I’m in the midst of reading George RR Martin’s Songs of Fire and Ice, more commonly known as Game of Thrones thanks to the first novel and the HBO series, for the second time. And in the second book (as well as the second season) there is the emergence of the red comet, a comet so bright it can be seen in the daylight (although, oddly, it never seems to change position in the sky which is, of course, impossible.)
Everyone who views the comet – from Daenerys to Catelyn Stark to Robb Stark to Joffrey Baratheon to the men of the Night’s Watch – see a different omen when they look upon the comet. Not surprisingly, in the vast majority of cases, the comet is viewed as a sign of the viewer’s ascension, or that of their liege lord.
Only a rare view look at the comet and see it for what it is, a comet. No more, no less.
One of the most consistent search terms that leads new readers to this website is “real estate forecast 2013” or a variant, such as “health of the Phoenix real estate market.” On the surface, it would seem these folks are looking for objective information about the state of the market. But in reality, the vast majority of the people looking for this kind of information or searching for some affirmation of their own views. Otherwise, they would come to the logical conclusion that the future can’t be predicted.
Here are the bland facts … there are 9,500-odd detached homes for sale in Maricopa County right now which, at current sales pace, means there’s about six weeks of inventory. If you’re a seller, particularly under about $175,000, it’s a great market. If you’re a buyer in that same price range, not so much. And if you’re an FHA or VA buyer, it’s hell on earth.
As for what’s going to happen?
Interest rates have been moving up and just posted the largest weekly increase in 25 years. The Fed isn’t going to be throwing cash into the market forever.
Appreciation has been driven almost exclusively by the lack of supply. As values rise, more and more home owners find themselves with equity and, if they were so inclined, could pick up stakes after being trapped in their homes for the past several years.
This remarkably thin supply of homes can’t last forever.
Bottom line is there is no way the double-digit appreciation most everyone has seen in the past year can be sustained. Sellers do find themselves with equity but then fall victim to two issues, one real and one perceived. Real – the prices of the homes they may want to move into also are rising. Perceived – the gambler’s downfall, the belief that if they hold out just a little longer they’ll get another several percentage points of appreciation.
It’s human nature. We beg and plead and pray for deliverance, in this case to get back to even, and then decide to keep riding the improbable wave rather than give thanks, cash out and move on.
Having said that it’s unsustainable …
Many buyers look at the rising prices and are secretly hoping this is another bubble, that values will come tumbling back down to where they were two years ago … and that’s equally as unrealistic and equally as pointless. Because, should values drop, these same buyers then will wait until they’re sure we’ve reached bottom. Except no one knows if we’ve reached bottom until you see the rebound, and then the cycle starts again.
Without the garbage loans on the market these days, it’s unlikely we’ll see people – investors, in particular, walk way in droves when they’ve had to put 20 percent down on a property. That would be plain stupid. And that’s what fueled the bubble collapse.
So if not a bubble burst, what will happen as interest rates and/or inventory rises?
Appreciation will level off and eventually get back to the historic norm of 3 to 5 percent annually. Sellers gambling on higher values will realize they’re looking at a wait of years, not weeks, to get to the new heights they want. Buyers will realize there’s no sense waiting for the next 40 percent drop.
Not that this will stop them from searching, hoping, and reading whatever portends they choose into the dry facts of where things stand.