John Karadsheh
It is hard to believe it already has been 10 years since the start of the national real estate crash that led to the Great Recession.
It was a crazy ride down to the abyss and an even more interesting climb back to a normal market. We all know things are better, but where are we really?
The Buyers Are Back
First of all, both locally and nationally, housing demand is up. At long last, first-time homebuyers are entering the market in droves. Millennials made up 52 percent of home shoppers in the spring, and their demand is only expected to increase. One reason for that market activity is simply that millennials are working. Employment in the 25 to 34 age group is at 79 percent and is finally back up to 2006 levels.
Many of those first-time homebuyers should have purchased years ago, but the economy limited their ability to do so. Other natural market movement, such as upsizing, downsizing, corporate relocation and household division (divorce, adult kids moving out) also has returned with a burst of activity.
Sold in 24 Hours
In some sense, our normal market conditions were paused for the last decade, and now we have suddenly awakened to a new reality. Our population has increased, and with it, housing demand has increased, as well. However, the amount of new inventory required to meet the demand simply was never constructed. Even though we have been aware of the looming low inventory issue for years, it is now a reality. In the market segment below $275,000, homes often sell in a day at list price or over.
New single-family permits are up 12 percent already this year, but they are just half of what they were at the peak. Nationally, we still are below normal construction levels, with only 0.7 single-family household starts per household formation (at the peak, it was 1.4). Raw land also is more expensive, making it necessary for homebuilders to increase the price of entry into new housing. So, even though construction is booming, it is not enough to meet demand and will continue to drive price increases across the board.
So, How Robust Is the Market?
Good old-fashioned supply and demand has led 31 of the 50 largest U.S. metropolitan areas back to pre-recession price levels. Nationwide, realtor.com data shows that listing prices have been up by double digits for the majority of 2017. In Maricopa County, single-family home sales are up 18 percent year over year (Sept. 2016 through Sept. 2017). While it may feel like a frenzy in segments of the market, according to the Cromford Report, just 14 percent of homes in Maricopa County have sold over list price this year as compared to 39 percent in 2005. This is a great indicator that our market is stable and not unnaturally inflated.
“As we compare today’s market dynamics to those of a decade ago, it’s important to remember rising prices didn’t cause the housing crash,” said Danielle Hale, chief economist for realtor.com. “It was rising prices stoked by subprime and low-documentation mortgages, as well as people looking for short-term gains—versus today’s truer market vitality—that created the environment for the crash.”
Don’t Let the Market Activity Scare You
The recession left an indelible imprint on housing consumers. So, it is no surprise that we regularly get asked if today’s activity is just a precursor to tomorrow’s crash. In addition to having a valid supply of real buyers (and not just speculators), we have much stricter lending regulations as a result of the Dodd-Frank Act. Lenders now have to show that a borrower can repay their loan. As a result, the median 2017 home loan FICO score was 734, significantly up from 700 in 2006. The low end of the range has pulled up, as well. In 2017, the lower 10 percent of borrowers have had an average FICO of 649, up from 602 in 2006. The stricter lending standards, as well as rising prices, have also kept home flippers in check.
What Else Is Driving the Housing Market?
Locally, the answer is growth. We are the fastest growing county in the country, with a growing workforce in diverse industries (not just construction). We have low unemployment of just 3.9 percent in Maricopa County compared to 10.1 percent in 2010. Compared to many other metro markets (Seattle, San Francisco, Denver), our housing is also more affordable. Nationally, the rising stock market and stronger economy is helping boost consumer confidence.
So, 10 years later, we can say confidently the housing market is back but better than before. Our local growth is being built on diversified industries, our housing growth is the result of real demand, and our lending practices are better designed to make sure the foreclosure mess stays in history books.
John Karadsheh is the Designated Broker for KOR Properties. He has been a Multi-Million Dollar producing agent for more than 15 years and is an Accredited Buyers Representative (ABR) and Certified Residential Specialist (CRS). In 2014, John was voted the No. 1 Real Estate Agent in Arizona by Ranking Arizona. You can reach John at (480) 568-8684, or visit his website at KORproperties.com.
KOR Properties is a boutique real estate brokerage serving the Valley of the Sun and the creator and founding sponsor of Mesa Food Truck Fridays.