Our apologies to Charles Dickens, as we co-opt his famous title. Rather we should say “tale of two markets” as greater Phoenix is currently operating as two very distinct marketplaces. Depending on which you fall in, your experience will differ greatly from the other segment. One segment, the luxury market, is flourishing. Why? We can attribute that to the stock market having had three years of impressive growth. 2024 was, by most any measure, a fantastic year for domestic stock markets. The S&P 500 hit 57 new all-time highs during the year and closed with a gain of 25% (including dividends). When the stock market flourishes, so do luxury sales, as they typically aren’t dependent upon and therefore not sensitive to mortgage rate fluctuations. A word of caution to those in this market segment: the luxury market is cyclical and good times do not last forever. As to the general marketplace where the bulk of the housing sales occur, interest rates are having an outsized impact. The low and mid-range market is experiencing low demand and its result of drastically restricted number of sales. As a point of comparison, in 2021 when mortgage rates were low, the greater Phoenix market has 108,998 sales. Fast forward to now, and that number is only 71,858 ( a drop of 34%). While demand remains stubbornly stalled in this market segment, supply continues to creep upwards. Hence, buyers are experiencing newfound strength in negotiations over sellers. The Cromford Report further explains the trend:
“Since the beginning of this year we have seen an increase of 2,324 in the active listing count (excluding those with a contract). This a 11.9% rise, which is much higher than the 8.1% increase we saw this time last year, and it is added to a base of 19,460 rather than 14,593. So it is safe to conclude that supply is both higher and growing more quickly than a year ago.
Listings under contract have also shown some growth – up 13.3% from 5,387 to 6,103. This time last year they grew 23.8% over the same period. We have gained only 716 listings under contract instead of 1,257 last year and the growth percentage is down 44%.
We are therefore seeing demand grow, as is normal for the season but at a significantly slower rate than in January 2024.
So if supply is growing faster than a year ago, but demand is growing more slowly, the comparison with 2024 looks discouraging for sellers. Many readings confirm this picture…
This situation will result in more difficulty for sellers in resisting negotiation demands from potential buyers. New competition from other sellers is appearing quickly and asking prices will need to be set to be competitive and attractive rather than complacent. A price which is initially set higher than the market can bear will result in a long marketing period and eventually deeper price cuts than if the price had been set properly in the first place. This is particularly true at the low and mid-range price points. ‘
Pricing – As we oft times mention, pricing is a trailing indicator. The S&P / Case-Shiller® Home Price Index® just reported year over year appreciation of 2.1% for greater Phoenix. The fact that pricing is not keeping up with inflation shows the market weakness. It is important to remember, supply and demand ultimately control pricing. With demand weak, sellers are forced to respond with price reductions to compete. As the Cromford Report confirms: “Price changes are very much in vogue – they recently peaked at 3,820 per week, 52% higher than this time last year. This is not too surprising as we do have 40% more listings now. Price cuts outnumber price increases by about 14 to 1.”
New Builds – New builds – once the shining star of the marketplace – are losing some luster. The Cromford Report shows a drop in market share of new builds from December of 2023 vs. December 2024 of 28% down to 24%. Builders have also begun to scale back on their production plans as evidenced by a drop in permits. As the report shares, this is likely due to two reasons:
“This decline may be partly responding to a perceived lack of demand, but may also be influenced by home builders’ reaction to 2 key elements of government policy which could make life for the developers a little more tricky in 2025 and beyond.
- higher tariffs on materials imported from countries such as Canada, Mexico and China – either option will increase building costs – either paying tariffs on foreign sourced materials or buying American-made products will both be more expensive for builders than the current situation and will put pressure on their gross margins
- a clamp down on undocumented employees engaged in the construction trade could make some skills hard to find and lengthen build times
By far the largest area of employment for undocumented labor in Arizona is the construction trade. It is estimated that about 34,000 such undocumented immigrants are currently working in construction in Arizona, and roughly 80% of them were born in Mexico. These are unlikely to be working directly for the big homebuilders, but they make up a significant percentage of the skilled workers in their subcontractors. It is not yet clear whether or when these people might be deported, especially if they have no criminal record apart from staying and working in the USA without authorization. Less than 4% of undocumented immigrants are believed to have a criminal record. However, if the numbers of construction workers were to be significantly reduced through deportation, the rate of construction of new homes would likely fall. “
This is not a commentary on the current administration and its policies, but rather a housing discussion. If the number of new builds continues to decline due to the limited labor pool or an increase in expense from inflation or tariffs on goods (lumber, aluminum, etc.), this could benefit the resale market. With reduced competition (i.e. less supply being created) or increased affordability comparative to new builds, the resale market would benefit. Conversely, if large volumes of undocumented immigrants are deported – already weak demand for housing will drop further, resulting in price erosion. These uncertain factors in the housing markets bear watching.
Whatever the housing market brings, we will report it here. If you have questions you would like answered in a future article or in person, please contact us. As always, we are here to serve and inform our wonderful clients and friends.
Russell & Wendy Shaw
(mostly Wendy)