Greater Phoenix Housing Update 6/22/2022

It happened. The residential real estate market was going so fast that the only way to slow it down was to pull the emergency brake. And boy, was that emergency brake pulled. It threw the market into chaos but this chaos won’t last long. It may feel as though we are spinning out of control. It is all in an effort to find normal.

Normal is not exciting. It is rather boring. And change is scary. But normal isn’t exhausting. Normal is healthy and sustainable. But we aren’t there yet.

We are in the chaos. Inventory is up, price reductions are up, and consumer sentiment is down.

National Real Estate:

• Supply of unsold single family homes in the US increased by 5.6% last week, up to 396,000. We probably have 12 more weeks of climbing inventory before we see a peak. Inventory is up 16% year over year and is up 22.3% in the past four weeks.

• Price reductions continue to increase. Two weeks ago, we saw the largest weekly increase in price reductions and last week’s increase was even bigger. Now 25.5% of homes on the market are taking price cuts. That is a 1.4% increase, week over week, which is significant. We will probably be at a normal level of price reductions (30%) in July. Based on this trajectory, we could see above normal price reductions by the fall.

• At 23%, immediate sales continue to decline, despite falling more slowly than expected. Expect this to keep dropping and to see more inventory, longer market time, and fewer bidding wars as we go deeper into the year.
• Fannie Mae’s June forecast now predicts a 13.5% decline in total sales this year due to increased mortgage interest rates and another decline of 11.2% next year due to the Fed’s rate hikes which Fannie Mae believes will push us into a recession in 2023.

• According to Redfin, luxury home (top 5% priciest homes in a market) sales declined by 18% year over year through the end of April. Non-luxury home sales declined by 5.4% over the same timeframe.

Consumer Sentiment:

The latest news of unexpected higher inflation which caused Wall Street to freak out and fall into a bear market and drove the Fed to increase rates by 0.75% instead of the expected 0.50% scared a lot of people. All of that happened in 4 days. And add that to the uncertainty with the war in Ukraine, gas prices, and still rising mortgage rates; people are nervous. This is why consumer sentiment is so important. If enough people freak out, it can stop the market, even when things aren’t as bad as they believe.

The most important thing right now is to not overprice listings. The perception with all of these price reductions is that prices are going down. That isn’t the case at all. The current year over year appreciation rates are about 15% nationally and 20% locally. As you know, sellers want the moon right now and many still believe they can have it. But as more and more listings drop their prices, buyers will pull back more waiting to see how much lower they will go which will further soften the market.

June’s preliminary Consumer Sentiment level dropped 14% from May to 50.2 reaching its lowest recorded value. Increased gas prices are the biggest cause. Gas prices are up 65 cents nationally since May. All consumers are feeling pitched. Fluctuations in interest rates impacts that housing sector more than any other sector.

Rates, Inflation, and the Fed:

Housing makes up about 40% of costs in the CPI so the huge appreciation rates of the past 2 years is considered the primary cause of inflation. When inflation increased in May, the Federal Reserve increased rates by 0.75 of a point, the largest increase since 1994. More rate hikes are likely ahead, as the Fed tries to cool off the U.S. economy without causing a recession.

Dr. Lawrence Yun, NAR’s Chief Economist, said, “The Federal Reserve set a big increase in interest rates and means several more rounds of rate hikes are on the way in upcoming months. So far, the short-term fed funds rate that the Fed directly controls has risen by 175 basis points. But the 30-year fixed rate mortgage has risen even more, by nearly 300 basis points. On the same $300,000 mortgage, the monthly payment has risen from $1265 in December to $1800 today. That’s painful and, consequently, will shrink the buyer pool.”

The AZ Market:

While the Greater Phoenix housing market follows the same trends of the national housing market, it does so first (currently running 4-6 weeks ahead versus the usual 6-9 months ahead). The cooling trend emerged 10-12 weeks ago locally, while nationally the trend became more apparent in April. Not only does the Greater Phoenix market run ahead of the national market, it has bigger swings. Our highs are higher and lows are lower. For example, over the past three months, the national single family inventory has increased by 64% and during the same time period, Greater Phoenix’s single family inventory increased by 148%.

• Total active listing inventory is up 47% in the past month.
• The median number of days prior to contract is now 11, up 4 days from last month.
• Price reductions are up 471% since the beginning of the year.
• The current median sales price is $475,000.
• Sales prices are likely peaking now and pending sales prices peaked the second week of May. This means monthly price appreciation will likely go flat in the coming weeks (if not days).

Join us for our next Cromford Market Update with Tina Tamboer on July 13. For details and registration, click here.

Real Estate News:

• Homeowners gained 32.2% in equity over the past year giving them an average of $207,000 in available equity.
• Short term rental bookings increased by 2.6% year over year and yet occupancy rates declined by 8.6% in May. This is due to a 24.7% (57,000 properties) increase in Airbnb and VRBO listings.

Final Thoughts:

The imbalance in the market was caused by very low supply, not unusually high demand. This is the fundamental difference between the 2005 market and the 2021 market. In a market with already falling demand, drastically rising mortgage interest rates has pushed our current demand off a cliff.

The data line to watch is active inventory. If inventory continues to climb at its current rate, we will be in a buyer’s market soon. However, at roughly 13,000 active listings, if inventory slows or flattens we will stay in a weak seller’s market.

We are once again, in uncharted territory. Hopefully, the chaos clears soon.

Copyright 2022 Sarah Perkins