Last year was anything but normal — especially in Arizona’s residential real estate market. Median sale prices rose in Phoenix from $325,000 in January 2021 to $404,300 by October, a 24.4% increase, according to real estate website Redfin. Houses listed for sale saw fierce bidding wars with buyers willing to contort themselves to meet sellers’ demands, which include such concessions as renting the home back to the sellers for a period while they found a new house to purchase. Can this continue, or is there a potential housing market crash on the way in 2022?
Efforts to boost the housing supply through new construction also faltered as the industry experienced acute shortages. Steven Hensley, senior manager at Zonda, a housing market analysis platform, notes that the strained supply chain created material constraints that caused major sticker shock for would-be buyers of new homes.
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“In terms of annual appreciation for homes, 30% is an outrageous number. Imagine the price of anything going up by 30% in one year,” Hensley says.
As with any product, housing follows the law of supply and demand. When demand is high and supply is low, prices rise in response. The Valley continues to be an attractive option for businesses and individuals, with the U.S. Census Bureau reporting that the City of Phoenix added 163,000 residents over the last decade — all of whom need a place to live.
Trevor Halpern, founder of Halpern Residential at North&Co, says that even after a slight boost in inventory from its lowest point, the number of available houses is still historically low for the region.
“If we look at homes that are not under contract or pending, we have about 7,700 properties available today,” Halpern notes. “Two years ago, we had 14,000, and this time last year we had 8,700. Inventory continues to trend down.”
Rich La Rue, a broker with HomeSmart, says that the Greater Phoenix area is still in a severely unbalanced market. He cites the Cromford Report, which rates the industry based on current conditions. When supply and demand is perfectly balanced, the Cromford Report assigns a score of 100.
“Last April, we were basically at 500 on the Cromford Report, which is definitely a seller’s market with far more buyers than there were homes available to purchase. In mid-November, it was around 345, so it has gone from a crazy, hair-on-fire market to just a frenzied one,” La Rue notes.
Halpern adds that the end of the year is typically leaner, as folks focus on the holidays instead of moving. “Historically, 40% fewer homes hit the market in December than in January, which is typically our top month for new listings,” he says.
With the new year, will the market continue an upward trend in home prices, or is it due for a correction — perhaps even a crash?
Fire in the auditorium?
One way to help ease the supply issue is to simply build more housing to meet the demand. But Ivy Zelman, CEO of Zelman & Associates, believes that the U.S. as a whole is overbuilding.
“When we think about what drives the need for shelter, it’s based on household growth, homes that get demolished that need to be replaced and any required excess vacancies. Those three components drive our overall normalized demand figure,” she explains. “That equates to approximately 1.3 million units per annum between now and 2030. When you look at the pipeline of what’s coming, we will be overbuilding once those homes get completed by north of 20% for single-family homes and 10% for multifamily.”
Zelman adds that market conditions are more complicated than having a glut of everyday buyers. Record low interest rates have fueled strong primary demand, along with a desire for more space during the pandemic. But she argues that low rates have also incentivized investors, which includes second-home purchasers, private investors seeking diversification, fix-and-flip investors, institutional investors and iBuyers such as Offerpad.
“Houses are getting gobbled up by more than just our schoolteachers, firemen and healthcare workers. It’s not the primary buyers alone,” Zelman says. “This enables velocity, which we define as homes that are available for sale at the end of the month and then sold subsequently in the next 30 days. Prior to the pandemic, the average velocity of the U.S. existing home sale market ran about 21% going back to 2000. Fast forward to January and February of 2021, and it was at 50%.”
Velocity rates have since fallen to 43%, which is still more than double the average of the past two decades. Zelman explains that velocity is so high because homes are bought up as soon as they are listed, which is driven by primary buyers competing with cash buyers. The concern is what investors decide to do if the market starts to dip.
“The level of units under construction is the highest that it’s been in decades. The question is, where are all these bodies going to come from, unless the investors are still going to be willing to keep buying and keep buying on top of the primary buyers,” she says.
Harbinger of things to come?
People and companies that purchase homes as investment vehicles rather than shelter are more likely to be “non-sticky buyers,” meaning they’re more likely to quickly sell as market conditions change, plunging the market down further. Primary buyers are more likely to be “sticky” and not sell if home values start to drop.
