Re: Cities to watch (good, neutral and BUBBLE?) - Posted by John Corey
Posted by John Corey on May 18, 2006 at 06:42:20:
Lets put aside market mentality and the effects from what might be called froth.
If a location puts up 65,000 new homes per year you would expect the increase in the demand for new housing to be 65,000. Hence there needs to be a lot of families moving to the area or existing families splitting into two (child moves out of the family home to start a family, divorce, etc).
If the supply and demand do not remain in balance then there will be too a shift in prices to compensate. Build too many homes and the builders start to slow down as they have excess inventory. They start to discount to get ride of the units that are completed as they need to move on to the next project. Build too few and people bid up prices or start moving further out as they have to live somewhere.
Lets also assume that independent of the number of units being built there is a 30% rise in prices. Have wages gone up by 30%? Over time if the price rises faster than what people earn you reach a point that no one can afford to buy their own home back. Hence the lower paid workers who are trying to get into the market, the children of present homeowners and other people not on the elevator can not buy. Unless there is a lot of rental housing at a lower price than the ownership route people stop moving to the area (or they commute a long distance).
There is a very clear historic connection between prices, income levels and the net job growth for an area. When one of the variables gets out of line something else has to give. If prices rise faster than the incomes and the population the prices will stop rising.
Phoenix is a bit special in that CA buyers with dumb money have poured in to speculate on the future values. How many properties were purchased by an investor who expects to lose money as a rental but is betting on the appreciation. If that is their bet and the appreciation cools down or stops while the monthly negative cash flow keeps showing up do you expect them to just sit tight? If they are there for appreciation and they are not getting a higher rate they are likely to pull up stakes and head to a different market that is ‘hot’.
Phoenix has seen periods of rapid growth before. Some ended with a major crash and burn. This time around that may not happen. Then again the true demand for housing in the area might be a lot less than what is being built.