Thought Leadership

Ghostwritten for a real estate professional for Arizona Business Magazine

The Leveling Factor: A Balancing Act for Buyers and Sellers in 2006

As the market levels off in 2006, the formidable “Bubble Factor” that everyone seems to be waiting for has not occurred; rather a “Leveling Factor” to a more traditional market has begun. Real estate is still a hot topic and people are asking, “What contributed to the sudden market frenzy of '05, and what can we expect from this year’s settling market?”

Predictions for the 2005 real estate market were good, but few predicted the buying and selling frenzy that ensued. The housing supply was consumed by the demand. Buyers panicked, engaging in bidding wars, and sellers reveled, listing properties up to $20,000 over appraised values.

Many factors can be attributed to the 2005 market spike. Low interest rates made home purchases more affordable, while a population influx created an increase in housing demands. In addition, Arizona’s climate, availability of jobs, and a diversified economic base kept the market humming. Investors also played a large role in last year’s market increase, turning from areas such as California and Las Vegas and eyeing Phoenix.

The influx of new residents and investors contributed to a smaller inventory of available homes and subsequent increase in home values. According to the National Association of Realtors, the metropolitan Phoenix area was the nation's hotspot for home price gains in 2005. The average home price in the fourth quarter reached $268,400, a 48.9 percent increase from 2004.

As housing prices edged up in Phoenix, many buyers became priced out of the Arizona market. As the market levels off, home prices still remain high. With an average home priced at $286,000, however, real estate in the Phoenix area is still some of the most affordable for major metropolitan areas in the country. More affordable housing is being created as the Phoenix metropolitan area grows outward. The region is beginning to demonstrate a “drive for price;” the farther the drive from the central Phoenix/Scottsdale area, the more affordable the housing options.

Two of the most important factors contributing to a strong housing market are population and job growth. According to Marshal Vest, forecasting director for the University of Arizona’s Eller College of Business and Public Administration, Arizona currently leads the nation in job growth. 2006 is expected to bring 110,000 new jobs statewide, with 70 percent concentrated in the Phoenix area.

Vest expects Arizona's population to continue expanding by another 200,000 people this year, a factor that will contribute to growth of the state’s economy and continued high volume home sales. The Arizona Blue Chip Economic Forecast announced that Arizona was second in the nation for population growth in 2005 with a 3.47 percent gain, trailing behind Nevada’s 3.51 percent gain. This healthy balance of population influx and income generation will continue to support a strong market.

Despite the leveling off of the 2006 market, the National Association of Realtors expects a historically strong year, forecasting the third strongest year on record. The buyer is back in the driver’s seat, determining the price of the property and many buyers are waiting to see where the market settles. Sellers are starting to understand the reality of this new market and list prices are adjusting accordingly. Unlike last year, where homes were selling no matter how they were priced, this year’s market will bring homes in line with their actual value.

Historically, real estate has shown steady growth and is an excellent long-term investment. It was never intended to be a "get rich quick” scheme. Home prices in the Phoenix metropolitan area have demonstrated a pattern of relatively slow change. Investors who took advantage of the lowered interest rates and strong housing market saw an immense and short-lived jump in property values, which has now leveled. Those looking for a quick and profitable turnaround will likely have to hold onto properties or sell at a loss. This is not a concern for the average homebuyer, who traditionally approaches real estate as a longer investment spanning several years.

Arizona is a vibrant, exciting and dynamic area with an abundant amount of affordable land, which will continue to draw residents and investors. The state continues to lead the nation in job growth and is expected to maintain its position of number two in population growth. Though the frenzy of the 2005 market has settled, the core drivers of the Arizona housing market remain strong. The future looks bright, and the real estate market, like our weather, promises to remain hot.