Arizona Real Estate Market - Research Paper Example

Arizona Real E Market Introduction Arizona real e market is one of the housing markets in the U.S with a history of success since it was commissioned (Vannutini Par. 3). However, it is one of the housing markets that was worst affected by the housing crash that began in the first quarter of 2007, where their home prices are reported to have dropped by over 50% (Mclntyre Par.10). Economists argue that the 2007 housing market crash is the worst ever-housing crash experienced in the history of the United States. In fact, economists argue that the real estate crash of 2007 was partly to blame for the financial crisis that hit the U.S. The U.S. is still struggling to recover from this crisis to date. Despite the crash, Arizona is reported to have had one of the best recoveries from the crash throughout the U.S. This paper analyzes the causes of Arizona’s real estate market crash. It will also describe why Arizona is having one of the best recoveries of the real estate market in the U.S. Causes of Arizona’s real estate market crash. The crash of Arizona’s real estate market was caused by a number of factors according to a study. Firstly, economists argue that the crash was caused by poor lending practices that the adopted by lenders just before the crash. In this regard, banks are reported to have lent a lot of money to mortgagers without taking into account their ability to repay the loans. As a result, when the economy of the country started declining, many mortgage owners began experiencing difficulties repaying the loans and the mortgage interests resulting in default. Consequently, since there were no enough homebuyers in the market, prices of homes in Arizona dropped to an all time low leading to the crash (Vannutini Par. 3). The crash was also caused by speculative buying rather than sheltering. A research conducted by the National association of Realtors found out that about 23 percent of homebuyers only do so for investment purposes while about 13 percent of those surveyed identified their buying for vacation, which in itself signifies speculation. A research indicated that a majority of homebuyers from Arizona real estate market bought their houses at low interest adjustable rates with the intention of keeping their costs as low as possible then sold them at higher prices for profit. With speculation, buyers kept off the market when prices are high and making purchases when prices are low. The more the speculation continued the more the market prices declined leading to crash of the market (DeGrace Par.5). Low interest rate is also cited as the leading cause of the Arizona real estate market crash. Merriam notes that just before the crash, there was a lot of cheap money available for those intending to secure loans for owning their homes (Par.4). The cheap money is said to have been introduced by the crash witnessed in 2000, which forced the Federal Reserve to lower its short-term lending rates to an all time low of 1% down from 6.5% as a recovery strategy for the 2000-2001 economic recession. With the low interest rates, many Arizonians could now be able to obtain loans with which to build their own houses rather than depending on mortgages offered by Arizona real estate market. As a result, the demand for mortgage declined tremendously as very few people were now obtaining a mortgage or buying houses from the real estate market. This soon led to a decline in the home prices lending to the crash according to Merriam (Par.4). Economists also argue that the crash was caused by the fact that the market prices were very high despite the income of most potential homebuyers not increasing in proportion to that of the homes. As the prices continued to rise, few people could afford to buy homes from the Arizona real estate market. This was followed by a sharp drop in demand from potential homebuyers consequently resulting in a decline in prices in Arizona real estate market (Merriam Par.5). The declines in real property prices in Arizona was also witnessed due to the fact that as homebuyers kept off the market, it began experiencing financial difficulties, which forced the market to lower its home prices so as to attract many mortgagers’ and homebuyers as a strategy of getting more money to revamp its financial stability. As a result, the prices declined to an all time low leading to the crash (Merriam Par.2). The crash was also caused by the fact that Arizona real estate market happened to have built more houses that were needed. This means that there were no enough real estate buyers to take up the houses. As a result, the market remained idle with no active activity leading to a fall in the prices of the real estate property in Arizona real estate market (DeGrace Par.6). Economists also argue that the crash was caused by Adjustable Rate Mortgage (ARM), which allowed people to be able to buy the homes within their financial means. For instance, when the interest rates for ARM went down, many people were able to qualify for larger loan despite their income. This gave them the opportunity to buy homes leading to an increase in demand for homes. With an increase in demand, prices began shooting