Generally, long-term demographic trends favor the Southwest. However, my main reason for expecting demand to stay strong for a while is:
1. Job creation due to construction coming back, linked with;
2. Market psychology improving.
However, more specifically, these markets have been operating in a never-neverland of economic dynamics, driven by market psychology in a leveraged asset environment.
In a normal market, prices fall, demand rises, prices equalize. Econ 101.
In this cycle however, once prices fell past a certain level (lots of people underwater), more distress was created, increasing supply, and lessening demand, as people were more and more nervous.
What we got was prices fall==>supply increases==>demand weakens. Econ negative 101.
My thought is that once psychology shifts, supply will decrease (fewer people walking away), demand picks up as people panic that they are going to “miss it”, and prices rise in a more traditional Econ 101 mode.
This is what seems to be happening.
This new dynamic will happen (causing a quick bounce up in prices) until it is economically feasible to build more homes to meet this “we’re going to miss it” induced demand, up to a point where the rent/buy decisions are more in line with history.
This is where I believe development costs are too high to start developing new lots right away, meaning supply will continue to dwindle, exacerbating the “we’re going to miss it” market psychology, causing price increase momentum to go higher before it falls.
If however, you believe that it is cheap to add more homes to the mix, we should see earthmovers right away to meet this recent increase in demand, which will keep prices from going too high, too fast.
I totally agree with you about ability to borrow…this will dampen the situation in either case. However, as much as people are saying that no one can get financing, there are loans being made, and people are buying homes.
The other place where I get nervous about my thought is with overall vacancy in the market and the immigration policy of Phoenix. There are a lot of empty housing units…they will need to get filled up before things tighten too much there.
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