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Wow, there sure is a lot of press on the “Real Estate Bubble”….
Is there a bubble? If so, is it going to pop, burst, explode, grow or shrink?
Who knows….. One thing that is certain, the Phoenix market can not, and will not sustain the appreciation rates we’ve seen in the past year. I’m not an economist, I don’t pretend to know everything about what moves the real estate market. But one thing I do know–we won’t see 50% appreciation rates year after year. It just can’t keep happening.
Just do the math…
FOR EXAMPLE (and it’s only an example!!)
Say the appreciation rate is 50% and stays that way for five years.
You buy a home in 2003 for $200,000
In 2004, that home would be worth $300,000
In 2005, it’d be worth $450,000
In 2006, it’d be worth $675,000
In 2007, it’d be worth $1, 012,500
And in 2008, it’d be worth $1,518,7500
Sorry, but the rest of the economy (including your paycheck) simply isn’t going to support a home increasing in value from $200,000 to $1,518,750 in five years.
It’s completely unrealistic to expect our local appreciation rates to continue to increase at this rate.
Look at what the monthly payments on the above example would be:
The $200,000 home in 2003 would cost you (roughly) $1,200 a month.
The $300,000 home in 2004 would cost you (roughly) $1,800 a month.
The $450,000 home in 2005 would cost you (roughly) $2,700 a month.
The $675,000 home in 2006 would cost you (roughly) $4.050 a month.
The $1,012,500 home in 2007 would cost you (roughly) $6,075 a month.
The $1,518750 home in 2008 would cost you (roughly) $9,113 a month.
And that’s if interest rates stay as low as they are right now.
A lot of people can afford a $1200 a month mortgage right now. How many can afford to pay $9,000 a month for a house right now? Think there will be more people that can afford that in five years? Maybe a few, but certainly not enough to support a real estate market.
Basic economics here folks. If the market continues to rise like this, no one will be able to afford a home. If no one buys homes, the prices drop until people can afford it.
So will the bubble “pop”? Depends on how you define “pop”? In my opinion, current appreciation rates are not sustainable. Is that a popping of the bubble? I don’t think so. Some do. I think appreciation rates will drop to historical levels. Since 1968, home prices generally have risen between 1 and 2 percentage points faster than the overall rate of inflation. (http://realtytimes.com/rtcpages/20051116_appreciation.htm)
Long-term statistical averages have a way of evening out. (Hence the term “average”). Home ownership is a great investment. In addition to appreciating in value, you get tax benefits (at least for now…) and you get the satisfaction of owning your own home. It’s hard to put a price on that. And no matter what happens to this “bubble” (or the tax laws), home ownership will continue to be a good thing.
I’ll close with one more math example:
I bought my home in 1999 for $180,000. Today I could sell it for $400,000. Of course to live in a similar home, I’d have to pay $400,000 for a new one. Trading in my mortgage payment on a $180,000 loan for a $400,000 loan payment is not appealing to me, At all. But it’s nice to know my investment has grown. If the value of my home DROPS by 10%, my home will “only” be worth $360,000. But look again at what I paid for it… if the value of my home drops 10%, it will still be worth TWICE what I paid for it 6 years ago. I willnot have “lost” $40,000, I will have gained $180,000 in home value.
Doubling your money in six years is an incredible investment any way you cut it.
So don’t freak out if home values drop a little (and they just might). Look at the TOTAL picture. And keep in mind that even if values drop, they are almost certain to rise again…
Go to ThompsonsRealty.com
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Regarding the sustainability of such high appreciation rates, I agree. I’ve told my wife that repeatedly every time she tried to project the value of our home out for more that a year or so.
I have a question about your “closing math example,” though. If you sold your home for $400K and bought another $400K home, wouldn’t that more or less be a “push,” assuming you take the proceeds of the sale and apply it towards your new home? (I’m not counting things like closing costs, etc.) Just curious.
Dave
Dave –
Thanks for visiting and commenting! You’re correct and make a great point. If I sold my home for $400K and bought another for $400K, I’d still have a $180K mortgage, *if* I put ALL the proceeds into the new home (Which isn’t easy to do when they hand you a big fat check at closing. I can’t tell you how many people tell us, “We’ll put all the proceeds into the new home” and wind up spending 20, 50, 100K and more on new cars, college education, trips, etc. It takes a lot of discipline to roll those funds into a new home. And just 10, 20K can make a big difference).
The drawback to selling and rolling proceeds into a new home in my particular situation is that I’d have a *NEW* $180K mortgage, as opposed to the one I have now that I’ve been paying on for 7 years. Since I have a 15 year mortgage, right now I’ve only got 8 years left. It’s to the point now where I’m finally starting to pay more toward the principle rather than interest. With a new loan, I’d be back to several years of basically interest only payments. (I’d have a bigger tax deduction with a new mortgage, but I kinda like having my current mortgage with only 8 years left to payoff… If I had a 30 year mortgage, the time I’ve spent paying the existing one wouldn’t be as significant.)
It’s tough to NOT project out that home value, but it’s *really* important not to do it. It provides a false impression of your home’s value, and if nothing else, sets one up to be disappointed. It won’t be long until we hear people COMPLAINING because their house value “only” went up 10 or 15%…
Now as for your Steelers…. I’m a life-long Bronco fan. And those Steelers made my Broncs look like a high school team. They are on an incredible roll, and if the same team shows up that beat Indy and Denver, then the Seahawks don’t stand a chance. Good luck in the Super Bowl!
Jay
My name is Susan and I live in Orlando. Is there a way to get this blog feed in my email?
Can I subscribe to this blogs feed? Ron. Texas
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Wow, Jay…
Not too many bloggers can reference a blog post from over 3 years ago, and say “I told you so”. That’s just an example of why you’re THE Phoenix Real Estate Guy!
Thanks for keepin it real!
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I also am impressed you could find a post from 3 years ago and show that you had called out the crazy home inflation that was occuring in your area-great job! Yes, you are THE Phoenix Real Estate Guy!
Yes, I really like how you can say “look, I told you so!” But I have to agree, anyone looking could have realized it was coming; the example of 200,000 to 1,518,750 was perfect in showing how unstable that kind of growth was.