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By Nicole Hedges | Agent in Scottsdale, AZ
  • Phoenix Supply Vs. Interest Rates

    Posted Under: Home Buying in Phoenix, Financing in Phoenix, In My Neighborhood in Phoenix  |  June 14, 2013 3:18 PM  |  301 views  |  No comments
    This is a timely message, as it speaks to what many may be concerned about in the current housing market atmosphere of generally rising prices, high demand, low supply, but new (albeit inevitable) evidence of a rising trend in interest rates.

    While the sample data reported below is from Maricopa County, the fundamentals of this message apply statewide. 

    There is no inverse correlation between interest rates and home prices. In the past, home prices have often gone up when interest rates went up and they have also gone up when interest rates went down. Home prices only go down in unusual situations when supply is well in excess of demand. Prices have fallen like this in the Phoenix area between 1989 and 1991 and between 2006 and 2011. Between mid 1989 and mid 1991, the fall in prices was about 9 to 10%. During this time 30-year fixed mortgage interest rates fell from around 10% to around 8.5%. No inverse correlation there.

    Between June 2006 and August 2011 prices were also in a strong downward trend, though most of that decline happened between 3Q 2007 and 1Q 2009. Between 2006 and 2011 mortgage interest rates dropped from around 6.75% to around 4.5%. No inverse correlation there.

    Interest rates went up sharply during 1994, during 1996, between 1998 and 1999 and between 2003 and 2006. Did prices go down during these time. No they did not, they went up just like the interest rates. No inverse correlation there.

    During all these times the direction of home prices and the direction of mortgage interest rates were the same. At other times they can move in opposite directions. There is no clear correlation either negative or positive. The fact that the majority of people believe there is a correlation, does not change the reality.

    Prices have moved strongly upward between August 2011 and June 2013. During that time interest rates drifted down from 4.5% to around 3.5% and very recently have moved back up to around 4%. There is little evidence that low interest rates had any major influence on the market pricing. Demand has been only slightly above normal during this time despite the very attractive interest rates. It was lack of supply that drove these huge price increases.

    So now that interest rate have finally started to rise from a ridiculously low level, some people have said this is going to cause home prices to fall. There is no logical basis for this assertion at all.

    When interest rates rise, this causes affordability to fall. However affordability does not equate to demand. Demand is one of the two key factors that influence prices, affordability is not. The highest demand we have seen in the past 30 years was in 2004 and early 2005 when affordability was extremely low.

    In fact increases in mortgage interest rates often cause an increase in demand in spite of falling affordability. That is because many people expect the upward trend to continue, so they want to lock in the current rate by getting a mortgage now before it rises higher. This "sense of urgency" phenomenon is very real and has been observed many times in the last 60 years and confirmed by many experienced Realtors®.

    Now if interest rates were to increase dramatically and suddenly, this could destroy the "sense of urgency" because people would immediately feel they were too late to make the move. I am talking of a jump from 4% to 9% or something of that nature. But is that really likely? I doubt it. The government likes to interfere with interest rates and they are unlikely to let that happen.

    Gentle and predictable rises in interest rates will actually be good for the housing market because the rising gap between low and high rates will probably encourage lenders to be a little more flexible with their underwriting practices. Opening up the market to more people will have a much larger effect than the increase in their monthly payments. It's no good being able to afford a mortgage payment if you can't get approved for it.

    Of course demand is not sufficient to determine prices. Supply is the other key factor. The foreclosure crisis has caused us to under-build new homes by a huge amount for over 5 years. This is still creating a supply hole that has been largely unrecognized by the general public. This effect is likely to dominate the market for a very long time, except in areas where the population is shrinking. Only the builders can create significantly more supply. It is not coming from lenders, it is not coming from landlord investors and it is not coming from ordinary homeowners. Ordinary homeowners and landlord investors usually involve homes that are occupied. So when they sell they do not create net new supply. The families or individuals living there move into a new home, often not too far away. This means they add 1 to supply and 1 to demand. The net effect is zero. Only when that home is somewhere other than Greater Phoenix do we see an increase in our supply. For the foreseeable future those people are likely to be outnumbered by the people who are moving here from somewhere else, who add 1 to demand and 0 to supply.

    This housing cycle still has a very long way to run before it turns down again. None of the negative factors mentioned by observers recently have enough market power to overcome the dominant effect of the chronic supply shortage.

    From The Cromford Report Daily Observation

  • Upward Pricing Pressure in Phoenix

    Posted Under: Home Buying in Phoenix, Home Selling in Phoenix, Financing in Phoenix  |  January 29, 2013 11:52 AM  |  260 views  |  No comments

    To combine measures of supply and demand and adjust for seasonality, we use the Cromford Market Indexâ„¢. When this is above 100 then it indicates that demand exceeds supply and pricing pressure is upward. When it is below 100 it indicates that supply exceeds demand and pricing pressure is downward..

    Right now across the ARMLS territory we see the Cromford Market Indexâ„¢ at 172.8. That message is not vague. Long term pricing pressure is still strongly upward. There are areas where the Cromford Market Indexâ„¢ is much lower, but most of the local housing markets have a strong excess of supply over demand. Here are some of the local Cromford Market Indexâ„¢ values for the single family detached market:

    • Glendale - 228.8
    • Gilbert - 215.8
    • Tolleson - 214.0
    • Apache Junction - 209.5
    • Peoria - 208.5
    • Mesa - 206.5
    • Chandler - 204.3
    • Avondale - 197.6
    • Anthem - 197.0
    • Tempe - 194.9
    • Phoenix - 190.1
    • Paradise Valley - 171.6
    • Scottsdale - 170.3
    • El Mirage - 169.3
    • Cave Creek - 165.4
    • Laveen - 165.1
    • Fountain Hills - 163.1
    • Sun City -149.4
    • Sun Lakes - 140.8
    • Goodyear - 139.5
    • Sun City West - 134.1
    • Surprise - 129.3
    • Litchfield Park - 129.1
    • Casa Grande - 112.6
    • Arizona City - 110.8
    • Buckeye - 107.6
    • Queen Creek - 105.7 (dominated by San Tan Valley, the Town of Queen Creek is much stronger)
    • Gold Canyon - 91.5
    • Maricopa - 73.3

    There is typically a 12-18 month delay between changes in the Cromford Market Indexâ„¢ and a corresponding change in average sales price per sq. ft.. Note that Queen Creek (especially the San Tan Valley area) and Maricopa (city) have already seen huge increases in average price per sq. ft. and this has already done much to lessen demand and bring out more supply. Maricopa's CMI is now moving higher having hit a low point of 65.5 in December.

    That 12-18 month delay is the 'predicting' part. Put another way, if everyone had been paying attention to this index in 2005 (see demand plummeting even as prices kept rising in my compilation graph below) many buyers would have avoided disaster. So now today's index would suggest prospective buyers could be making a serious mistake not jumping in if they can find the right property. Add to this that Lawrence Yun, chief economist for NAR is going around the country talking about the inevitability of higher interest rates. Kind of a no-brainer! Still, remember, for every point rates go up on a 80% loan is the rough equivalent of paying 10% more for the house (because of what the difference in payment would amortize).

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