Metropolitan Phoenix April 2022 Market Summary

Market Summary for the Beginning of April 2022

The downward trend in supply that started in late October has reversed during March and we are now seeing what appears to be a significant rising trend. However, this is not due to more incoming new listings. It is due to fewer active listings going under contract. Ordinary owner-occupier home buyers are hitting real trouble.

Closed listings remained healthy during March, but were down 2.6% from last year. However, the massive rise in prices since March 2021 means that March 2022 holds the record for the highest monthly dollar volume ever seen - $5.816 billion.

This might lead you to think that demand remains very strong, but you would be wrong. The falling number of listings under contract shows a negative story - down almost 8% from this time last year and even down 3.6% compared to the beginning of March. As we said - fewer active listings are going under contract.

The very significant rise in mortgage interest rates over the past few months is keeping many sellers out of the market - they do not want to let go of their cheap fixed-rate loans. However, it is also taking the wind from the sails of the normal owner-occupiers, especially the first-time homebuyer. Not only are they suffering sticker shock from the asking prices of the homes they would like to buy, and crazy competition from cash buyers, the higher interest rates mean their monthly mortgage payment has increased alarmingly. In some cases it has increased so much it is no longer deemed to be affordable by their lender and their loan application is denied.

In this way an expensive market reduces demand and prices start to climb less steeply. At least they would do if it were not for the investor demand. Many investors are flush with cash and the residential real-estate looks like a safe haven. A hedge against inflation, revenue-producing (unlike many stocks, cryptocurrency, commodities, and gold), and very tangible - it looks extremely attractive when coupled with rapidly rising rents.

The problem is that rents are not rising anymore. Based on closed leases on ARMLS, average rents peaked last August and have been gently falling since then. The leading indicator, average asking prices, has fallen more significantly. So many new rental properties of all kinds have been created - we may be running a bit short of prospective tenants sometime soon. How will investor sentiment change when tenants get scarce?

Meanwhile, home prices are still rising at amazing speed. The average $/SF has risen 8.9% in the first 3 months of the year and is likely to continue rising until June at least. The median sales price is up from $425,000 to $456,000 in 3 months and looks likely to break $470,000 by the end of the second quarter. The third quarter is always a slower period and it is likely we will get some respite from the rising prices between June and September. What happens in the fourth quarter will largely depend on how long investors retain their current euphoria in the face of increasing risks. Is their investment safe as houses?

Mid Month Pricing Update and Forecast

Each month about this time we look back at the previous month, analyze how pricing has behaved, and report on how well our forecasting techniques performed. We also give a forecast for how pricing will move over the next month.

For the monthly period ending April 15, we are currently recording sales $/SF of $293.33 averaged for all areas and types across the ARMLS database. This is up 1.3% from the $289.69 we now measure for March 15. Our forecast range midpoint was $302.42, so we were expecting a large 4.4% rise and saw instead an increase of only one-third of that percentage. Last month the astonishing increase was outside the upper bound of our 90% confidence interval. This month we saw the opposite - the actual was below the lower bound. The monthly average $/SF can often vary by as much as 1% from day to day, but we clearly experienced a colossal increase in average price per square foot over the previous month, followed by a dramatic decrease in the rate of appreciation. However, 1.3% is still a lot of money for a single month. In fact, pricing has increased 9.3% since the start of the year, equivalent to an annual rate of 32%.

On April 15 the pending listings for all areas & types show an average list $/SF of $308.32, up 4.1% from the reading for March 15. Among those pending listings, we have 99.5% normal, 0.08% in REOs, and 0.4% in pre-foreclosures. Although the distressed segment of the market remains tiny, the number of pre-foreclosures has doubled in the last month. Very few homes are going back to the lender, however.

Our mid-point forecast for the average monthly sales $/SF on May 15 is $305.58, which is 4.2% above the April 15 reading. We have a 90% confidence that it will fall within ± 2% of this midpoint, i.e. in the range of $299.47 to $311.69.

Demand is falling while supply is starting to creep upward. The level of imbalance in the market remains enough to keep prices rising for the remainder of the second quarter. We anticipate some weaker price action during the third quarter, due mainly to the change in the mix that almost always occurs during the hottest months.

Source: Cromford Report