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Fire burns out in Phoenix market

Growth markets

The Phoenix housing market was so hot in the middle of last year that the median home price was primed to hit $514,000 at the end of 2021.

It did not quite get there. 

Still, prices have risen dramatically in the last three years in the Phoenix metro area (all numbers from

  • In June 2022, the median listing price hit $489,000, up from $364,900 in June of 2019, a 34 percent increase. 
  • The median sale price was $460,000 in June of 2022, up from $267,500 in June of 2019, up a whopping 72 percent. 
  • But June sale prices were down from $470,000 in May, indicating the market probably peaked earlier this year.

Phoenix real estate market feels effects of gravity

What a difference a year makes.

Through most of 2021 and into early 2022, the Phoenix metro area was at the top of the list of the hottest markets in the country. But once interest rates jumped — the rate on a 30-year mortgage climbed steadily from just over 3 percent in January to over 6 percent in June — activity slowed dramatically.

“Demand has fallen off a cliff, and values have peaked and are rapidly declining,” said Devyn Gillespie, senior sales director for Mynd.

In 2021, Redfin reported that out-of-state buyers were driving prices out of reach for the locals, indicating that more than a quarter of them came from Los Angeles, and another 17 percent from Seattle. That traffic has slowed. 

A little less than a third of sales were in cash in spring of 2021 in the greater Phoenix metro area, and some of those were buyers from out of state. This spring, about a third of purchases were in cash, but institutional buyers and iBuyers played a bigger role, according to HousingWire.

“There has been negative net migration in Phoenix this year,” said Travis Bohling, vice president for portfolio management at Mynd. The same population reversal has been felt across the Sunbelt, in states like Texas and North Carolina.

The metro area now has some 4.6 million people.

Most of the people that were wanting to move to Phoenix from further west have already done so, according to Bohling. Home prices are not such a bargain anymore, and higher interest rates make for higher monthly payments.

“If you can’t get a nicer house,” he said, “what’s the point of moving?”

Signs of a slowdown are spreading

Phoenix skyine

One of the aspects of the current market slowdown that has surprised some longtime Phoenix observers is the suddenness with which it hit.

Gillespie, a third-generation Arizonan with deep experience in the Phoenix market, contrasted what he’s observing today with what happened in 2005, which he called a “gold rush” of owners trying to sell.

“The story now is antithetical to 2005, when anyone could get a loan,” he said. “So listings were selling as fast as they would go active.”

Listings are piling up in Phoenix these days because sellers don’t want to miss out on the market appreciation, but buyers are being sidelined by higher mortgage rates.

Data shows that inventory has grown sharply as demand dried up (all statistics from the Stat Report, compiled by Tom Ruff):

  • June sales were down 7,720 units, or 6.7 percent, month-to-month, and down 21 percent from June 2021.
  • Total inventory on the market was 17,973 units, an increase of almost 30 percent month-to-month, and almost 77 percent from June 2021.
  • Days on market were up by two from May, and up three days year-over-year.

A lot of this can be attributed to higher mortgage rates, but high inflation is also playing a role in the market slowdown. Fed chair Jerome Powell has spoken about the importance of reining in runaway housing prices.

Gillespie sees a correction, not a crash. Since sale prices have jumped almost 80 percent since 2019, there is room for a drop, while still allowing those who bought in a few years back to show tidy gains in equity.

Going forward, “people are going to have to get used to paying more and getting less,” he added.

Housing prices are also being trimmed in other places that saw huge gains, including Boise, Nashville, Las Vegas and several markets in California and Florida.

Uncertainties shadow the economy

Phoenix, with its business-friendly climate and few regulatory hurdles, succeeded at attracting tech companies (along with other Sunbelt cities like Austin, Las Vegas, and Dallas). One study suggests it is 32 percent cheaper to start a business in Arizona than in neighboring California.  

In December, electric vehicle maker Lucid opened part of its factory in Casa Grande, ini Southeast Pinal county, where it eventually plans to build 400,000 electric vehicles a year and employ some 2,000 people.

Quite a few other startups have chosen Phoenix as their base, but Bohling worries that many of those tech jobs are now at risk.

“There are a lot of zombie companies that are not making money,” he said. “When the venture capital funding dries up, they resort to layoffs.”

And with fears of a looming recession, VC investment has been harder to come by in 2022.

“The tech part of our economy is untenable,” Bohling said.

With interest rates up, many homeowners are content to sit tight if they were able to finance near the historically low rate of about three percent that prevailed through the second half of 2020 and throughout 2021.

“When interest rates move up the way they have,” Bohling said, “what’s the point of buying a new house and moving up?”

While the market was running hot, many potential buyers put their names on lists for housing they were hoping to move into in the next year.

That, too, has changed.

“People are backing out at record-high rates,” he said.

A dip could restore affordability index

With a median sales price now at $450,000 — $10,000 more than June’s figure — many locals are shut out of the housing market and would welcome a correction, or more.

“In order for that to be affordable, a family needs to be making $111,000 a year,” Tina Tamboer, a senior housing analyst with the Cromford Report, told a local NBC affiliate in May.

According to the U.S. Census Bureau, the median family makes $68,000 in Maricopa county. As of June, there was a $40,000 gap between what the median income worker made and what was needed to buy a house in the median price range. 

Affordability issues are plaguing a number of markets across the country, as the run up in housing prices has combined with higher interest rates to put a home purchase out of reach for many.

Drought and heat challenges ahead

Phoenix drought

The Southwest is going through one of its most severe droughts in 1,200 years, according to researchers. Lake Mead, which is just to the east of Las Vegas a few hundred miles to the northwest and is fed by the Colorado Rivers, is at its lowest level since the 1930s.

Central Arizona is experiencing the first-ever declared shortage on the Colorado River, and many scientists attribute it to climate change. 

And it’s a dry heat, but … during a heat wave in early June, several days in a row posted temperatures north of 110 degrees in Phoenix. Another stretch of 110+ degree days hit in July. Some 145 days a year are hotter than 100 degrees. 

City officials believe they can manage the drought.

"The Colorado River shortage is coming sooner than anticipated," Troy Hayes, director of Phoenix Water Services, said in May. "But all the planning and investment in infrastructure that we have done has put the city in a good place to manage the challenging conditions."

The city is spending $280 million on a 66-inch pipeline, expected to be completed in 2023, to move water from its Salt and Verde River reserves to North Phoenix. 

The pipeline project is designed to reduce the city’s reliance on water from the Colorado.

There are doomsday scenarios about the habitability of Phoenix in several decades, based on climate change projections and drought conditions in the Southwest. 

But it’s likely Phoenicians will adapt and the city will continue to attract transplants, long after the current blip in the housing market passes.

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