Buying a home in Greater Phoenix has been fraught with uncertainty in recent years, but what does 2024 hold for the market? Since the beginning of the pandemic, home prices in the region have appreciated 54%, according to Ali Wolf, chief economist for Zonda, at the Land Advisor Organization’s 2023 Land and Housing Forecast in December. Over the same period, the Federal Reserve raised interest rates making homebuyers reconsider making a purchase. 

“2023 was rough because the Fed continued to hike interest rates,” explains Sheryl Bowden, president of Phoenix REALTORS. “Homebuyers were sitting back going, ‘Wow, I really can’t afford a house now.’ I had a couple of buyers who were in the $450,000 range, but as rates got hiked, they went from qualifying for $450,000 down to $300,000 and they had to go sit on the sidelines. They’re still there because they can’t afford to buy a house.” 

With interest rates intertwined with buying power, Wolf notes that the industry is in an odd position where good news about the economy is bad news for the market.  

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“Let’s go back to the beginning of October [2023] when we had this stronger than expected jobs report,” she continues. “We had a narrative shift that the Fed will have to hold rates higher for longer. That put upward pressure on the 10-year treasury. Since then, we’ve seen a series of economic data that has slowed from where we were. It’s not a bad economy, we’re just coming off these highs. What that has done is lower the 10-year treasury and by default, the mortgage rates.” 

The elevated cost of a loan doesn’t only impact homebuyers, but sellers too. Bowden notes that 90% of mortgages out there are at 6% or lower creating a “lock-in” effect since a seller must turnaround and purchase a new home — which means taking out a more costly loan. Instead, more homeowners are doing remodels to keep the house fresh while they wait for market dynamics to shift.

“Baby boomers, who own a majority of the properties out there, might be sitting on 2% or 3% loans and aren’t selling,” she continues. “They’re not going to pay [the mortgage loan] off either because they can earn more interest in a high-yield savings account. It’s a golden handcuffs situation.”  

Inventory issues

This interconnectivity between the broader economy and the housing market can be seen in the sales data. According to Wolf, home sales are down 37% in the region when comparing 2019 to 2023. Interest rates play a large part of the affordability of a home, but so does the available supply. The “golden handcuffs” dynamic caused by interest rates keeps houses off the market, but Greater Phoenix is also underbuilt. 

Danny Court, partner and senior economist with Elliott D. Pollack & Company, explains at the IREM | CCIM Economic Forecast in January that it took about a decade for the excess housing supply in Greater Phoenix to be absorbed after the overbuilding that occurred in the mid-2000s. Court says there is a wide range of estimates of how many total housing units are needed, with some groups saying at least 45,000 units and others claiming upwards of 270,000 units. 

“We’re an undersupplied market, and we’ve been saying that for two years. That hasn’t changed,” he continues. “The only thing that has changed is that demand has been subdued. When it comes back, it’s going to be front page news again — that we have all this under supply and prices are going to go up because we didn’t [build enough].”

Looking at single-family permits — a data point reflecting how many houses are being built — in the Metro Phoenix area, 2010 bottomed out with 5,587 permits issued. That number rose steadily year-over-year, peaking in 2021 with 23,453 permits before decreasing nearly 20% to 18,834 permits in 2022.

Another factor impacting supply is the region’s population growth. “As we look at the [U.S.] population growth over the past 22 years, Arizona is only 2.2% of the overall population,” explains Greg Vogel, founder and CEO of Land Advisors Organization, at the 2023 Land and Housing Forecast. “But we have captured 4% of the [total] U.S. growth.” 

The largest population group in the state is aged 25 to 30, according to Court. Many are living at home still for economic reasons but want to form households of their own. The affordability of houses in Greater Phoenix, once touted as a reason to move to the state, has plummeted. In 2015, a family making the median income could afford 72% of the region’s housing stock. In 2023, only 25% of houses are affordable for that same family. 

“Not since the Great Depression have we seen so many adult children ages 18 to 29 still living at home,” he says. “This is pent up demand that will be coming online as well.”

Incentives for homebuyers

In this market of high interest rates and low housing stock, builders are providing concessions to attract homebuyers. A common one, Bowden says, is an interest rate buydown. In this arrangement, funds are contributed to reduce the borrower’s interest rate for the first few years of the loan to lower the mortgage payment. 

“Historically, builders have offered incentives of some kind, whether it’s $10,000 towards upgrades or an interest rate buydown, to keep you from going to the next builder down the street,” she continues. “We’re expecting that when interest rates get back down into the 5% range, they’ll ease up on that.” 

This has led to more homebuyers considering a new build over existing stock. For example, if someone wants to buy a $500,000 house and a builder can buy their rate down to 5%, they end up saving $600 a month compared to purchasing an existing house at the same price. 

“Consumers are saying, ‘The resale side of the market is expensive. But I can find a quick move in from a builder, or I can pick my lot and my finishes. And if I do have to pay top dollar, at least this helps me justify that purchase,’” Wolf notes. “When we look at total new home sales, we’re finding they’re up compared to 2019, and have massively come up compared to where we were this time last year.” 

Looking at the rest of 2024, Bowden does see reasons for optimism in the market, but it’s contingent on the Fed cutting rates.  

“I feel like we’re going to have a very strong spring for sales, and it seems as though interest rates will soften. Sellers are more educated now on concessions and what needs to be done to entice a buyer,” she concludes. “If the Fed decides to stay at the status quo, we’ll still have buyers, but we’ll need to figure out how to buy interest rates down better and seller concessions will have to increase.”