up, and soon buyers could not afford the prices. This then led to a decline in the demand for homes leading to a crash (Hardaway 6). Certainly, the financial crisis that hit the U.S. at the time is also another cause of the crash of the Arizona real estate market. This is because it made many foreign investors in Arizona real estate market to incur huge losses resulting in these investors being declared bankrupt. As a result, they had to pull out from the market thereby causing the crash since the market had hugely depended on their investments. Furthermore, with the bad economy resulting from a financial meltdown, many people could not afford to buy the houses due to lack of money. This saw real estate houses remaining idle with little or no demand leading to the crash (Wake Par.1). Supreme mortgage is also arguably the leading cause of the crash of Arizona real estate market. In this regard, a report reveals that the prices of Arizona real estate had been rising steadily, to the extent that even those with less income were struggling to buy houses with the intention of selling it later when the prices reach an all time high when they can dispose the houses off at a profit. As a result, getting subprime loan was easy as the loans were offered at very low interest rates during the first few years prior to the crash. However, few years later the maturity of the loans, their interest rates began increasing. As a result, those who had little income to help finance the loans started finding it hard servicing their mortgage thereby leading to a crash of the Arizona real estate market (Hardaway 6). The crash is also reported having been caused by the fact that many potential homebuyers preferred residential real estates. As a result, the little money that remained after the dot.com crash of 2000 was invested only on residential real estate as a security strategy. This resulted in a price drop, in Arizona real estate market due to low demand from Arizonians and other investors. The prices continued to drop uncontrolled which soon resulted in a crash (Hardaway 4). Reasons why Arizona is having one of the best recoveries of the real estate market in the nation. Despite the Arizona being one of the worst hit real estate markets, experiencing a drop in real estate prices by about 49.9%, the state is reported to have one of the best recoveries from the crash in the entire country. For instance, it has had an improvement in the prices by about 16.6% in just one year, increasing its medium home prices to $248,299. It is also projected that the home prices in Arizona could increase by approximately 1.4% from early 2013 to 2014. At the same time, the same survey also projects the prices to improve by about 2.5% every year from 2012 to 2017 (Mclntyre par.10). This massive recovery has been contributed by a number of factors, which aimed at enticing people to buy more homes. In this regard, Arizona first concentrated on improving the economic states of its citizens by creating more jobs to improve people’s earnings. With the reduction in the unemployment rate, which now stands at 8.3%, people could now afford to buy homes even when property prices are increased. In addition, with increased earnings and drop in unemployment, the demand for home ownership started increasing thereby resulting in an increase, in price. This argument is supported by the ceteris paribus law of demand (Mclntyre Par.10). Arizona real estate property market has also engaged in strategies aimed at attracting more investments in the state. This has helped in attracting foreign investments in Arizona, which has consequently increased demand for homeownership in the state. This increase in demand has resulted in a rise in the prices of real estate, thus the recovery being witnessed in Arizona (Mclntyre Par.10). Conclusion Certainly, the crash that affected Arizona real estate market and other states in the U.S. was caused by a number of factors some of which could have been avoided. Nevertheless, Arizona real estate market has been able to recover well from the crash due to proper measures that it has put in place such as reducing the level of unemployment in the state as well as attracting foreign investments. Work Cited DeGrace, Tom. The Housing Market Crash of 2007 and What Caused the Crash. December 18, 2011. Web 22 Nov. 2012: http://www.stockpickssystem.com/housing-market-crash-2007/ Hardaway, Robert M. The Great American Housing Bubble: The Road to Collapse. Santa Barbara, CA:ABC-CLIO. 2011. Print. Merriam, Dwight. Cause of the Housing Bubble, Burst and Recession Revealed: Its Growth Management. November 30, 2009. Web 22 Nov. 2012 http://www.planetizen.com/node/41867 Mclntyre, Douglas A. The top 5 strengthening housing markets by state. Wall Street. Web. 22 Nov. 2012 http://homes.yahoo.com/news/the-top-5-strengthening-housing-markets-by-state.html Vannutini, Sal, S. The Real Estate Market Crash of 2008 - How Did We Get Here? Web. 22 Nov. 2012 http://ezinearticles.com/?The-Real-Estate-Market-Crash-of-2008---How-Did-We-Get-Here?&id=1425372 Wake, John. Arizona Real Estate Notebook. HomeSmart Real Estate • (480) 463-4475. Web 22 Nov. 2012 http://www.arizonarealestatenotebook.com/ Read More