Analysts maintain that we are still in the early stages of the housing cycle. For those who experienced the "normal" housing market from 1992-2000 and then from 2002 - 2006, it may seem apparent that we are still below the mid-point of the cycle. The local real estate market is certainly not as strong as it used to be. However, after nearly 8 years of an anemic market, many mistake the first few indications of growth as a sign that we have returned to "normal" -- just as after a long winter one is overly-eager to stash away their winter coat at the first signs of Spring. With that being said, I think very few people expect the market to return to the over-exuberance of 2006-2007. For a reminder that we are still in the early stages of the real estate cycle, we turn to analyst reports, market data and local market sentiment.
Morningstar believes that the mid-point in the real estate cycle (halfway from trough to peak) will be reached in 2019. Between 2014 and the mid-point of the cycle in 2019, they expect annual new home sales to rise by an impressive 61% - at which point they will at long last reach the 40-year historical average.
JP Morgan noted that on KB Home's latest earnings call, KB Home revealed that they were "'very encouraged' with early indications of the Spring selling seaons." Additionally, they noted that "Phoenix has stabilized and is improving." It is key to note that while builders are "encouraged," they do not claim to be back to business-as-usual (e.g. most of the 1990's or early to mid 2000's).
Goldman Sachs believes that the recent decline in homeownership rates is actually a sign of growing strength in the housing market. A decline in homeownership rates can be caused by either a decline in the numerator (the number of homeowners) or a faster rise in the denominator (the number of households). In this case, Goldman Sachs believes that both renters and homeowners are growing, but renters are growing at a faster rate. Their view is that years of delayed household formation , a result of the economic recession and demographic trends, will be followed by a sharp increase in household formation. Most importantly, this in turn will drive the housing sector (both multi-family and single-family residential) back toward normalcy.
Homeownership rates hit historic highs in the run-up to the 2007-2008 housing crisis. In 2006 the homeownership rate (the % of households that own their own home) reached 69%. As a result of excessive sub-prime lending, many new homeowners in the run-up to the crisis were arguably not financially equipped to purchase their homes. The pendulum had shifted too far towards high homeownership rates. Since 2006, homeownership rates have steadily declined. In Q4 of last year they reached 64% - an historically low level not seen since before 1995. Today, one could make the case that the pendulum has shifted too far towards low homeownership rates due to tight lending standards, lack of consumer confidence and low household formation rates. However, local market data suggests that the homeownership rates are stabilizing back toward their long-term historical average of 66% - 68%. In March 2015, the number of residential rental closings was 23% less than one year ago and 29% less than two years ago. Rising rents is one of the main reasons why many people are moving out of their rental units and into new homes. This trend is expected to continue for the next several years and should be a source of sustained demand for both new and existing single family housing.
Local Market Sentiment:
The local market sentiment is currently mixed. While few real estate investors, brokers or market observers would claim that we are in a "strong" market, most would note that the market outlook continues to gradually improve due to employment growth and economic growth. We believe that this recovery still has legs to run since the signs of that improvement are inconsistent and concentrated in certain areas. For example, the higher-end of the market for single family residential homes has taken the lead. Several new high-end subdivisions in North Scottsdale & Cave Creek have sold out or have only limited inventory remaining. Additionally, the mid to upper-end subdivisions in NW Peoria have seen relatively robust sales over most of the past year. However, in many sub-markets (such as Maricopa, Buckeye and Glendale, to name a few) the housing market has yet to gain momentum. We expect to see the entry-level to mid-level single family housing market rebound over the next several years.
Arizona Regional Multiple Listing Service (ARMLS® COPYRIGHT 2015).
Goldman Sachs Research.
Krapfel, James. Lennar Report. Morningstar Equity Research. March 19, 2015.
Rehaut, Michael. KB Home Report. JP Morgan Research. March 20, 2015.
United States Census.
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