Although prices have risen dramatically over the last year, the situation is very different from 2005. Let us examine the number of active listings across all areas and types in the ARMLS database, using the monthly active listings chart:
We have selected 2005, 2020 and 2021 and in 2005 we can see that March and April counts were extremely low that year. However the rapid increases in price and massive building programs for new homes turned the situation around in just 6 months. Demand dropped because of the high pricing and supply increased because builders opened new subdivisions as if there were no limit to the market, causing supply to jump. The market stalled as supply trebled in just 9 months.
This was the popping of the bubble, which was cleanly audible even before Michael Burry figured it out. Unfortunately few people took any notice because they had somehow come to believe that house prices never go down. House prices are a trailing indicator and it was mid 2006 before they started to go down across Greater Phoenix. The first signs of this cropped up in the City of Maricopa which saw prices weaken during the fourth quarter of 2005. The San Tan Valley area was also an early downward mover.
In 2021, supply has increased during the last 7 months, but not by very much and has even declined since October. It remains lower than it was in 2020. Prices are very unlikely to go down while supply remains this low.
The idea that supply will increase dramatically because of people coming out of forbearance is unsound. The volume of borrowers in such difficulties is too low to make much of a difference to the market as whole.
So how could the situation change?
Well a lot of the current demand is coming from large scale investors buying both new and re-sale homes to rent to tenants. If this demand were to suddenly evaporate, then we could see demand drop by between 500 and 1,000 homes per month. This would cause supply to grow and it could even double after 12 months. However, there is almost no sign of these investors losing steam right now. If anything they are getting more motivated. But one day they will ease up and when they do, this will cause a significant softening of demand. What could cause them to ease up? Finding it hard to lease their homes to tenants is a likely cause. At the moment, there is no shortage of tenants, but if they keep adding to the pool of rented single-family homes, they will one day run short of prospective tenants. They will start to lower rents in an attempt to attract tenants from other properties.
In this scenario, the first sign of a problem for home price appreciation would be a fall in rental prices. My advice would be to keep an eye on the Rental Price Chart Below.
Commentary by the crew at the Cromford Report.