Zelman points to Zillow, which recently exited the iBuyer business after overpaying for houses and selling them at a loss, as a harbinger of what could come.
“The iBuyer business model is to sell. They do not hold an asset. If the market moderates and they are not able to sell that house at whatever incremental cost they incurred to refurbish it, they’re going to blow it out,” she argues. “What does that do to the zip code where you have a lot of homes that are now for sale? If you live next to a home sold to an iBuyer, it may hurt your valuation because they must sell. That starts to ripple through to the market, combined with every other type of investor that’s not sticky.”
Zelman continues, “There’s no fire yet in the auditorium, but we don’t want the people who follow us to be there when the flames start. We’re trying to be cautionary, so people are thoughtful about what’s driving that velocity and surge in home prices.”
The specter of the Great Recession overshadows much of the conversation around the future of the housing market. With prices rising as they did during 2021, Halpern has heard worries that a bubble is about to pop.
“If you look at what is going on in our marketplace, the fundamentals are very different than back in 2008 and 2009. Back then, there was false demand in the market based on mortgage-backed securities. With the financial regulations that came in after that, that type of activity no longer exists,” he says, referring to the Dodd–Frank Wall Street Reform and Consumer Protection Act.
The pandemic also had a severe effect on people’s ability to pay their mortgages, which has caused undue anxiety in the market, according to Rich La Rue, designated broker at HomeSmart.
“People have equity in their homes and values have gone up. Most of the larger lenders are doing loan modifications so owners can stay in their properties,” he explains. “Even if lenders are saying, ‘No, you have to pay it off now,’ the homeowner has the equity to sell and pay it off. That’s why it’s not going to be 2008 all over again. You will have some instances where people are upside down, but that’s going to be the exception, not the norm.”
Moreover, Halpern isn’t as concerned with the iBuyers putting a drag on the market. He says that this fear isn’t a
“There’s the idea of ‘shadow inventory,’ where institutional investors and hedge funds are gobbling up homes,” Halpern explains. “What happens if they dump all of this inventory? If you look right now, we have about 26 days’ worth of inventory. Let’s say Zillow put another 7,500 homes on the market, bringing us to about 14,000 total. That’s where it was two years ago, and the market was still pretty
The year ahead
La Rue agrees that Zillow pulling out isn’t a portent of an impending cataclysm.
“I’m not just shrugging my shoulders and saying the market is going to be unchanged,” La Rue argues. “But we’re not going to see a major crash. It’s going to be more of a parachute down — a settling of prices. Investors are slowing down on their purchases, which lets the regular homebuyer back into the market.”
Some buyers decided to quit looking for a home due to frustration caused by intense competition. But rather than foreclosing on the idea of moving, these would-be buyers are waiting for the right time to continue their search, all the while building their down payment fund. If home prices start to decline, there is a reserve of demand that would reenter the market and act as a buffer to sliding home values.
Still, Halpern points to mortgage rates as potentially altering the current dynamics.
“The general rule of thumb is that for every 1% that interest rates go up, a buyer loses 10% of their buying power. If interest rates rise precipitously, we’re going to see a big impact on the demand side of the market,” he contends. “Interest rates are still historically low, so it will take a significant jump to have a discernible impact.”
Even then, Halpern mentions that consistent job growth and migration into the state, along with low interest rates and high desirability of living in Phoenix will keep demand strong.
Conversely, Zelman believes Phoenix’s attractiveness might be weakening its long-term position. She notes that the amount of issued homebuilding permits was fewer than 20,000 before the pandemic, and it’s now at approximately 40,000, which her firm believes is more than enough to accommodate increased job opportunities and could lead to a surplus of homes.
“Phoenix attracts so much capital, and you have lots of investors trying to take advantage of the strength of that job market,” she explains. “There’s a fear of missing out, but there’s only so much alcohol at the party.”
Zelman, who called the top of the market before the 2008 crash, is used to going against the grain. “I recognize that we’re being the sober guy,” she says, “but we’re trying to give people time to think about the risks, because they can change pretty quickly since so much of this incremental demand is coming from non-primary buyers.”