The Greater Phoenix residential market is experiencing a recent uptick in investor interest and deals. Although that is the broad picture, there are noticeable differences in approach. On one end are wholesalers who make lowball offers without even visiting a given property. On the other are the true investors: willing to do their due diligence, including spending time at the property, and waiving inspections.
Until the past few months, there was enough uncertainty, particularly in the entry-level/move-up space, that investors had become scarce. One interesting trend is that many investors are taking a buy-improve-hold-and-rent approach rather than a fix-and-flip. In such cases, that’s a wager on potential buyers waiting on interest rates and the overall economy. Whereas fix-and-flip investors need true wholesale pricing to make the numbers work before selling to an owner-occupant, many investors have graduated into a longer-term view of generating stable rental income. In both cases, there is variance in how much they are willing to take on in rehab. On the low end, cosmetic fixes might include changing out flooring, countertops, and paint—whether or not the structure is up to date. More serious renovations involve a lot of work and heavy lifting, whether reconfiguring or adding rooms in addition to the cosmetic polish.
Private Investors Competing with Owner-Occupant Buyers
A recent R.O.I. listing offers a snapshot into the current environment dynamic. McCormick Ranch in Scottsdale has traditionally been an older community, but currently it’s a hotspot for young families. The listing was a probate estate property in rough condition, which would typically attract an investor. Most owner-occupant buyers are not willing to take on such drastic situations, and even if they can get the financing, they are concerned about the contractor hitting their price and timeline.
“The McCormick Ranch area is highly desirable, but there are few distressed properties,” says Joey Hasselbring, R.O.I. real estate specialist. “Out of a half-dozen interested buyers, the sight-unseen wholesale offers came in well below list price, The true investors were right at list and even a little above, and they waived the inspection. The highest offer we received, though, was the lone owner-occupant buyer—and they waived the inspection too.”
Luxury and Institutional Investors Remain Quiet
Finally, it’s important to note that there are two areas where investing action is quiet. First, we are seeing few investors willing to take on big luxury properties on a speculative basis. Second, despite the headlines, we are not seeing the same volume of institutional investors in the marketplace as a few years ago. Last month, a bill to cap corporate ownership of homes in Arizona failed to get a hearing in the House. The reality is, most of that activity had played out by 2022, and only a very small slice of inventory is owned by institutions.
For now, the market is the realm of private investors who may have a continually moving portfolio, but they are managing a few properties at a time—not thousands. In addition, a recent Trust & Will study of 73 U.S. metros ranked Phoenix #2 among cities where real estate investment pays off for millennials.
New HOA Lending Requirements Drive Uncertainty and Upsides
Last month, total active listings were up 4.3% over last year, and now they’re down -0.7%. This is attributed in part to a 7% decline in new listings added to inventory in February combined with a 10% increase in expired listings. The stagnation in the supply count is mostly in listings between $500K-$600K, where new listing counts were down 17% in February, and those between $600K-$800K, down 14%.
Listings under $300K are up nearly 15% over last year, but new listings slowed by 7% in February. New condo/townhome listings, which make up 45% of listings in this price range, were down 10% in February. The listing success rate under $300K is 67%, which means that out of all the properties that came off an active or contract status, 67% closed escrow and 33% cancelled or expired. This is the lowest success rate of all the price ranges, which could be reflecting increasing problems with closing on condos due to unmet HOA lending requirements. Changes to FHFA lending guidelines came out this month that focused on HOAs in relation to condominiums specifically.
The upside for this segment is the new requirement that HOAs insure the current value instead of the replacement value of a roof. This option is much less expensive and could put condos within reach for more homebuyers. The downside is an increase from 10% to 15% in reserves set aside for capital improvements and maintenance, in addition to more lender requests to see the financials of the HOA prior to funding. This could cause some deals to fall through if the HOA boards are not compliant by January 2027.
Rising Rates Impacting Sales Volume & Price
February closings were down just slightly at -0.9% below February 2025 sales. However, contract activity began to pull away from last year and currently listings in escrow are the highest they’ve been for this time of year in three years. This correlates with conventional mortgage rates dropping to 5.99% and maintaining that level for the last two weeks of February. At the same time, the CPI inflation report for January had come in at a favorable 2.4%, providing a level of optimism that buyer demand and affordability was on its way up and mortgage rates could normalize below 6%. Things were looking up in the housing market. Then the military action in Iran began and thus began a period of uncertainty.
Despite assurances that the war will be short lived, wars are inherently unpredictable. In the absence of certainty regarding the Strait of Hormuz, its influence on future inflation rates, and the risk of a recession, mortgage rates subsequently rose from 5.99% to 6.55%. Abrupt movement in mortgage rates often shocks buyers and can stun them temporarily into inaction. This increase in rates equates to a 5-6% increase in quoted mortgage payments (for example, from $2,500 to $2,625), or a 5-6% drop in purchasing power (i.e., from $500K to $475K).
The housing market is no stranger to 6.5% rates; in fact, rates were in a similar place in 2023 and the April/May season still saw elevated contract activity. The median sales price at that time was $429K, which is coincidentally 5-6% lower than February’s median of $455K. Who would’ve thought that a tiny 2-mile strait on the other side of the world could have such an impact locally? The quicker this is resolved, the better for home buyers and sellers.
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