The 20 years historical average for real estate appreciation
in the greater Phoenix area is between 5-6%. This means, when you average the
historical appreciation, taking in the highs and lows through a historically
stable period, you will average 6%. Keep in mind, real estate is extremely regional,
thus in some markets appreciation may average 5% while others will average 7%
when broken down to specific regions within a city. For the purpose of this writing, I broke the average down over a 20 year period from three very different
areas of Phoenix and averaged the appreciation.
In the greater Phoenix market, I have taken this data and
worked backward to a point in time where we know prices were in relatively stable 20 year period. In
addition to price, average number of sales should be considered as well. Taking
into account that the 14 year average sales numbers in the Greater Phoenix
market is 91,463 homes per year, is also vital when predicting a bubble with my logic being higher sale prices with exceptional activity would be a strong indicator of a bubble. Knowing these two vital statistics, we can
assume that annual appreciation above an average 6% appreciation over any 20
year period combined with increased sales would indicate a possible bubble, much like we saw in 2006.
Average sale prices in the Greater Phoenix Area in 2001 were
just shy of $174,000. Today that sale price is averaged at $316,500.00. This shows a market average of 3.5% annual
appreciation. Thus in examining the market today, it indicates no sign of over
inflation and prices should continue to rise. The second indicator of a bubble
would be excessive purchasing, however this also does not seem to be the case
as annual purchases remain within the historical averages at 95,000 for 2017.
Knowing Phoenix is not in a bubble can provide some security
for the long-term investment of real estate, there are some concerns for the
shorter-term growth when looking at all market indicators. The biggest concern
with regard to indicators would be the affordability index. Currently, Phoenix
has an affordability index of 85, which generally means 85% of all buyers can
purchase the median home in Arizona. However, affordability is affected by many
factors, most significant of which is rising incomes with rising interest
rates. If income levels rise by percentage to match increases in interest
rates, the affordability index will remain high, however if incomes become stagnant
and interest rates continue to rise, less people will be able to afford homes
and the affordability index will fall.
For short term investment, the safest investments are
currently at or below the median home prices in greater Phoenix area, around
$300K as inventory of these assets remain extremely low and the affordability
of these homes is not likely to be affected by a rise in interest rates. However, with an expected growth in salary of
3% in 2018, interest rates would be forced to rise by a minimum of .5% to truly
affect the affordability index. As this does not seem likely in the near
future, I believe it a safe bet to anticipate continued increase of homes in
all sectors of real estate throughout Q4 of 2018 and Q1 of 2019.
Jim’s Market Outlook….