No Housing Bubble

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Housing prices in Maricopa and Pinal Counties are up 30 percent from last year, but a local housing expert doesn’t see a housing bubble on the horizon. Mike Orr, director of the Center for Real Estate Theory and Practice at the Arizona State University W. P. Carey School of Business, will talk about why he thinks there won’t be a housing bubble.

Ted Simons: Good evening. Welcome to "Arizona Horizon." I'm Ted Simons. Valley home prices are up 30% from last year, so are we headed for another housing bubble? Not according to our guest Mike Orr. Thanks for joining us.
Mike Orr: Thank you for having me.
Ted Simons: Home prices are surging yet not necessarily a bubble?
Mike Orr: I don't think they are. I'm not afraid to call a bubble if I see it. In 2005 I thought we had all the makings of a bubble but it's different this time. The reason is that the prices are going up because people actually want homes to live in them or to rent to other people. They are not using them as speculation vehicles. That's what we learned in 2005. I think the supply shortage is going to be with us for quite some time. It's not just that they have already gone up a lot they are probably going to continue to increase until we get more homes on to the market.
Ted Simons: Let's talk about inference regarding investors. Are investors a major factor and if they are why shouldn't that be a warning sign?
Mike Orr: They are a major factor but they are not buying just to sell to other people. They are buying to rent them out. We have a lot of people that have been through foreclosure, short sales that can't buy. They need to live here still so there has to be some rental accommodation. If we didn't have people coming in and renting them out there would be no place for people to live. They would be owned by banks and not available. In a sense there a necessary part of the churn that's happened because of the foreclosure wave. Those homes are not empty, so if an investor decides to sell one it's got a tenant family in them. So when that home changes hands you get a family that needs somewhere to live so it's neutral to the overall market. It's not creating new supply.
Ted Simons: Yet if the investors all decide to bail at the same time for whatever reason, got a problem, don't you?
Mike Orr: Well, you have, but that just does not happen. There's been a lot of talk about institutional investors. We have had a lot of small time investors in the valley for a very long time and they are actually still in the majority but last year we had a lot of big companies come to town, start buying with cash because they saw a good opportunity. All the people said, are the markets dominated by these? That just isn't true. There's something like 10,000 or 11,000 homes now in the possession of these big player but that's a really small number compared with the 1.7 million homes in Maricopa County that we have in total. Even if all 10,000 of them went on the market tomorrow, that wouldn't create a surplus.
Ted Simons: Yet talk about the dynamics and the change and behavior characteristics between an institutional lender and the mom and the pop. Does that change the landscape?
Mike Orr: It potentially could because we have not seen the institutional investors before. Most of them have fairly long term plans. They are not buying the homes just to turn them over within months. Had their plan is to hold on to them four to eight years. They are buying them because they can make money out of renting them out, the money they received in rent gives return on the initial investment. Anything they make in terms of appreciation is all bonus. It's very unlikely all of them would suddenly decide to sell immediately. If they did we would have a lot of fancy who currently lease them who would need a place to live anyway. It's not like a lot of empty homes come on to the market.
Ted Simons: Do we know the families are interested in buying homes?
Mike Orr: It may not be them that buy them what. Often happens is another investor says, you want to sell but I want to be a landlord. They basically swap. It still remains a rented home for a long time.
Ted Simons: You mentioned tight housing supply. How tight is that supply and why is it so tight?
Mike Orr: We are at about 2.2 to 2.3 months of supply. That's very tight, normally between four and six months in a typical balance market. We have less than half of what we would normally see on the market. The reason is we have had very little construction going on for the last five years. The homebuilders could not compete with all these bank owned homes so they downsized, many went bust, now we have the population growing again, they are not able to build homes fast enough to keep pace with the growing population.
Ted Simons: That's an interesting dynamic, interesting equation. Homebuilders, if they can't keep up, the price goes up, not a bad deal to get into.
Mike Orr: Homebuilders are like that. In fact I think a few of them are saying we might be able to build them a bit faster but why should we? We like someone appreciating our product. They were the lowest of the low in the past.
Ted Simons: Do you see a gentle pace in terms of rising, falling?
Mike Orr: I don't know. Like most people you're looking at the future it's a mystery what is going to happen. I'm trying to detect where we're going. At the moment there's not much sign of change. The supply is low and it's not improving but not getting worse. It's kind of stuck. It's going to be interesting to see if the price rises whether that encourages more ordinary people to sell their homes thinking, okay, it's reached a level where I can make some money out of selling my house. We still have a lot of people under water. There's a disincentive for enlisting a home if you're under water.
Ted Simons: Also lenders will be looking at you cross eyed. Talk about interest rates. Are lenders relaxing a bit?
Mike Orr: Well, very interesting dynamic there. Interest rates are starting to edge up. They are no longer at the lowest level in years as they were recently but still very low from a historic point of view. What happens when interest rates go up, two things. First it gets more expensive so that puts people off. But then they start thinking, well, it may go higher still. If I really need a house because in a sense of urgency in some cases it increases demand. People think buying now rather than wait until it gets up to 5%. I'm seeing that now. People are starting to get more urgency and the banks are saying well if interest rates go up we can make more profit on the difference between the rate at which we borrow and the rate at which we lend it so think maybe we should relax our lending rules just a little bit. They are very tight at the moment.
Ted Simons: Still pretty tight.
Mike Orr: Very tight. If they went closer to normal more people would qualify and we would actually get more transactions going through.
Ted Simons: From lending requirements to supply of homes, how is a difference between lower cost homes higher priced homes?
Mike Orr: Well, higher priced homes are more expensive per square foot and also from a long point of view because the interest rates on jumbo loans are higher than on the other loans. Most activity and interest is at the lower end of the market but the luxury market is also hotting up. It often has its best markets in April and May. I think that market is actually done the best that I have seen since for the last two months.
Ted Simons: The bottom line for you is things are moving relatively slowly, 30% year over year?
Mike Orr: I wouldn't say slowly. I would say they are pretty hot.
Ted Simons: But as far as the other factors involved, slow enough to where you adopt see a bubble popping here.
Mike Orr: The key thing about a bubble is it's going to pop. I don't think we're ever going to see today's prices again. At some point if they continue to go up at 30% we're going to get into a bubble but we're nowhere near that yet. We would have to carry on at that rate for a couple of years before I would start to get worried about that.
Ted Simons: Good stuff. Thank you for joining us.
Mike Orr: Thank you very much.

Mike Orr:Center for Real Estate Theory and Practice at the Arizona State University W. P. Carey School of Business, Director;

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