Is The Real Estate Market on The Edge of Weakness | Phoenix Real Estate Market Update

Is the real estate market on the edge of weakness? As demand decreases and inventory increases, the Phoenix real estate market continues to weaken for sellers. How far will this go? Will see a buyer's market this summer?

Photo byCaitlin McKeague

National Forecast and Local Impact

More Listings, Lower Rates Expected to Boost 2025 Home Sales

Fannie Mae has revised its forecast, pushing the anticipated rebound in home sales to 2025, rather than 2024 as previously expected. This adjustment is driven by an increase in listings, particularly in the Sun Belt regions like Texas, Florida, and Arizona. The economy is showing signs of slowing, with recent data indicating cooling inflation and a gradual slowdown in the labor market. Fannie Mae suggests that a combination of continued household income growth, further slowing of home price appreciation, or a decline in mortgage rates will be necessary to bring affordability within range and spur home sales.

Existing vs. New Home Sales

Sales Trends and Inventory Dynamics

Sales of existing homes fell by 1.9% in April, reaching an annualized pace of 4.14 million. The existing home sale market is distinct from the new home sale market, which behaves differently. The ongoing "lock-in effect" has kept many sellers from listing their homes due to low-interest rates. However, some sellers are now listing their homes despite the high rates, driven by necessity. The lack of affordability for buyers remains a significant constraint.

Affordability Challenges

Zillow’s Findings on Down Payments

According to Zillow, buyers need a $127,000 down payment to afford the typical mortgage payment. This figure represents 35.4% of the median household income. In many U.S. markets, a typical home is affordable to a median household income with a 20% down payment or less. However, only 10 of the 50 largest U.S. markets meet this criterion. For instance, in Seattle, a median household income of around $116,000 would require approximately $462,000 to lower the debt enough to comfortably afford the monthly payment on a typical home valued at $753,000.

Phoenix Market Dynamics

Active Listings and Buyer Demand

Currently, there are 16,000 active listings in the Phoenix market, a significant increase compared to the past four to five years. However, this number is not historically high for Phoenix. The Cromford Market Index shows that supply and demand are balanced, though both are below normal levels. This situation results in lower transaction volumes, with fewer buyers and sellers in the market.

Mortgage Rates and Buyer Activity

Recent Movements in Mortgage Rates

The average rate on a 30-year loan declined to 6.87%, marking three consecutive weeks of small declines. While this is positive news for buyers, it has not yet resulted in a noticeable increase in market activity. Historical data suggests that further declines to around 6.5% or lower could stimulate buyer activity.

New Construction Insights

Single-Family Permits and New Home Sales

Year-to-date, there have been nearly 11,000 single-family permits in the Phoenix area, almost double the number from last year. New home sales have also increased, with 7,486 sales year-to-date. Builders are confident, pulling more permits and offering incentives like rate buy-downs and covering closing costs to attract buyers.

Rental Market Trends

Increasing Rental Listings and Decreasing Rates

The number of rental listings has increased, leading to a decrease in rental rates. Since March, there has been about an 18% drop in rental listing prices. The increase is most notable in apartment listings, which are up 34% year-over-year, while single-family home rental listings have increased by 9%.

Market Index and City-Specific Trends

Cromford Market Index and City Performance

The Cromford Market Index currently sits at 103.6, indicating a balanced market. Most cities in the Phoenix metro area are moving toward a buyer's market, with Chandler and Fountain Hills showing the most significant declines. Overall, the market is softening for sellers, with increased inventory providing more options for buyers.

Conclusion and Advice for Buyers and Sellers

As the Phoenix real estate market experiences these shifts, it is crucial for sellers to price competitively and ensure their homes are in good condition. Buyers, particularly those interested in new construction, may find opportunities with builder incentives. Stay tuned for more updates and insights into the Phoenix real estate market.

If you have any questions or need further information, please leave a comment below, and I'll address it in the next market update. Don't forget to subscribe and share this with anyone who might find it valuable. See you next week!

Sources:

• Fannie Mae Economic and Housing Outlook
• Zillow Research
• Cromford Report