By now most are aware that the greater Phoenix market began the year as a seller’s market, then balanced market, and now has slipped to a buyer’s market. As we often repeat, real estate markets are local (meaning national statistics are not reflective of what is happening locally) and truth be told, real estate markets are actually hyper-local. That means different areas and price points may not act in unison even in the same locality. The Cromford Report shares:
“Buckeye, Maricopa and Queen Creek entered a buyers’ market in July. Surprise, Chandler, Gilbert and Tempe followed in August. Goodyear, Peoria and Avondale joined in September with Mesa and Goodyear falling in line by October. Phoenix is expected to succumb this month within a matter of days. The only holdouts remain in the Northeast Valley cities of Paradise Valley, Fountain Hills, Cave Creek and Scottsdale”. Why is the Northeast holding on at the moment? Because they are the luxury areas of the valley – and luxury is not greatly impacted by rising interest rates.
The Report further explains: “The 2022 peak of price was achieved in May, which was the result of contracts accepted in late March and April. Starting in June, sales prices revealed their decline in response to mortgage rate increases. At the end of October, the decline in average sales price per square foot since May was recorded at -9.1%…The largest declines happened between June and July at -4.5% and between August and September at –3.6%.”
Where does that leave us? We have a shrunken marketplace with less sellers and less buyers choosing to enter the marketplace. Sellers cannot replace the low interest rates on their homes if they change houses, and buyers are sidelined either because they cannot afford the interest rate hikes or hope to buy at bottom of the market. This shrinkage has resulted in a softer landing for the housing market.
Wise words for sellers: if you are selling and you have owned your home for at least 2 years you have made money. Cromford reports “Appreciation rates based on sales price per square foot through the MLS are: 2 years: +33.6%, 3 years: +59.9%, 4 years: +68.1%, 5 years: +84.8%.” Wise words for buyers: timing a market is hard. We typically cannot tell when bottom has been reached until 3- 4 months after the fact. When rates drop, we expect the market to respond quickly. Sidelined markets never remain so forever.
Much has been written about the greater Phoenix housing market and even more about the national housing market. The first thing to remember is housing is local. Following the national trends while interesting (misery loves company), is anecdotal. Shocking headlines and clickbait may increase readership, but is of little help to those trying to make financial decisions. While the future is unknown, the present is knowable. Let’s examine some commonly held ideas and see which hold up as fact, or fall apart as fiction.
Interest rates have weakened demand
Fact. The year began with mortgage rates in the 3% range, but by the end of October they surpassed 7% for the first time since 2002. That is a huge difference in buying power. Michael Orr of the Cromford Report further explains:
“In most years, mortgage interest rates do not have a large impact on the housing market. Other factors have a greater influence that usually overwhelms the effect of any fluctuations in rates. This is not one of those normal years. This is because the changes in interest rates have been both fast and enormous… Rates increased by 14% from 6.47 to 7.37 over the last month alone. This is a colossal hit to affordability in a very short time and the consequent reduction in demand is rippling through the industry in ways that have not been experienced since the 1980s.”
Rapid change is unsettling both to people and financial markets. While we can point out that 30-year mortgage rates are still below their historical average of 8 percent, affordability and consumer sentiment have taken a terrible blow.
Buyers are scarce but so are sellers.
Fact. This is both good and bad news. The bad news is that the market has shrunk – meaning far less transactions are occurring – which is bad for the livelihood of lenders, title companies, and real estate agents who are now sharing a piece of a much smaller pie. The good news is that less sellers at the same time as reduced buyers has allowed the market to gently move in favor of buyers. A sort of shaky stability is forming with demand and supply seeking balance. Michael Orr further comments: “Everyone is focused on how weak demand has become thanks to rising interest rates. However, the same phenomenon is affecting new supply too. Existing homeowner occupiers are very reluctant to lose the mortgages they already have and so motivation to list and sell homes is very low. Total supply is still rising slowly because although new listings are scarce, new contract signings are even scarcer”
Market corrections are normal
Fact. At the risk of dating ourselves horribly, Blood, Sweat and Tears had it right – “what goes up, must come down”. Financial markets are a complex blend of economic conditions converging. To name a few factors that affect real estate: demographic changes, interest rates, lending policies, the economy (both local and national), and government policies. Hence, the seesaw of supply and demand which affects pricing. There is no greater predictor of change than extended periods in either a buyer’s market or seller’s market. The last buyer’s market in the valley was in 2014. A shift was expected and predictable.
Now some fallacies about this market.
Nothing is selling
False. This is easy to disprove since every home has a deed that is recorded upon sale. As previously stated, it is true fewer transactions are occurring and sellers have had to come to grips with the frenzied buying party being over. Currently, 65.7% of the homes listed on MLS are selling (the “listing success rate”). To put this in perspective – at the peak of the buying frenzy in May of 2021 – 93.3% of the homes listed on MLS sold. In January of 2008 (the nadir of the market), only 20.4% of the homes listed sold! The historical average for the valley’s real estate market is 68.8%. Factually, the Greater Phoenix market has experienced long periods where the listing success rate was below 50%. If your home is not selling, you need a better agent – not a better market.
The market is crashing like 2008
False. History is not repeating itself. The frenzy of the housing market in 2005 was followed by the crash of 2008. This is not a crash. This is a correction. Again, Michael Orr explains:
“The market is moving in favor of buyers, but nothing like as fast as it did during the bursting of the 2005-6 bubble. Without a source of extra supply, prices are very likely to retreat but relatively slowly and modestly. Any talk of massive price drops is pure speculation. I am not saying it cannot happen. Anything is possible in the right (or wrong) circumstances. But if supply stays tight, then price movements are likely to be slow and gentle, not sudden and violent.”
False. No one explains it better than Michael: “High interest rates make demand fall, but on their own they do not make prices fall. That depends on supply and market sentiment. It is a mixed story on these. Market sentiment is unusually poor (which funnily enough, is often a good sign that things will shortly improve). Supply is also weak, with sellers discouraged. This keeps prices much higher than if supply were rapidly increasing.”
Cash offers are the way to go in a tough market
False. If you want top dollar, full marketing with an experienced agent are currently crushing cash offers. Investors offer pricing that reflects their profit and predictions of future value – which they believe will be much lower than present value. Full marketing with an agent obtains current values and therefore are much higher. Not convinced? The good news is we have collaborated with the highest paying investors in town so that our clients can compare all options – from full marketing for top dollar to cash offers.
Cromford Report Final Prediction for 2022
“Normally when prices start to go down, we get a flood of anxious sellers who want to dispose of their properties before prices get lower still. This is what we saw between April and July, but almost all those sellers have now gone. What is now ailing the market is a lack of motivation, both to buy and sell. In this situation prices are likely to drift lower, but not at a fast pace. In fact with the likelihood of even less supply in November and December, we could possibly see some price stabilization. This would leave us at the end of 2022 at roughly the same pricing level as the end of 2021.”
As we approach the end of 2022 – we wish to thank all our clients and friends for allowing us to serve you. We are truly grateful for your trust. We wish you a joyous holiday season.