How High Can the Market Go?

      I am asked fairly regularly the question of  "How high will the Phoenix market go?" or more commonly "When will my home be back to what it was worth in 2006?"  The answer to the first question is a little more predictable than the second one. 
     The market in the entire Phoenix are has gone up about 33% since last August especially in the Avondale areas that I commonly work.  That market increase is basically due to two basic economic conditions.  The first is fairly straight forward.  There were more buyers than sellers.  When demand exceeds supply, then upward price pressure is applied.  We saw very rapid jumps in the first few months of the year because of a gross undersupply of homes which still exists today.  A few people held back, waiting for the "huge supply of shadow inventory" that the banks were holding to be released.  That never materialized so some of those people missed the boat. 
     I want to analyze this under supply situation a little more closely.  Our buyers market is currently made of a huge number of cash or conventional investors trying to buy homes on the way up.  It is further composed of some of the people who short sold in the very beginnings of the crisis who are now eligible to purchase again on some financing programs.  These buyers plus the regular numbers of buyers who relocate for job, divorce, downsizing, upsizing etc. led to a demand level that far exceeds normal. 
     The extra buyers combined with historically favorable interest rate and what I believe is still an artificially undervalued market (you can still buy a home for about 10% more than it sold for in 1995) leads to an unprecedented brisk market even hotter than it was in 2005 and 2006 when the market was peaking.  This may lead you to believe that we are on track to repeat that fiasco but I don't think it will happen and here is why?  In 2005 and 2006, our starting price was already somewhat inflated.  This time we are starting from an under value point of beginning rather than starting on top of the curve and then heading up.
     So what is going to curb this spike in value?  My belief is that two things will stabilize the market.  The first is, that at some price point on the way up, the investors will decide that it is no longer prudent to purchase at that price point so they will be removed from the demand pool.  This will be offset somewhat by the return of buyers to the market that were removed by the short sale or foreclosure process in 2007 to 2010 when the bulk of these things occured.  These buyers become eligible 3 years from time of the event but may be somewhat reluctant to jump right back into a home.    
      In addition, new builders become an every increasing contributor on the supply side.  As the prices go up more builders will add inventory and begin developing new tracks again.  We are already seeing this in the far East Valley but the West Valley is lagging somewhat.  This combined with the ever increasing number of sellers who CAN and are now willing to sell their home for the market value we have attained should stabilize the market to some degree of normalcy for the first time in almost 8 years. 
     Of course, things like geopolitical events, mass sell off by investors (there are a lot of homes in the valley owned by investors right now) , prohibitive regulation or changes in the availabilty of mortgages (such as changing the waiting period after a foreclosure from 3 to 7 years) could alter this outcome significantly.
     To answer the question, I expect the market to go up around 5% in the next year and then stabilize to a tradition appreciation rate of around 3%.  Those of you waiting for another 30% run probably have a while to wait and may never achieve the level it was in 2006  . . . . . . . . . .
Oh Dang, that crystal ball is fuzzy again.  Can I get some Windex?