Phoenix Housing Market Has Begun Recovering and the Pendulum Shift of House Prices

My recent observations of the Phoenix Housing Market have led to one conclusion: Many areas in Phoenix have already begun recovering – the pendulum has shifted.

Historically, the Phoenix market has appreciated between 4 and 6% annually for more than three decades. It is nothing too exciting; just slow methodical growth which is ideal. The Phoenix market has been out of equilibrium since the beginning of 2004 when home prices started accelerating. Like a pendulum swinging wildly, the Phoenix market started to see extreme value increases. 2004 saw Phoenix house appreciation nearing 16%, only to then skyrocket up to more than 40% in 2005. In 2006, the market start settling down, as the pendulum began swinging back it appeared that a soft landing was possible. By 2007, the homes started losing value, almost a negative 5.5%. Disaster struck in 2008, with a loss of 20.92%. The market continued to react in 2009, dropping an additional 16%. In 2010, the market had started calming to a loss of 7.9%, with the majority of the loss coming from the first half of the year. This slight shift was subtle, but served as the turning point for the Valley housing market. Insubstantial good news can sometimes snowball into substantial good news – and that’s where we are today.

We have hit rock bottom in the established areas of the Phoenix market – those neighborhoods where equilibrium was established prior to 2004 before the home prices started accelerating. Homes located in the outlying areas continue to lose value, primarily because the core level of necessary amenities in these areas cannot sustain the general demand from a significant number of primary home buyers. Unfortunately home builders reading the market badly in 2005 through 2007 over built and saturated those markets. Sadly, the neighborhoods located in the periphery of the Phoenix market should actually be torn down and returned to farm land or desert. It will be years before the available stock of those homes will be absorbed. The nature of those neighborhoods is already being established as slums with a preponderance of vacant rental properties and squatters.

The home prices in Phoenix are still not close to being in a balanced position. The pendulum is almost as far from center as it was in 2006. Just as prices were drastically inflated, home values are now artificially low. In addition we have a growing number of qualified home buyers sitting on the fence watching market trends and listening to forecasters/historians interpret the current value of housing. As soon as a major story breaks with the announcement that home prices have hit the bottom and have started their rise, the Phoenix market will again experience a rush of home buyers and the pendulum will begin to swing wildly. It is doubtful that the market in the short run will return to values that were witnessed in 2005 and 2006. Neighborhoods that have been undervalued will see the greatest gains. Some areas are already seeing buyers returning as home values in the stronger neighborhoods have already started their assent. I’ve already seen several deals in the last few weeks go for more than the asking price – on fairly priced homes.

The Phoenix Housing Market will eventually demonstrate the classic example of the free market system, where supply and demand will establish a true value. Buyers have already started to bid up the price of homes found in neighborhoods that provide the most services and amenities; proximity to jobs, excellent transportation, dynamic schools, and neighborhoods with large amount of options that address leisure activities. This next generation of home buyers is more astute. They have begun to analyze the true nature of potential neighborhoods and how they fit in with their “Quality of Life” demands as more and more buyers have grown dissatisfied with unnecessary commutes as a trade off for a larger or cheaper home. Most importantly, these buyers are starting to view their home as shelter to satisfy their needs versus a short term investment opportunity. Hopefully these buyers will calm the wild swing of our housing pendulum.