I’m going through the first posts I wrote on this blog back in 2006 and it’s pretty humbling. I had NO idea that home prices would fall as much as they eventually did. I thought the towns on the outskirts like Queen Creek, Maricopa and Buckeye would be hit first and hardest but I had no idea how hard.

My operating theory in the summer of 2006 seems to be that home prices would stagnate for several years and that real inflation-adjusted home values in metro Phoenix would decline slowly and orderly.

I hadn’t yet learned about the huge lag times in real estate. I thought that because the number of homes sold tanked in the summer of 2005 that prices would soon weaken. Instead they continued to increase for metro Phoenix until the summer of 2006.

I later learned that the lag between cause and effect in real estate is typically 1 or 2 years. Inertia is the most powerful force in real estate.

July 2006

It’s fun to remember my observations about the market back then.

I had a call recently from a homeowner in Johnson Ranch who thought her home was worth $640,000, although she would be willing to price it at $620,000 to sell quickly. In fact, I would be surprised if she could sell it for what she overpaid for it at the top of the market last August, $475,000. »

It’s also scary to see how wrong I was.

Keep in mind that most home sellers in Maricopa aren’t going to lose money. They just aren’t going to make as much money as they once thought. »

My attitude in the summer of 2006 was along the lines of, “Yeah, prices are falling on the outskirts but home prices in closer-in locations are still increasing, and home builders are cutting production so that should take care of the supply overhang.” If only.

I used the term, supply or investor “overhang” a lot.

Freddie Mac didn’t seem too worried.

Though the direction of housing activity is unambiguously heading cooler, we remain confident that the climate is still temperate and that 2006 will finish as the third strongest year ever for the national housing market. »

Back to me again. Sales were way down but prices for metro Phoenix overall hadn’t.

Despite overall strength in median home prices, the number of homes sold in June was way below June a year ago. Many cities had less than half the number of homes sell in June 2006 versus June 2005.

I still haven’t figured out how home prices in some cities can increase at the same time the number of homes for sale increases. »

The first price declines show up.

Next month’s home price chart (see below) will probably show that the median home price in El Mirage was slightly LESS in July 2006 than in July 2005. Brace yourself for an avalanche of negative publicity. (If you are selling a home in El Mirage, price it to sell right now.)

I sure hope the media doesn’t unintentionally stigmatize El Mirage real estate when they use it as the poster child for their real estate bubble stories. El Mirage may be the first city but it soon will have company. »

Interest rates seem high by today’s standards but the 30-year fixed rate wasn’t that much higher than during the peak boom years of 2004 and 2005.

6.70% and 0.9 points – 30-year fixed-rate mortgage, average in Western U.S. for week ending July 13, 2006. 

The interest rates on adjustable rate mortgages had, however, increased a lot since 2004.

On a technical note, it’s fun to see that I was already playing with audio and video back then but the video was only 240 pixels wide by 180 pixels tall. Pretty cutting edge stuff to have streaming video on a website in 2006.

August 2006

This morning I went on a Realtor tour of homes listed in 85260 (sponsored by Guarantee Title). Many Realtors complained their listings were getting few showings. »

The Arizona Real Estate Center at ASU says in August 2006, “This is the weakest July since… July 1999” but then allays any fears by saying the cumulative home sales January through July were similar to the same period in 2003 and 2004.

I wrote;

The unusually large decline in Sun City West made it the first Valley city to show no gain in median home prices year over year, beating out El Mirage which stopped a 5 month slide with a strong $5,000 gain in July… metro Phoenix has between a 7 and 8 month supply of homes. »

From the Wall Street Journal;

In his 40 years as a home builder, Mr. Toll says, he has never seen a slump unfold like the current one. “I’ve never seen a downturn in housing without a downturn in employment or… some macroeconomic nasty condition that took housing down along with other elements of the economy,” he says. “This time, you’ve got low unemployment, you’ve got job creation, you’ve got a stable stock market and relatively low interest rates.” »

I blamed homebuilders saying they had never before raised new home prices as fast as they did in 2004 and 2005, either.

But I was even handed.

On the other hand, if you as a home builder raise a model’s price $10,000 in one month and sales don’t decline, then you raise them another $10,000 the next month and sales still don’t decline, what are you going to do? Continue raising prices, of course… until people stop buying. »

Homebuilders weren’t the only ones setting crazy high prices.

A home owner commonly believes their home is worth more than it actually is worth but during the crazy market of 2004 and 2005 those overly optimistic sellers often turned out to be right. A seller would ask a crazy high price… and eventually get it!

It got to the point that I didn’t recommend a list price based on what the home would sell for today, but how much I believed the home would sell for in 2 months, which was considerably more. That worked great at getting the most money for my sellers.

Today, however, the estimated selling price in 2 months is the same as the price today. Many sellers, however, have been slow to adapt to the new reality and are pricing their homes too high. »

Back in the day, many buyers were willing to pay above appraised value.

Sure, during the crazy market of 2004 and 2005, some buyers paid more than the appraised value. They saw the rapid appreciation and believed the home would soon be worth far more than the offered price, even if it wasn’t worth it at the time. »