This Week in (Greater Phoenix) Real Estate 3/22/21

In this 12 minute video, Amber Kovarik and I discuss the latest in housing, lending, and proposed policy.

Affordability:

Affordability is and will remain the biggest issue in real estate this year. Not only are prices increasing quickly, but builders are also struggling with the supply chain, labor shortages, and lumber increasing by 200%. The average additional cost to builders is $24,000 per home and that is being pushed to the buyers.

The increased cost, increased interest rates, and cold winter are all reasons why builders slowed their production in February.

Offerpad:

Offerpad is going public with former Zillow CEO, Spencer Rascoff’s SPAC. Since Rascoff left Zillow, Rich Barton has poured tons of money and resources into building up Zillow Homes, Zillow’s iBuyer. This will give Offerpad an equity position of $3 billion and up to $650 million in cash.

PRO Act:

The PRO Act is currently moving through Congress and President Biden said he would sign it. As it stands now it impacts independent contractor status and would make it so that anyone who is not incorporated will be considered an employee. Most Realtors create an LLC or PLLC and are employees of their entity. This impacts the 27 right-to-work states including Arizona. I have read arguments on both sides and I have no idea if it will pass or not but if it does, there could have an immediate impact on real estate.

The timing is interesting as we see many companies following Redfin’s path of employee agents. Zillow, Opendoor, and Homie all have agent employees. Last week Homie announced that they are hiring 1000 buyer agents nationwide.

The AZ Market:

Locally, active listings have, finally, stopped dropping. This could be for several reasons. The best one is that maybe we are going back to some element of seasonality and March is the time of year when we have the most inventory growth. Now the numbers are not going up, but they are not dropping. We have like 10 more listings than we had a month ago. Demand is dropping though, faster than supply. It remains nearly 14% above normal while supply is nearly 78% below normal. This means that sellers are getting 10 offers instead of 50 and that appreciate rates will slow. We do not need 20% appreciation rates so this is good for the market. We are currently unsustainable. The market needs some stability and allowing inventory to rise and demand to fall will get us there. And as long as demand remains above supply, prices will continue to go up. No one is expecting a crash or for values to go down.

The demand dropping is primarily due to buyer exhaustion, affordability challenges from quickly appreciating prices, and interest rates going up, but not as much as one would think.

Lending:

Interest Rates:

Interest rates have been on quite the tear lately. The market headline is that interest rates hit 14-month highs due to market expectations of a recovering economy and increasing inflation.

Today there is a small glimmer of hope for interest rates as the 10-year Treasury bond yield, which hit a high of 1.754% on Friday did not keep going higher so far today. 

The pause in the continuous rise of the Treasury bond yields over the past six weeks, is giving hope that interest rates might stabilize for a while. 

Amber also discussed the importance of talking with all pre-approved buyers, rates are 3.5% now. If a buyer wins an offer in this competitive market it is important that they still qualify for the loan and make the monthly payments.

Fannie Mae & Freddie Mac Restrictions:

She also explains what the new Fannie and Freddie regulations mean for second home and investor purchases. Just because the GSEs loan portfolio is now limited to 7% for second home loans; that doesn’t mean those are the only options. There are other options for second home borrowers but they will come at higher interest rates which could further slow demand. As the changes are implemented, we will continue to share the implications and options for these buyers.

This chart is a recent MBA chart of the week and it shows the growth in second home mortgage applications, either for purchase or refi. The MBA provides this commentary, “In February 2021, 10.1 percent of all applications in the retail and consumer direct channels were for a non-primary residence. This was an increase from 9.5 percent the previous month. 2019 and 2020 saw annual averages of approximately 8 percent. Breaking down the categories, second-home transactions accounted for 3.6 percent of all applications and investment properties were 6.5 percent, totaling 10.1 percent. Average loan sizes as of February 2021 were $430,000 for second homes and $263,000 for investment properties.”