Metro Phoenix Market Summary at the Beginning of April 2023

The market continues to improve.

Sales volumes remain much lower than a year ago, largely because institutional investors and iBuyers lack action on the buying front. A year ago they were competing frantically, which they probably now regret. However, sales in March are up 32% from February and only down 25% from March 2022, which compares favorably with down 29% in February and down 39% in January.

iBuyers create 2 transactions instead of one, so transaction volumes will fall when they stop (or almost stop) buying. Demand from normal buyers weakened in March, mostly due to higher interest rates. But these interest rates are lower again in early April, and the drop in demand has been overwhelmed by the sharp drop in supply. Active listings without a contract fell by 5.5% during March whereas listings under contract fell by only 1.9%.

The balance between supply and demand has been moving consistently in sellers' favor since mid-November. This confirms we are in the rebound phase of the correction that dominated the second half of last year and created an atmosphere of fear throughout the market. That fear can now be replaced with relief as one market signal after another turns positive and resumes a normal trend. Despite the doom scrollers on social media and elsewhere, today's market is healthier than it was in April 2019, which at the time we were perfectly comfortable with. Casual observers tend to worry about factors that can cause weakness in demand, then forget to balance that with factors that can cause weakness in supply. Right now, supply is weakening much faster than demand, so interest rate movements are no longer the key thing driving the market. Competition between buyers is starting to warm up because there are so few sellers. This should not surprise us. Supply is just as important as demand.

The USA is unusual in having a very large percentage of its existing mortgage loans at fixed interest rates. In most countries, the majority of mortgage loans have adjustable rates. In Central Arizona, this means loans written more than a year ago look very cheap compared with new loans. This deters homeowners from selling homes unless they don't need them. They may not need a home if they have just inherited it from a relative who died, or if it is a second home or investment. But if they have a primary residence, selling that home means killing a very cheap mortgage and giving birth to one with a more expensive new rate. Most people do not want to do that. In 2022 we saw a flood of supply from investors, speculators, panicking iBuyers, and the like, but this wave has exhausted itself. We are back to a chronic shortage of homes to buy. We have less than 14,000 available, which is about 40% below normal. Demand is indeed weak, but it is only 18% below normal. Do the math.

Prices have moved higher even earlier than we expected. The monthly median is $419,900, up from $410,000 in late February. The average closed price per square foot has reached $277.60, up from $265,20 on Feb 9. That is almost a 5% rise in just 7 weeks.

The listing success rate is back to 78% or so, having fallen to a low of 62% in November last year.

Foreclosure activity remains minuscule. There is little sign of much new supply coming from that direction antime soon.

New construction permits for single-family homes are currently low, so there will be limited new supply from builders for a while.

It is time to re-adjust buyers to expect increasing competition from each other as they chase a dwindling number of homes for sale. Sellers have recently been offering generous incentives including substantial interest rate buy-downs. Those incentives are likely to reduce in value as sellers start to realize they have the upper hand in negotiations.

A few areas on the outer fringes of Greater Phoenix still have a robust supply. These include Buckeye, Casa Grande, Coolidge, Florence, Maricopa, and San Tan Valley. However, these are counter-balanced by extremely low numbers of active listings in the more affordable central areas, such as West Phoenix, South Phoenix, Tolleson, South Glendale, and West Mesa.

Do not make the mistake of thinking the market is the same as it was in late 2022. We are in a new and very different phase.