Tuesday, December 14, 2004

Tucson housing market bubble may soon burst - or not

, Tucson Citizen

Tucson's real estate market has been so good for so long, repeatedly surpassing expectations.

Housing prices in Tucson jumped 14.3 percent in the past year, more than six times the 2.3 percent rate of inflation.

Can the market continue to flourish here in 2005, or is a crash on the horizon?

That question was asked by Marshall Vest, a University of Arizona economist, at Friday's Economic Outlook luncheon for 2005 at The Westin La Paloma Resort & Spa.

I'll get to his answer later.

Vest said the most disturbing aspect of skyrocketing housing prices is that they are driving moderate-income Tucsonans from the market.

"Affordable housing has been available but is declining quickly," he said. "Are prices now too high? One measure is the ratio of average home prices to average household disposable income. That ratio is the highest in nearly 30 years, both for new and resale housing."

Vest, who is project director for the College of Business and Public Administration at UA, said people are committing ever increasing amounts of their income to buy bigger and fancier homes.

Home builders in Arizona are busier than ever.

"As a long-term average, the Arizona home building industry supplies roughly 400 housing units for each 1,000 increase in new residents. That's 2 1/2 persons per household," Vest said. "Today, about 550 housing units are being built for each 1,000 increase in population, less than 2 persons per household."

About 20 percent of homes in new housing subdivisions in Phoenix are being sold to investors, Vest said, while just 5 percent of new home sales in Tucson are going to investors.

"The biggest concern is whether individuals are good at assessing risk or market imbalances and if they will be able to recognize when to say 'when,' " he said.

Even though home costs are soaring in Tucson, price surges have been even greater in such places as New York City; Washington, D.C.; San Francisco; Boston; Los Angeles and Las Vegas.

"California and Nevada have seen prices explode during the past year, with gains of 18 percent and 23 percent, respectively," Vest said. "Other states recording double-digit gains are in the northeastern United States and in Virginia and Florida. Fortunately, price increases in Arizona have been more moderate."

He said population growth and the flood of real estate money into Arizona from California, the Midwest and the East Coast have been the principal drivers of the state economy over the past four years.

And even though housing inventory is low and the state's population continues to grow, Vest said rapid price acceleration and other trends in Arizona's housing market cannot continue forever.

"All things considered, our forecast calls for a modest downturn in home building in '05," he said. "A further orderly retreat is expected for '06."

Is the real estate bubble about to pop?

"Bubbles are notoriously difficult to detect until after they burst," Vest said.

About as difficult as getting a "yes" or "no" answer from an economist.


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