The market is indeed softening, locally no doubt, nationally – it is just becoming visible. The AZ market had a four-week head start. The pressure on affordability hit nationally last week when we saw purchase mortgage applications decline by 17% year over year. 2014 was the last year total housing inventory increased (this is true both locally and nationally). Currently, inventory is up 19% in a month.
*Before going further, I want to be clear, market softening does NOT mean the market is crashing nor does it mean prices are declining. We remain in a strong seller’s market that is weakening quickly. Prices are still increasing and will continue to do so for the foreseeable future. In this case, market softening means that buyer demand is declining.
Negative year over year reports illustrate what we know, 2021 was a record-breaking year for (re)sales units and volume. 2021’s records happened because of a perfect storm between 2020’s pent-up demand and the nation’s current demographics with about 33 million Americans aged 27-34, the perfect home buying age.*
According to the Wall Street Journal, Greater Phoenix is the metro area with the highest inflation rate in the country. From February 2021 to February 2022, Phoenix’s consumer price increase is at 10.9%. Metro-specific inflation data comes out every other month, so in May we will get a new rate for Greater Phoenix.
Nationally it is up 8.5% year over year in March, a 40 year high, and has cut buyers budgets of upwards of $40,000. The average consumer is spending $511 more a month than they were a year ago. There is early evidence that inflation may have peaked in March. Consumer sentiment increased by over 10% due to gas price declines since March.
The AZ Market:
Greater Phoenix’s higher than average inflation has everything to do with housing. Both purchase and rental prices are up 25%-30% year over year. With appreciation rates like that it is easy to see why investors flooded the market with capital. But keep in mind that the prop-tech startups have been investing here for several years. The most notable are Opendoor’s launch here in 2014, Offerpad’s launch here in 2015, and Treehouse Group launched in 2005 which evolved into Invitation Homes in 2012, the largest single family rental company in the country.
Why Greater Phoenix? Yes, the founders of those organizations have significant ties here. Yes, our local MLS is well run and covers the entire region (some areas have separate MLS’s for each city). The most simple reason is also the biggest reason why Greater Phoenix…it is because most of our houses are the same. Sure, we have custom homes, horse property, agriculture, etc. but the properties in the buy boxes of these companies are all the same. I can admit that I have pulled into the wrong driveway before and only realized it when my garage door opener didn’t work. Also, I grew up in a house built in 1892 and it wasn’t a particularly old house for the area (north shore Chicago). Here an old house was built in 1980. The math is simply easier which allows for large scale activity.
- According to the Case-Shiller Index, in February, Greater Phoenix had a 32.9% year over year appreciation rate. Experts believe that the rate of appreciation has peaked and we will see it begin to slow. Declining demand and increasing inventory stifles price appreciation.
- April started with 5.7% fewer pending homes than last April.
- The redevelopment of Metrocenter Mall is expected to cost $1 billion!
- Available rentals owned by Progress Residential, one of the biggest single family rental buyers, increased by nearly 24% in 22 days (3/21-4/12). Their median asking price declined by 2% in the first two weeks of April.
- ES America purchased 650 acres of state land for $84.4M in Queen Creek. ES America is partnering with LG Energy Solution to build a lithium battery manufacturing plant. More jobs!
In 2018, when rates reached 5%, new home construction all but paused for 30 months. Interest rate changes impact new home sales more than existing home sales, combine that with stocks declining and continued labor and supply chain shortages could lead to buyers backing out of contracts prior to completion due to buyer affordability challenges.
Builder sentiment declined by 2 points to 77 in April, which was the fourth month in a row of declines. Keep in mind, any measure over 50 is considered a good market.
National Real Estate:
- For the 5th month in a row, pending home sales declined in March from February, down 1.2%, according to NAR.
- Existing home sales declined 2.7% in March month over month and the sales pace is down 4.5% from last year.
- Prices are up! Fannie Mae says year over year appreciation is 20%, the highest in 47 years. Redfin says prices in March increased by 6% month over month, the highest monthly jump since 2013. NAR says prices are up 15% year over year. And Case-Shiller says 20% year over year in February.
- 87% of homes sold during March were on the market for less than a month.
- For the second month in a row, demand for second homes declined in March. At only 13% above pre-pandemic levels, demand for second homes declined by 85% year over year.
- Fannie Mae adjusted its unit sales forecast. Home sales are now expected to decline by 7.4% this year and 9.7% in 2023, a big drop from March, when Fannie Mae forecast a 4.1% decrease in home sales this year and a 2.7% decrease in 2023. They also predicted a modest recession during the second half of 2023.
This is what I mean about expected home price appreciation cooling. The rate in which homes appreciate will slow but they will continue increasing in value. All forecasted amounts are positive. Keep in mind, normal annual appreciation is 3%-10%. Normal appreciation in the late 20th century was 3% annually.
Another headline to be mindful of is the one mentioning the increase in foreclosure starts. Yes, foreclosures are increasing. Keep in mind that last year there was still a foreclosure moratorium, there were essentially zero foreclosures at this time last year so the year over year data looks dreadful. Look at the chart below, it shows an increase in foreclosures. However, the number of current filings remains substantially lower than 2017-2019 filings.
Economist Dr. Peter Linneman is aware of the headwinds but he will not bet against the American economy. The US economy has grown 3.5% since February 2020, no one expected that. We are back at full employment, business is up, wages are up, equity is high, and costs are high. Focus is shifting from growth to profitability and sustainability; both typical in late-stage growth markets. Economics are cyclical and recessions are a natural part of the cycle, and the next recession will be very different from the previous ones. And remember it was residential real estate that pulled us out of the shortest recession in history.
Copyright 2022 Sarah Perkins
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.