Phoenix Residential Remains in Limbo for Now

The Greater Phoenix residential market received a nice bump in October with the decrease in interest rates a few weeks ago, but that has since petered out. At the end of October, consumer confidence notched its strongest monthly gain since March 2021, but stayed in the narrow range of the past two years. There is still concern in the marketplace: Interest rates are impacting pricing dramatically, and many people have returned to their holding pattern, leaving the market in limbo. 

The bond market’s behavior has run counter to the Fed’s total 75-basis-point decrease this fall, with 30-year Treasury bonds rising to around 4.6%, their highest since May. While people were pleasantly surprised by the September and November rate cuts, they have been digested at this point. Could we see another rate cut on December 18? According to the CME’s FedWatch tool, it’s viewed as “slightly more likely than not.” Like the old stock market adage “don’t fight the Fed,” the current situation with mortgage rates can be boiled down to “don’t try to outguess the Fed.”

September to October 2024, the Greater Phoenix supply-demand index dropped from 96.0 to 92.0, gliding further into buyer’s market territory. This is only the third time in a decade that we’ve drifted below 100; most recently was Q4 2022, and before that it was Q1 2014. Both times proved quite beneficial for buyers who took advantage. The median price measure in December 2022 was $415K, 14% lower than the peak of $480K in May 2022 and 7% lower than June 2023 after the market shifted back towards a seller’s market. In both 2014 and 2022, the buyer’s advantage was short lived, lasting about 4-5 months in 2014 and only 2-3 months in 2022. Demand was on the rise during October; however, rising supply has outpaced it, giving buyers a plethora of choices.

Phoenix Residential Market Snapshot: Active Listings

More than 21,000 active listings in October puts us nearly 41% higher than this point in 2023—but is it seasonal or is it a shift? In our view, it’s a little bit of both. Seasonally, it’s typical for supply to rise at this time of year and peak before declining over the holidays. This year, however, the rise in supply started earlier and more aggressively than normal across most price ranges, which indicates it’s also a shift that needs attention. Sellers caught in this wave will most likely experience a longer list time prior to contract, fewer showings, and increased uncertainty. Weekly price reductions typically see a big hurrah as Thanksgiving approaches, then they drop as consumers redirect their attention towards the holidays.

In short, this is a market for serious sellers only. The Q4 is seasonally the best time to be a buyer anyway, and with a buyer’s market looming on the horizon, sellers’ expectations could be crushed. October saw a faster daily rate of listings cancel compared to last year, which indicates more sellers bowing out for now with the intention of re-listing after the new year. The largest percentage of supply growth is under $300K, which is 44% mobile homes, 39% condos/townhomes, and only 17% single family homes. Overall, condo and townhome active supply is up 63% from last year. This could be a result of increasing insurance costs that lead to higher HOA fees.

The Mortgage Rate Effect: Looking Ahead

Mortgage rates continue to betray any thread of hope the housing industry has for a swift turnaround in demand. After seeing a 12% increase in accepted contracts when rates hovered in the low-6% range for 4 weeks, they popped back up to 6.6%, then 6.9% by late October. While demand can hang on in the mid-6% range, it’s reduced to a trickle once rates move too close to 7%. An increase affects both supply and demand, as many sellers also need rates to stay low to afford their next home. 

General expectations are that rates will glide down over time, but they rarely move in straight line. How long rates stay elevated depends on how the economy is doing. The rate of inflation is declining today, although mortgage rates are not responding to it like before. Instead, the fear of recession is focused on unemployment reports, which are at a tipping point. The national unemployment rate remained steady from September to October at 4.1%, while Arizona’s rate ticked up to 3.6%.If those numbers worsen, mortgage rates can be expected to decline. If not, we could be here for a while. 

In the meantime, sellers in the Greater Phoenix market need to up their game to compete. Condition in the form of cleanliness, maintenance, and updates is the baseline to meet. Expect even more sellers to cover the buyers’ closing costs and rate buydowns; when concessions are no longer a unique selling technique, however, then further price negotiations will follow. For buyers who can shoulder the higher rates with plans to refinance later, and those who are utilizing grant programs and down payment assistance, this is their market.