markets in the US is unbelievable considering where starts have been over the last couple of years.

The sales of existing homes is minuscule. It’s at a run rate of 4 million this year. That’s about half of the median. Because the sales number is so low we still have about 10 months supply on the market even with housing being at a net zero run rate (500k starts and 500k in tear downs a year).

Upward momentum in housing is still a long way off. As a result people are choosing to stay in their existing homes. They are choosing to remodel and put on additions not wanting to sell into a “weak market”. Interestingly, I think this is why the Lowe’s and Home Depot numbers are decent.

May 19 11:11 AM

[John Wake:]

Tim said, "... you have to wonder what's going to happen in another year or two when long-term interest rates are much higher."

I think you are going to wonder why the hell you didn't buy in 2009 when interest rates were crazy low.

May 19 01:49 PM

[jhartz:]

On May 19 01:49 PM John Wake wrote:

> I think you are going to wonder why the hell you didn't buy in 2009
> when interest rates were crazy low.

That might happen. I'd give it about a 10% probability, and only that much because I believe there is that much of a chance that Dollars will begin to lose purchasing power on a quick scale.

I'd give 90% probability that people will be wondering in 2010 and 2011 if the bottom for residential housing will ever get put in.

There will be a lag time, after our government quits lying to us, before we can assess what constitutes fair value for housing. Right now, fair value depends completely on which set of doctored data you're relying on.

I don't know about anyone else, but for me, I don't see any credible sign that the bottom is getting close.

May 19 07:22 PM

[Mad Hedge F...:]

There are green shoots in Las Vegas too. The Las Vegas residential market has broken every record with the speed and the viciousness of its collapse over the last two years, with the median price plunging 56% from $360,000 to $160,000. Driving around the outskirts of the city there is no shortage of half finished neighborhoods, complete with vacant shopping malls. But after a near shut down in December, it appears that the market has hit at least an interim bottom. In March, a halving of the price produced a doubling of the volume, with new sales jumping from 1,954 to 3,626 units in a year. Bargain basement buyers are definitely chewing through record high inventories, as they are in other black holes like Sacramento and Stockton, California. I don’t want to get too excited here, but this is what bottoms look like.

May 19 11:21 PM

[Sean in CA:]

there will never be a rebound. just a descent to sanity.


On May 19 05:39 AM Kirill wrote:

> Good, thank God we are seeing signs of rebound!

May 20 01:28 AM

[zagrebzagreb:]

I have to wonder if the Fed really will raise interest rates significantly with any economic improvements.

Previously, they kept rates low - though they would deny it emphatically - for political purposes. I think this is pretty obvious in retrospect. There is such a short-term focus in our collective mind that we still expect a genuine turnaround in months, not years, depsite the fact that this is a massive world-wide recession. Low interest rates (cheap money) is the easiest most politically popular 'solution' to economic distress... never mind the structural damage.

My point is, I wouldn't bet too heavily on that mortgage payment being significantly larger in a few years.

May 20 08:20 PM