Clear Capital, an investment advisory firm specializing in real estate, recently predicted a national real estate trend consistent with my projections for Flagstaff home sales. After the double-digit growth in home prices last year (though it was more like 8% in Flagstaff), Clear Capital economists predict that national home prices will now fall into line with inflation and follow more historical rates of growth, namely prices increases of 3%-5% per year. Clear Capital sees no real estate bubble in sight although there might have been a little bit of one in Phoenix last year, now burst.
The National Association of REALTORS® reported in its December existing-home sales report that home prices rose 11.5% in 2013 compared to 2012. That marked the strongest gain since 2005, when median prices for existing homes rose 12.4%. Flagstaff’s median price is higher than the national number and rose just about 8% over the course of 2013.
Looking at the national home price picture, Clear Capital economists note that home prices at the metro level, when adjusted for inflation, reveal 46 out of 50 metro markets have home price levels that are at pre-2003 levels. Twenty-five of 50 markets are reporting prices below 2000 levels. Phoenix and Las Vegas (two markets that have some influence over Flagstaff’s home sales due to second home buys) are showing signs of overheating and should be watched closely, according to Clear Capital. Both markets saw yearly gains around 30% in 2013, but home prices have since been cooling. Home prices in Las Vegas remain 20.8% below 2000 levels when adjusted for inflation. Prices in Phoenix are about 1.9 % above 2000 levels.
“Double-digit gains over the last year, while similar to rates of growth in the run-up to the bubble, are off a much lower price floor,” says Alex Villacorta, vice president of research and analytics at Clear Capital. “With the majority of metro markets still so far below peak prices, it’s time for conversations surrounding price trends to shift away from the 2006 peak as the point of reference, and back to current trends and forecasts,” says Villacorta. “While there are certainly investors and home owners holding real estate assets that will be underwater for seven years or more, the current housing market is positioned to behave very similar or even below historical norms, given the current economic climate.”
If Clear Capital is right, and I see reasons in our economic climate to believe they are, home prices may not return to peak levels until 2021. This means folks who bought their Flagstaff homes in 2006-2007 may be “underwater” for another seven years. Those who haven’t suffered through distressed sales yet are unlikely to sell now until they recover their investment for tax as well as financial reasons (The tax break on loan forgiveness expired at the end of 2013.) Thus, be prepared for low inventory of Flagstaff resale homes for a while although perhaps some folks who have been holding out for a comeback will throw in the towel and move-on.