Greater Phoenix Housing Update 11/9/2022

Economist Dr. Peter Linneman said that the roaring (20)20’s would see continued asset appreciation, job growth, GDP growth, and other good things from a healthy economy until – the one thing that ends all healthy growth emerges – and emerge it did. He was talking about greed.

RIP Demand:

During the summer of 2021 before the ridiculous iBuyer nonsense started, the Greater Phoenix housing market was starting to normalize. The spring frenzy cooled as the last of pent-up demand was exhausted. Initial evidence of seasonality appeared but not for long.

Money was cheap so Opendoor, Zillow, and several other institutional investors were all flush with cash (AKA other people’s money) and were ready to spend. The investor frenzy commenced, and no one spent more than Opendoor and Zillow. Properties sold in minutes, far above asking. The median sales prices grew 1% to 2% a month.

Institutional buyers purchased from each other. Many properties never even hit the market. The intensity of the frenzy killed Zillow’s iBuyer business by Q4 2021. Zillow realized that Q3 2021 losses shouldn’t have been $422M during the most intense seller’s market in 16 years.

This Wall Street funded frenzy broke the emerging seasonality and pushed prices up and sidelined regular buyers. Inflation grew further and the Federal Reserve realized it wasn’t transitory. Demand peaked in early January 2022 as the increasing prices took their toll.

Mortgage rates rose and demand dropped below normal levels in early May. Prices peaked in late May. The relationship between supply and demand that had treated sellers so well for so long turned its back on the sellers. The demand finally had some supply to choose from, but the demand was now priced out.

The corporate investors and iBuyers outbid their competition, regular buyers, and now those same corporate investors and iBuyers are losing money on those investments. They forgot that in order to make a profit, their target consumer needs to be able to afford the product.

Disruptors Disrupted:

Eventually, investors expect profits or at least market sustainability. As the cost of capital increases and mortgage rates hang out around 7%, demand continues to fade further. The result, market caps decline and losses mount. Mike DelPrete shared this information on Opendoor’s Q3 results and Zillow’s final quarter of iBuying results. He also mentioned Opendoor shuttered its mortgage company, Opendoor Finance.

Inflation & Rates:

While the Federal Reserve is tasked with reducing inflation, it is limited to altering the Fed Funds rate. After artificially holding rates low for over two years, the Fed has increased rates 5 times this year which has pushed mortgage rates to around 7%. Unfortunately, despite the rate hikes, the inflation remains high.

One big cause of inflation, that isn’t lowered by increased rates, is the country’s significantly increased money supply. There is simply a lot more money flowing through the economy. According to Shadow Stats, September’s money supply was 121.6% above the pre-pandemic high. The way to reduce inflation caused by increased money supply is to remove capital from the economy.

Housing economists worry that the Fed has already over-corrected and is leading us to recession because the inflation data is a lagging indicator (tells us where we were). The Fed is expected to increase the Fed funds rate by 0.5% to 0.75% before the end of the year.

The Fed does not use the CPI to gauge inflation. Instead, it uses the Personal Consumption Expenditures (PCE). Both the CPI and PCE weigh housing (rents) heavily, the CPI at 42% and the PCE at 23%

• PCE is currently up 6.2% year over year and has already started to stabilize.
• PCE is a survey of businesses and adjusts over time.
• CPI is currently up 8.2% year over year.
• CPI is a survey of consumers and doesn’t change.

Notices & Foreclosures:

A foreclosure crisis remains unlikely. The total number of residential notices of trustee sale declined by 2% from September to October. Notices of trustee sale and foreclosures remain below 2018 and 2019 levels.

Demand Isn’t Completely Dead:

In order to have a healthy real estate market, two things are required: 1) jobs and 2) inbound migration. Jobs and migration create new housing demand. While today’s demand has been sidelined by volatile mortgage rates and affordability challenges, it is important to note that the demand does exist. We saw a glimpse of it in early August went rates dropped down to 5% and we had a spike in new contracts for a few weeks. When rates went back up above 6% (and continued to rise) that demand cooled, waiting again. And we have jobs and people are still moving here.

The Greater Phoenix Economic Council (GPEC) has been busy this year bringing more businesses and jobs to Greater Phoenix. During fiscal year 2022 (10/1/21 – 9/30/22):

• 55 new businesses came to Greater Phoenix
• 10,859 new jobs
• $635M+ in payroll was generated
• Average high-wage salary: $76,000

Future prospects include:

• 214 domestic businesses
• 58 international businesses
• A potential of 4,748 high wage jobs

Final Thoughts:

The Greater Phoenix median sales price peaked in May at $480,000. Through October the median is down to $436,000; a 9% decline in only five months. Prices will continue to decline through the end of the year. The high prices and high mortgage rates have sidelined most of today’s buyers.

Yes, it is true that this is the second largest price decline since the end of WWII. And that sounds scary, but it is ok. It will ultimately help our market normalize. The 2021 housing market was unsustainable and unhealthy.

We are going through growing pains, or shrinking pains, we need to go through in order to get back to a healthier, calmer market. It is only a matter of time.