Benchmarks: Housing Prices, Affordability, and Homeownership in Arizona: 2nd Quarter 2004 Update

Heather Peterson
Research Associate, Economic & Business Research Center
Eller College of Management

October 2004

Introduction

A strengthening economy and historically low interest rates have contributed to dramatic increases in home prices. Over the past 5 years, homes in Arizona have appreciated by 37.16% and nationally by 43.59%. Rising home values benefit homeowners and sellers, who see their property asset appreciating, but how does this affect homeowners-to-be? How affordable are Arizona's homes and are rising prices affecting our homeownership rates?

Housing prices and appreciation in Arizona and the U.S.

Average home prices in Arizona increased 2.61% in 2nd quarter 2004 and 9.46% from 2 nd quarter 2003 through 2 nd quarter 2004, surpassing the national average for the first time since 1998, and placing Arizona 17 th in the nation and 3 rd among western states in home appreciation, preceded only by Nevada, with its 7.53% quarterly increase and staggering 22.92% gain for the year, and California with 4.85% for the quarter and 18.39% for the year (exhibit 1). Home prices in the U.S. increased 2.21% in the 2nd quarter, reflecting an annualized rate of 8.83% and yielding a 9.36% gain for the year, the largest national yearly increase since 1979, according to the Office of Federal Housing Enterprise Oversight's Housing Price Index (HPI) 1. During this same time period, prices of other consumer goods and services rose only 3.03%, as measured by the CPI. After hefty gains in 4th quarter 2003 (3.71% nationally and 3.6% for Arizona ), home appreciation rates appeared to moderate in the 1st quarter 2004 with gains of only 1.45% nationally and 1.1% for Arizona. This apparent moderation seems now to have disappeared, as home prices resume their steep ascent.

The HPI is also computed for metropolitan areas. Home appreciation in Las Vegas, AZ-NV MSA, continues to lead the nation with a 2nd quarter increase of 8.12%, nearly doubling the previous quarter's 4.8% and yielding a total appreciation for the year of 24.94%! In Tucson, home prices rose 2.75%, up sharply from the previous quarter's meager 0.27% increase, to gain 9.91% for the year. The Phoenix-Mesa MSA wasn't far behind more than doubling last quarter‘s 1% increase to gain 2.21% this quarter and 8.16% for the year. Home values in Flagstaff also rose sharply with appreciation at 13.39 for the year.

Housing affordability

Arizona State University Real Estate Center's annual Housing Affordability Index (HAI) for single-family homes in metropolitan Phoenix offers insight into what's happening to the affordability of homes in the Phoenix Metro area.

An HAI index value of 100 means that a family earning a median income has exactly enough income to qualify for a mortgage on a median priced home. An index value above 100 indicates that a family has more than enough income, while an index value below 100 indicates insufficient income to qualify. For example, an HAI value of 120 indicates a family has 120% of the income necessary, and an HAI value of 86 indicates a family earning the median income has only 86% of the income necessary to qualify.

In the resale home market, although median home prices have steadily increased, the HAI has also risen from 117 in 2000 to 126 in 2002, indicating an improvement in affordability, good news for prospective home buyers. In the new home market, the index has shown no improvement in affordability from 2002 to 2003, remaining constant at 113 in both years, indicating that an average family would still only have 13% more income than is necessary to quality for a loan on a new median-priced home. Nonetheless, this remains the most affordable new homes have been since 1984 when the index was first calculated.

How has homeownership fared in Arizona?

According to the U.S. Census Bureau's annual report Housing Vacancies and Homeownership Annual Statistics: 2003 67% of Arizona's households owned their own homes in 2003, compared to a national average of 68.3%, placing Arizona 41st in the nation and 8th among western states. Arizona 's homeownership was reported at 68% in Census 2000 before decreasing to 65.6% by 2002, according to Census annual reports. Historically, homeownership in Arizona surged to a high of 69.3% in 1992, well above the US rate of 64.1%, and then declined during in the 1990's, reaching a low of 62% in 1996.

Of Arizona's immediate neighbors, Utah has consistently had the highest homeownership rate hovering around 70% through the 1980's and 1990's, then pulling up close to 75% before declining to 66% in 2003. Of states bordering Arizona, California has had the lowest homeownership rate, although it has been slowly increasing since 1984, from less than 55% to close to 60%, still well below the national rate.

The Census Bureau report also includes data for metropolitan areas. According to the report, the percentage of households owning homes in Metro Phoenix reached an all-time high of 70.7% in 2000, and remained just below 70% in the subsequent 3 years. This was above the statewide rate and well above a general homeownership rate for "inside metropolitan areas” (Inside MAs) included in the report as a standard for comparison between metro areas. Homeownership in the Tucson MA has remained consistently below this Inside MA rate, but has been improving, reaching a high in 2001 with 64.4% of households owning homes, and declining slightly by 2003 to 61.1%.

In 2003, the homeownership rate in the Phoenix-Mesa MA placed the city 3rd among 11 western metro areas. In 2003, three metro areas were above the Inside MA rate of 66.5%: Salt Lake City – Ogden, UT, with the highest rate at 74.7%, followed by Denver, CO, with 71.9% and Phoenix-Mesa with 69.4%.

It would be reasonable to expect that low mortgage interest rates would entice households to consider becoming homeowners; on the other hand economic concerns and increasing home prices, possibly in response to increased demand, might dampen this enthusiasm. In recent years, it is encouraging to see that both nationally and in Arizona and its metro areas, homeownership and affordability continue to be strong, even as home values appreciate.

End Notes

1. The HPI is a "constant quality" index designed to capture changes in the values of single-family homes across the nation. To compute the HPI, OFHEO obtains quarterly information about conventional conforming mortgage transactions for the past 25 years on an enormous number of properties nationwide from Fannie Mae and Freddie Mac. The HPI tracks repeat sales, thus controlling for differences in the quality of houses. For this reason, it is preferred to other sources of home value information, such as local Multiple Listing Services (MLS), which report a price for "homes sold" and can vary from one period to the next as the mix of expensive and inexpensive homes changes.

References

Arizona State University. College of Business. Arizona Real Estate Center and L. William Seidman Research Institute. Housing Affordability Index: Metro Phoenix. http://www.cob.asu.edu/seid/arec .

Office of Federal Housing Enterprise Oversight. House Price Index. March, 2004. http://www.ofheo.gov/index.asp

U.S. Census Bureau. 2000 Census. Housing Characteristics: 2000.

U.S. Census Bureau. Housing Vacancies and Homeownership Annual Statistics: 2003. February, 2004. http://www.census.gov/hhes/www/housing/hvs/annual03/ann03t13.html

For more information, please contact us.