The Lock In Effect in Full Effect | Phoenix Real Estate Market Update

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A Tug-of-War in the Market

In today's real estate market, there's a bit of a tug-of-war happening. We also see some interesting movements with investors re-entering the market. Let's dive into the details.

The Lock-In Effect on Home Buyers

The "lock-in effect" is significantly impacting home buyers, and it might get worse. A recent survey found that Americans expect mortgage rates to climb from just under 7% now to 8.7% in a year, and up to 9.7% in three years. This is the highest recorded expectation since the agency started asking this question about 10 years ago.

There are two ways to interpret this pessimism. On one hand, high expected rates might deter people from buying homes. On the other, if people believe rates will be much higher in the future, they might choose to buy now rather than wait. This article suggests that many homeowners are reluctant to sell due to the low-interest rates they previously secured, which makes buying a new home less attractive due to higher prices and rates.

Tight Inventory and Soaring Housing Costs

Tight inventory continues to drive up housing costs. While new listings in cities served by Redfin are up 10% over 2023, they are still far below 2022 and 2021 levels. Despite a slight increase in inventory, we're not yet at pre-pandemic levels, which means the market remains tight.

A recent survey indicated that 40% of renters believe the odds of them owning a home in the future are only 40%, down from 44% a year ago. Renters also expect rents to increase by about 9.7% in the next year, higher than the 8.2% predicted last year. Additionally, 38% of homeowners don't believe they could afford to buy their own home if they were purchasing it today.

Generational Dynamics in Homeownership

Generational differences are also shaping the market. Baby boomers, millennials, and Gen Z are all active in the market. The average time people stay in their homes has doubled since 2006, from about 6.5 years to 13.4 years. Many baby boomers have lived in their homes for over a decade, often without renovations, leading to an inventory of homes needing updates.

Newly Built Homes and Market Trends

One-third of homes for sale are newly built, just shy of the record high. This trend began during the pandemic's home buying boom, prompting builders to ramp up construction. Despite this increase, the supply of existing homes has dropped as homeowners prefer to keep their low mortgage rates rather than move.

Current Mortgage Rates and Investor Activity

Mortgage rates have increased slightly this week due to various factors, including Fed officials' comments suggesting no significant rate cuts this year. Buyers should stay in close contact with their lenders to understand how these rates affect their payments.

Interestingly, investors are re-entering the housing market after a two-year retreat. Purchases by investors grew 0.5% year-over-year in Q1, with a notable distinction between mom-and-pop investors and institutional investors. Despite the increase, investor activity hasn't returned to the pandemic-era frenzy.

Local Market Insights: Phoenix

In Phoenix, the market remains dynamic. Investor purchases in Q1 were at 13.9%, lower than during the pandemic years but closer to pre-pandemic levels. The Cromford Market Index, a measure of market balance, is currently at 107.7, indicating a balanced market. Some cities like Chandler and Fountain Hills remain seller's markets, while others are shifting towards balance or even buyer's markets.

Overall, the real estate market is in a state of flux with tight inventory, rising mortgage rates, and varying investor activity. Staying informed and in touch with real estate professionals is crucial for navigating these changes. For more detailed information on specific ZIP codes and other resources, check the links provided.