Greater Phoenix real estate market expectations

Have you felt a gnawing suspicion that the recent increase in real estate prices will end in another great recession?

If so, you aren’t alone.

Unbalanced supply and demand created the 2008 bubble in real estate prices and are the major driver of today’s price increases. However, the cause of the unbalance is different today and far less risky.

This article will evaluate today’s price drivers and review reasonable expectations for greater Phoenix real estate prices for the next three to six months.

Supply (sellers):

The number of single-family homes available for purchase has continued to drop to extremely low levels resulting in bidding wars for the available homes on the market.

This situation has resulted in a price appreciation approaching 25% in the last year or so, with 50% of the contract prices being higher than the asking price.

Evidence abounds that home builders are at least 10 years behind in providing sufficient homes for the demand. Current supply chain problems have resulted in a lead time of 12 to 14 months for a new build.

Apparently, more of the baby boomer generation has decided to “age in place” – the reverse of the situation predicted some time back that baby boomers would produce a glut of selling as they moved to care facilities.

Demand (buyers):

Demand was increasing about as fast as the supply has been dropping. However, there are signs that demand might be approaching a peak, but firm evidence has not yet appeared. Purchase prices are exceeding asking prices by almost 2%.

Arizona and the Greater Phoenix area has always been a draw for people retiring, seeking warmer weather, and a great place for winter homes, just to name a few reasons.

Desire to leave costly states for less expensive surroundings has increased dramatically in the last year or so. The end effect is an increase in buyers with plenty of cash available to bid up prices on relatively less expensive housing accommodations.

Internet buyers added significantly to the demand, although expectations are that these buyers will have less of an effect in the future due to business model failure.

Wall street and institutional investors have also added to the demand in a big way. Not by buying loan packages (which ended up being fraudulent and toxic and contributed significantly to the great recession) but by investing in properties outright, primarily to profit from price increases and rental income.

So, what can we reasonably expect prices to do for the next three to six months?

It’s reasonable to expect a drop in demand with prices plateauing somewhat. Increasing interest rates, although still historically low, will decrease the affordability of homes unless the buyer is using pure cash, not just a loan designed to look like a cash purchase.

Because of the run-up in prices, many buyers are deciding to stay where they are and take on a wait-and-see attitude before moving. In fact, from a purely financial short-term perspective, renting is starting to look more favorable than buying.

There is scant evidence that supply will increase significantly. There is little loan default risk in the near term with very few owners underwater at the present time.

How can you determine when the balance of supply and demand might be changing?

Just keep watching the numbers depicted in these charts for early indication of potential price direction changes across the residential real estate market in general.

When these numbers start to approach normal levels indicating a more balanced supply and demand, it is likely to create a return to more normal price growth numbers in the greater phoenix area.

Geoff Green is a Realtor with Keller Williams Realty Sonoran Living.

Information: Geoff@Gmgreen.Net or 602 790 2927.

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