High home sales prices and mortgage interest rates are squeezing out first-time homebuyers from entering the market, especially as incomes have not kept up, housing experts say.

In 2020, the housing market was in a frenzy. High numbers of homes were selling, agents’ inventories were low and offers were frequently being made over list prices, said Jason Giarrizzo, a realtor with West USA Realty, who has been in the industry for 31 years.

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Coming out of 2020, during the COVID-19 pandemic, the market continued to surge as people began buying real estate, Giarrizzo said. “We weren’t sure where the market was going to go, (if) it (was) going to plummet because of you know, the shutdown and everything, but it was quite the opposite.”

A balanced market in the Phoenix metropolitan area would have inventory levels of about 30,000 properties, Giarrizzo said, but by the end of 2021 inventory began to shrink to about 4,400 properties in the area.

Then, home prices hit a high and interest rates began to climb as the Federal Reserve started raising rates in an attempt to head off inflation. “In all my years of real estate, I don’t think I saw the inventory spike to the level that it did in such a short period of time. We went from 4,400 properties just coming into spring to almost 20,000 properties for sale by summer,” Giarrizzo said.

Now, the inventory is at about 13,000, which is still half of what a balanced inventory is for the Phoenix metropolitan area, Giarrizzo said.

As mortgage loan interest rates have risen, that frenzy has subsided, especially for the first-time homebuyers market, Giarrizzo said.

Mortgage loan interest rates vary widely based on factors such as the individual market, credit score of the buyer, price of the home, down payment, rate type, loan term and type.

The current average rate for a conventional 30-year fixed mortgage is at or below 8.063% for a $430,000 home in Arizona for a buyer with a credit score of 700-719 who puts 10% down, according to the Consumer Financial Protection Bureau.

Chris Giarrizzo, a mortgage loan officer at Lennar Mortgage, who has been in the industry for over 23 years and is married to Jason Giarrizzo, said many hourly workers are struggling to afford housing, whether it’s a home purchase, or even rent.

The median home sale price in the Phoenix metropolitan area in September 2023 was $435,700, according to Redfin, a real estate firm that tracks prices and trends.

“I actually wouldn’t say necessarily it’s a bad time to buy a home, it’s just a challenging time to buy a home,” Chris Giarrizzo said.

Although mortgage loan rates have been this high before, high sales prices are providing little relief to buyers, she said, and there’s no relief anticipated until possibly sometime next year.

The last time 30-year fixed mortgage loan rates reached 8% was in 2000.

It was a combination of people who moved to the state and people who had more disposable income following the pandemic shutdown that drove the market takeoff in the Phoenix metropolitan area in 2020, Chris Giarrizzo said.

“We weren’t out shopping and weren’t traveling, and so I’ll be honest, not only in my industry, but in several industries, people had said that they had never been as busy. … We were all working a lot of hours,” Chris Giarrizzo said.

A “perfect storm” of high demand, low interest rates and not enough inventory drove home values up, creating the frenzy of people paying over list price because there was so much competition, she said.

The downtown Phoenix skyline overlooks homes in the Willo Historic District in Phoenix on Sept. 6, 2023. (Photo by Kevinjonah Paguio/Cronkite News)

First-time homebuyers in the market

“You’ve got a lot of people that are just sitting on the sidelines right now, eager to jump in and buy their first home,” Chris Giarrizzo said.

Many people locked in low interest rates years ago, so even if it makes sense to move or downsize, they don’t, because they’ll be looking at interest rates of over 7%, Jason Giarrizzo said.

A February Realtor.com survey found that 82% of homeowners with existing low-rate mortgages feel “locked in.”

“Even though the frenzy is over, I don’t see a plummet in home values,” Jason Giarrizzo said. “We’re not going to see big spikes in inventory, I think, due to those people that have locked in on those low rates.”

Interest rates will eventually fall, but when and by how much is hard to predict, Chris Giarrizzo said, noting rates under 3% were largely pandemic-driven and will probably not be seen again.

In August 2021, the 30-year mortgage rate hovered around 2.8%, according to data from the Arizona Regional Multiple Listing Service.

“If we can get rates back into the fours or fives (percent), I think we’ll see a start to return to a more balanced market,” Chris Giarrizzo said.

In northern Arizona, where Jason Giarrizzo also sells real estate, the properties are being sold more quickly and at much higher prices, although there is still low inventory. “I’ve been working more in that $1 million to $2.5 million range, and actually I’m seeing a lot of those deals go in cash,” he said.

But in Payson, and other nonluxury home markets in northern Arizona, the same housing squeeze is being felt, where the housing is largely unaffordable due to the combination of rates and list prices, Chris Giarrizzo said.

J Cruz, a 46-year-old Phoenix park ranger, started his home search two months ago and does not see a light at the end of the tunnel.

“Trying to find a good deal – that’s been very hard and challenging,” Cruz said. “Monthly mortgage payments are way too high for what I want, and it’s not feasible to pay that every month.”

He fixed his credit score, saved for a down payment and recently started the process of getting a home loan.

But mortgage interest rates are one of the things holding Cruz back. “I don’t want to get into a home that I can afford for a few months and not be able to afford two years from now,” he said.

Cruz is in search of a three-bedroom home in Phoenix, Peoria or Glendale, and even though he is a full-time city employee and has good benefits, he and many of his co-workers have part-time jobs to make ends meet.

“Even though we have a full-time job with the city, you know, in today’s economy it is still a little bit hard,” Cruz said.

New-build financing at interest rates lower than market rate is probably the best route for a lot of first-time homebuyers, especially if they are struggling to qualify, Chris Giarrizzo said.

Federal Housing Administration loans are available for first-time homebuyers, with down-payment options as low as 3.5%.

Zillow Home Loans is offering a 1% down payment incentive to buyers in Arizona to reduce the amount of time that it takes for eligible buyers to save.

The program is intended for buyers who have kept up with high monthly rent payments but have not been able to save for a down payment.

“I would just advise borrowers that the less down you’re putting, the higher your (monthly) payments are going to be,” Chris Giarrizzo said.