Harvard’s Joint Center on Housing Studies came out with their State of the Nation’s Housing 2007 study and it’s surprisingly readable.

Indeed, rapid price appreciation by itself seldom leads to corrections. In the 75 largest metropolitan areas, there were 30 instances of severe overheating (at least 15-percent nominal price appreciation per year for three consecutive years) between 1980 and 2000. In the 12 cases where overheating alone occurred, only four metros saw a nominal price decline and only one saw a drop of more than five percent. In the other 18 instances where overbuilding and/or net employment loss accompanied the overheating, some 13 metros experienced nominal price declines and 12 saw a drop of more than five percent.

Well, Arizona doesn’t have employment losses so we’re great there. I am worried, however, about the extent of the overbuilding in Arizona and the home builders’ continued inability to get their inventory in line.

When housing was at its hottest, demand had been pulled forward first by falling interest rates and then by unprecedented house price appreciation. Homebuyers snapped up the limited supply of homes to get in on the rising prices and avoid having to pay more later.

I like this expression “demand had been pulled forward.” It explains well the idea that high sales in 2004 and 2005 cannibalized sales in future years. That could certainly explain the slower sales since the boom.

Most anyone who had been “thinking” about buying a home, perhaps talking about it for years, bought one in 2004 or 2005. In a few years, I expect we’ll start to see many 2004 and 2005 home buyers who have “outgrown” their homes come back into the market, increasing demand.