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Don’t burst my bubble! The crazy Phoenix real estate market

It’s hard to skim through the news these days without seeing a story about the real estate inventory shortage and dramatic price appreciation in the Phoenix metropolitan area.

Reports of 25 percent or more appreciation in the first half of 2012 have been generating flashbacks of 2004 and 2005 for many people, thus inducing fear of another non-sustainable “bubble” in the Phoenix housing market. But while the fast rise of sale prices per square foot in the first half of 2012 was at the same trajectory as late 2004 and early 2005, the circumstances behind our most recent growth is much different, leading me to believe that this is not the precursor to impending doom but a much-needed correction.

In order to understand why today’s market is different, we must remember what contributed to the foreclosure crisis in the first place: the combination of loose lending practices, 100 percent financing and rampant mortgage cash-back schemes fueled the price appreciation from 2004 to 2007. Today, over 40 percent of monthly closed residential transactions are cash purchases and the rest require down payments along with tighter lending requirements.

Additionally, a large part of our demand today is fueled by the discounted distressed market, 80 percent of which is under $300,000 in the local MLS. Large institutional investors have been willing to waive appraisal contingencies because they have long-term holding strategies and prices are still below where they should be along the long-term historical average. This has been very good for quick price recovery, but it’s made it difficult for traditional buyers to compete in the under-$300,000 market, since they are often obtaining a loan and are unable to waive an appraisal. Many of these buyers have decided to rent until the environment is more suitable to them.

I expect to see investors stay in the Phoenix residential market until overall prices get closer to where they should be historically. In certain areas like Scottsdale, south Tempe, east Mesa and Chandler, those levels may be reached sooner than other areas, since they had fewer foreclosures than most metro areas in Maricopa County and they have lower unemployment.

Conversely, prices in areas such as Avondale, south Glendale and west Phoenix may take much longer to recover and, as a result, investors will linger there longer as they scoop up the last remaining remnants of discounted real estate.

Once Phoenix home prices rise to where they don’t satisfy an investor’s spreadsheet, then we will see traditional buyers re-enter the market and a more gradual and sustainable appreciation will emerge reined in by conservative appraisal practices. How long that will take remains to be seen, but one fact remains: even with 25 percent price appreciation, buyers today can get a lot of square footage for their money.

Tina Tamboer joined The Cromford Report in January 2011. She has been living and analyzing the Phoenix real estate market since 1993. The Cromford Report combines local MLS data with county record data to provide unique, in-depth and relevant analysis of what’s happening for the Phoenix real estate market. She joins Realtor Diane Brennan of Trillium Properties and veteran Valley journalist Linda Williams for That Real Estate Show, Saturdays at 3pm on News/Talk 92.3 KTAR.