Is the Valley headed toward the collapse of another real estate bubble?
Troubling signs are pointing in that direction, according to real estate economists.
But they also add a few caveats that could lessen any future market downturn.
In an article in the latest issue of the Arizona Blue Chip Economic Forecast, a publication of the W.P. Carey School of Business at Arizona State University, Scottsdale economist Elliott Pollack said the state’s explosive residential market suggests the Valley has entered a period of "irrational exuberance."
He cited the skyrocketing number of building permits issued by Valley cities, growing 7.6 percent in 2002, 22.6 percent in 2003 and in line to set another record this year.
"There is no sustainability to the numbers we have seen so far this year," Pollack said.
He said between 10 percent and 20 percent of the demand for new and resale homes is coming from investors who don’t plan to live in them but anticipate either "flipping" them at higher prices upon delivery or renting them for a few years before selling them to reap substantial appreciation.
He cited a survey indicating that 28 percent of home buyers think prices are going to increase by 20 percent a year for the next 10 years.
"This is an almost impossible outcome," he said. "Thus, unrealistically optimistic expectations, almost the definition of a bubble, seem to be in place in many housing markets."
Pollack added, however, there are factors that could prevent a future slowdown from becoming too severe. Normally the reason for an end to a housing boom in Arizona has been a national economic recession, but the next recession looks far away, he said. Also mortgage rates remain relatively low by historic standards, and new residents continue to move to the Valley, creating an underlying demand for housing, he said.
Thus, if there is a market slowdown, prices probably won’t decline but simply will not rise as quickly, he said.
Similar views are held by Jay Butler, director of the Arizona Real Estate Center at ASU, who sees some similarities to the late 1970s and late 1980s, when the Valley suffered real estate slumps.
Typically slowdowns are preceded by rapid price increases, he said, noting that the median price of a resale home in the Valley has risen 10.4 percent in the past year to $177,500 while the median price of a new home has jumped 12.1 percent to $196,000.
"That’s a significant rise," he said. "If prices go up too fast . . . it raises the question of affordability."
Butler also sees warning signs from the Las Vegas housing market, although he said the Valley doesn’t always follow the Las Vegas pattern.
On Monday, Pulte Homes, a major builder in both markets, said its third-quarter earnings will be lower than expected because of weaker prices and sales at its Las Vegas developments.
But Mark Marymee, director of corporate communications for Pulte Homes, said company is not seeing the same trend in the Valley.
"We got a little ahead of the competition in aggressive pricing, but (Las Vegas) is still a strong market," he said. "Our sales numbers are still strong everywhere, and they have been especially strong in Phoenix."