Real Estate's Bursting Bubble

by: Steve Goldstein

September 20, 2006

Valley Economist Alan McGuire and Phoenix Realator Greg Swan (Photo Credit: John Tynan)

Here and Now: Real Estate's Bursting Bubble

( Phoenix, AZ ) Home sales in arizona are down sharply. Compared to last year, there are about half as many houses for sale in the valley. And prices have followed. average home values are down from last year, when the Phoenix area led the nation in home appreciation. Has the real estate bubble burst? Or are typical economic factors just cooling off what some economists say was an overheated housing market?

The Real Estate Bubble Past and Present

The last real estate bubble burst in 1989, when real estate sales declined by 13 percent and the median home price increased less than one percent. Arizona’s housing market recovered in 1993 with a 34 percent increase in home sales compared to 1992. Housing prices at the time remained modest with only a three percent increase in 1992. Housing prices increased on average of five and a half percent over the next ten years until the housing market took off in 2004 and 2005. The housing market heated up starting in 2004 with a 32 percent increase in home sales. The median home price increased from $160,000 in 2003 to $245,000 in 2005.

Arizona Home Sales and Median Home Prices

Year	Home Sales	% Increase	Median Home Price	% Increase
1988	40,460		$85,000
1989	35,120	(-13%)	85,470	1%
1990	33,160	(-6%)	86,390	1%
1991	33,290	0%	87,600	1%
1992	37,770	13%	90,175	3%
1993	50,580	34%	$92,700	3%
1994	56,320	11%	$100,000	8%
1995	55,870	(-1%)	$105,100	5%
1996	68,875	23%	$111,400	6%
1997	69,490	1%	$116,230	4%
1998	80,675	16%	$122,000	5%
1999	84,485	5%	$129,900	6%
2000	83,605	1%	$136,820	5%
2001	89,160	7%	$142,680	4%
2002	91,750	3%	$149,900	5%
2003	106,485	16%	$160,000	7%
2004	140,400	32%	$180,000	13%
2005	153,385	9%	$245,000	36%

Source: The Arizona Real Estate Center, Arizona State University

As of the second quarter of 2006, Arizona ranks first in the nation for the increase in the cost of housing as measured by the home price index determined by The Office of Federal Housing Enterprise Oversight (OFHEO). Below are statistics for Arizona, which ranks first, as compared with neighboring states California and Nevada and the state that ranks 51st, Michigan. The United States average for home price increases is 10 percent in the past year and almost 300 percent since 1980.

Home Price Index

Office of Federal Housing Enterprise Oversight*

State	Rank	1-Yr.	1-Qtr.	5-Yr.	Since 1980
Arizona, (AZ)	1	24.05	2.94	96.71	323.30
Florida, (FL)	2	21.28	2.51	112.59	377.53
California, (CA)	11	14.35	1.25	111.93	543.28
Nevada, (NV)	19	11.44	0.26	104.77	312.02
United States	0	10.06	1.17	56.49	298.85
Michigan, (MI)	51	1.01	-0.71	18.95	222.11

*Each quarter, Fannie Mae and Freddie Mac provide information on their most recent mortgage transactions. These data are combined with the data of the previous 29 years to establish price differentials on properties where more than one mortgage transaction has occurred. The data are merged, creating an updated historical database that is then used to estimate the HPI. Source: OFHEO

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