Pollack: Housing bubble trouble?

By Elliot D. Pollack & Co. | Rose Law Group Reporter

For about 22 consecutive months, Maricopa County has led the nation in housing price appreciation. In the last year, prices are up somewhere around 20% according to several sources. The Information Market suggests that prices for May 2021 are up 43% since May 2019. And in May of this year, the median sale price of a resale home surpassed the median price of a new home, something that is rarely seen. Prices are rising due to (1) limited for-sale inventory and (2) demand as Greater Phoenix continues to see in-migration.

So are we in a bubble? A bubble is typically driven by a surge in asset prices that is fueled by irrational behavior and disconnected from fundamentals. By that measure, what is happening in housing today is the opposite of a bubble and should help drive the economy. While the impact of the Great Recession and the collapse of the housing market is still a fresh memory, the damage to the economy was from the subprime mortgage fiasco. There is little evidence today that lending standards are anywhere near those of 2004 through 2007.

The issue today is that there are just not enough homes to meet demand. Nationally, the NAR says there are 2.1 months of inventory on the market. In Phoenix it is less than one month. Builders are faced with shortages of supplies and labor. Homes can’t be built fast enough, and many homeowners are sitting on the sidelines knowing that if they sell their house, they may not be able to find another one to buy.

Some observers believe that it will be quite a while before supply overwhelms demand. The demographics of the population provides a huge tailwind for housing. The key is Millennials and those behind them. They make up the bulk of first-time homebuyers and their numbers will keep growing over the next decade.

The hot housing market will eventually cool as supply catches up to demand. But in no way does this runup in the market suggest that a bubble has formed similar to what we saw 15 years ago. The age of high-risk derivatives is gone as financial regulations have prevented a repeat performance. Rather this market is built on a solid foundation of homeowner’s ability to pay a mortgage. We just need more housing.

U.S. Snapshot:

  • The U.S. employment increased 559,000 in May but were below expectations of 671,000. This was the fifth consecutive month of positive growth and brought the 2021 growth to 2.4 million jobs. Payrolls for March and April were revised upwards by 15,000 and 12,000, respectively.
  • The bulk of the job growth was in Leisure & Hospitality (292,000), Professional & Business Services (87,000) and Government (67,000). These three super-sectors accounted for 446,000 or 79.8%. Only Construction and Financial Activities had job losses for the month.
  • Since the recovery started, 14.7 million jobs have been added (65.9% of job lost) and the unemployment rate has recovered to 5.8% from a high of 14.8% a year ago.
  • ISM’s manufacturing and service indices increased for the month in May and remained well above the 50% cutoff. The manufacturing index improved to 61.2% from 60.2%. The service index reached an all-time high level of 64%.

Arizona Snapshot:

  • Maricopa County’s median resale sales price surpassed the new-home price in May, according to the Information Market latest data. The median resale price of existing homes was $393,000 and the price of new homes was $391,475. The only other time this happened in the last 20 years was in June 2005 at the height of the housing boom that led to the Great Recession. Normally, new housing prices are 25% to 30% higher than resale housing prices. Year-to-date, total sales volume is up 25.2% from a year ago.
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