A New Crystal Ball

John Mijac, Managing Broker
Long Realty Foothills Office


No one likes uncertainty and few things breed more doubt than a shifting market. We want a crystal ball, but fortune telling is risky, and REALTORS® know better than to predict the future. Nevertheless, I’ll give you an educated guess about the coming year. Before that, let’s dispel a few common misconceptions. 

the coming wave of foreclosures! Many pundits note “an unsustainable rise” in house prices over the last few years. Their assumption is we are repeating the upsurge in prices from 2005-07 and we might repeat the 2008 collapse. Nothing could be further from the truth. Remember, lending rules were substantially tightened after the bubble, and most buyers in the last 2 years are markedly different. Many have bought a home to own and now live in the property (rather than buying as an investment), and the equity in these properties is sizeable. Even if there were a financial crisis, equity alone would prevent a recurrence of 2008. This chart from NAR demonstrates the point…we are at historically low amounts of foreclosed properties…it was less than 1% of all sales in June.

Next, some Buyers are holding out thinking two things…that there will be a vast reduction in home prices and interest rates will plummet because of a recession. In my opinion, both thoughts are off the mark. First, although I do believe an adjustment is on the way, most experts dispute that idea. Fannie Mae expects a 4.4% rise, Freddie Mac 4% and NAR comes in at a 2% rise…only Zelman agrees with me and anticipates a 3% reduction. Depending upon your source, home values in Arizona have averaged a rise of between 6 and 8% per year for many decades. It’s true that if we look back over the last two years the rise has been closer to 21% and that looks a lot like the last bubble. However, this does not account for the many people who came into the market to create new households after the recovery. That pent up demand accounted for a significant part of home purchases. The chart above, from Trading Economics, shows
all sales in Arizona over the last 22 years. The Line (my addition and mapped over the graphic), shows what the average rate of increase of sales might be. Of course, this is the number of sales, not the price, but price points correlate nicely with the numbers. Here is historical data from the Southern Arizona Multiple Listing Services (compiled by Infosparks showing median price over the last 13 years in Southern Arizona).  This explains why I am predicting a drop, but not a substantial one. The rise in value we have experienced is not all bubble, some part of it was warranted.

Concern over a recession is also likely overblown, however if the war in the Ukraine continues throughout next year with subsequent tightening of energy and food worldwide, or if there is an additional financial crisis abroad then the chances for a serious recession are more likely and will exacerbate the bumpy housing market. However, if we imagine those possibilities, the results are not doom and gloom. In the event of a deeper recession, interest rates are more likely to fall, inventory will probably increase and home prices will at least stabilize if not come down a bit further. In that case the pool of Buyers will expand, and a later rebound is certain. 

Additional factors to account for are the purchases in the last 3 years by institutional Buyers (often called iBuyers). Some of these entities hold a substantial inventory of homes purchased at the height of the market. It appears that at least a portion of these properties are now being released at a loss. I do not have a grasp of how many properties are owned institutionally, but if they sell off their entire inventory quickly, that will affect the market.

Nevertheless, this prognosticator believes we are changing to a more balanced market, and it’s overdue. Ultimately, balance is good for buyers, sellers, and real estate agents. It may seem the opposite, but only because we are used to the madness of the last three years. People will still need to buy and sell houses. Going forward, buyers must adjust their wants closer to their needs and sellers should realize they need to cooperate and adjust their expectations. Agents? All we must do is take a breath and go back to basics—a signpost in the yard is no longer enough.