Residential Real Estate

Tina Tamboer, The Cromford Report

When the Dodd-Frank Act was signed into law in 2010 after the 2008 financial crisis, it was described as “the most far-reaching Wall Street reform in history” to ensure that “taxpayers will not have to bear the costs of Wall Street’s irresponsibility”1. Housing prices today are proving to be resilient in the face of a possible recession due to some of the lending regulations implemented in that bill. While supply has been severely restricted for buyers due to the “locked-in effect” of homeowners with fixed-rate sub-3% mortgages, most in the industry would agree they’d choose this over a flood of desperate sellers facing foreclosure any day of the week. Countries that do not have long-term fixed-rate mortgages, like the UK for example, are seeing homeowners forced to sell their properties as their payments adjust to higher rates. This is causing supply to surge and home prices to fall in those countries, while homeowners in the U.S. are content and able to stay put in the storm. Losses from last year’s price declines were realized mostly by Wall Street-backed companies engaging in short-term hold strategies, otherwise known as iBuyers, that were forced to deeply discount their holdings to sell. Since the beginning of this year, with most of Wall Street on the sidelines, home prices have been rising and closing the gap between last year’s and this year’s price measures. To reflect this, below are the year-over-year price appreciation measures for June, and appreciation rates since December 2022.

June 2023 vs June 2022

June

MONTHLY PRICE PER SQUARE FOOT

Declined -4.2% from $300.43 to $287.86

2023 vs December 2022

Increased +8.3% from $265.92 to $287.86

MONTHLY AVERAGE SALES PRICE

Declined -1.8% from $592,285 to $581,358

Increased +12.5% from $516,546 to $581,358

MONTHLY MEDIAN SALES PRICE

Declined -6.6% from $474,374 to $443,000

Increased +7.5% from $412,000 to $443,000

The 2023 price recovery in the Greater Phoenix market has caused some head scratching in the media since high mortgage rates in the 6-7% range have remained the leading impasse for home buyers and sellers to fully engage. The key piece of the puzzle is luxury real estate, which is not reliant on mortgage rates because a high percentage of the sales are cash.

Monthly Average Sales Price Per Square Foot

The market over $1M had its 3rd best Spring season in 2023 for both sales volume and dollar volume. 2022 had 3,432 sales in the first half, $6.7B in dollar volume, and +11.5% June-to-June price appreciation. 2021 had 3,015 sales in the first half, $5.9B in dollar volume, and +26.7% June-to-June price appreciation. 2023 had 2,746 sales in the first half, $5.3B in dollar volume and +8.3% Juneto-June price appreciation. Eliminating 2020 due to COVID-19 for comparison, 2019 had 1,136 sales in the first half, $2.1B in dollar volume, and +7.1% June-to-June price appreciation. When sales over $1M are removed from price calculations, the June-to-June price appreciation per square foot is reduced from a decline of -4.2% to -8.7% and the December 2022 to June 2023 price appreciation rate is softened from +8.3% to +3.2%.

The active supply of homes in Greater Phoenix has declined 48% since the peak in October 2022 from 19,640 to 10,200. Supply levels in 2018 and 2019 at this time of year were around 14,000. Overall contract activity has been severely restricted due to mortgage rates as well, with just 7,435 contracts in escrow at the end of June. Based on 2018 and 2019 at this time of year, there should be nearly 11,000 in escrow. While the drop in demand is dramatic, the simultaneous dramatic drop in supply has offset any downward pressure on price. This is keeping housing values stable and rising for now.

In the last issue, we estimated January would be the bottom of the market and we were almost right. December was officially the bottom, but without luxury sales January was the bottom for the rest of the market. Looking forward, the Cromford Market Index has moved into a mild seller’s market comparable to 2018. There is justifiable optimism that inflation rates will reveal more favorable improvements in the 3rd quarter of the year, which could have a positive effect on mortgage rates. If that happens, and unemployment remains low at 3.4% in Greater Phoenix, we could see both supply and demand rise in the second half of 2023. That wouldn’t have much effect on price appreciation but would be a huge relief to the real estate industry and its employees.