Mission De Los Arroyos Report Archive - January 2006

Will Housing Prices Hold? Or Are We In For A Decline?    

Recent headlines have screamed, "Housing Slump Predicted." Is this true? That headline might sell newspapers, but most industry experts think otherwise.

There is little doubt that the sale of homes will slow down compared to last spring's selling frenzy. But most homeowners I talk with are concerned more about housing prices than the number of transactions. Is the significant appreciation we enjoyed last year in jeopardy? Will the price of our homes decline now as the "what-goes-up-must-come-down" theory suggests?

Market skeptics typically base their opinions on the traditional price-to-income ratio. However, the ratio many feel is more relevant is the mortgage-servicing-cost-to-income ratio. This data indicates that with mortgage rates still at a 45-year low, the cost of home ownership is still quite low - regardless of price appreciation.

What's more, the Phoenix market is particularly strong compared to the national average and, therefore, less likely to see a decline in prices IF there was one (and that's a big IF). The National Association of Realtors (NAR) considers the Phoenix market to be "very favorable" in at least three major market indicators: 1) three-year job growth, 2) net migration, and 3) favorable mortgage costs relative to income.

1) Job creation is certainly one of the most significant contributors to appreciating home values. According to the NAR report, 168,000 jobs have been created over the past three years in the Phoenix market. 

2) For years, Arizona has been recognized by the world as one of the most desirable places to live and start a business. As a result, the state and the Valley have been the benefactors of a positive net migration.

3) 30-year fixed-rate mortgage loans used to be the standard. Today alternative financing offers homebuyers attractive ways to buy more house for their monthly outlay. Today interest-only loans account for almost 40% of all loans and in 2004 adjustable-rate mortgages were utilized for almost 40% of transactions. In addition to the affordability factor for buyers, many see the fact that lenders are willing to provide more creative financing options today as yet another positive indicator of continued market appreciation.

Of course, attempts to forecast the future are fraught with potential and unforeseen factors that can have impact on any market. According to the NAR, significant increases in mortgage rates alone probably would not impact prices, nor would substantial job losses alone. However, a combination of both high interest rates (say, 10% or higher) AND significant job losses (75,000 or higher) could cause a single-digit reduction in home values. The likelihood of both these conditions seems to be highly unlikely.