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The 2022 Deceleration

Think of the fastest you’ve driven a vehicle and what it felt like to hold your top speed. Then the sudden drop on the speedometer after taking your foot off the gas – that difference from the peak and how much slower the experience felt at 90, even 80 mph.

At the risk of a bad analogy, that sudden deceleration is where we are in the Metro Phoenix real estate market. We stomped on the gas pedal in the summer of 2020 and floored it from December 2020 and March 2022.

(I sat in on an excellent online meeting a few days ago, hosted by Rose Law Group, that I encourage you to watch (video below). It includes recession forecasting by local economist Elliott Pollack, a discussion of developing and selling finished lots, how homebuilders like Richmond American Homes are building despite supply concerns, and what their current sales cycle looks like.)

This past April, inflation dominated the news cycle, mortgage rates rose, and stocks overheated. Multiple contracts, greedy pricing, ridiculous offers, and a generally unhealthy, one-sided, and joyless real estate market operating at hyperspeed quickly eased. This summer’s demand is 20% lower than last summer’s.

What has happened since early 2020 is an anomaly. A pandemic created a combination of remote work, relocation, labor and supply shortages, homeowners locking in record-low refi rates, and a sprinkle of price gouging squeezed inventory down to only 2,400 available homes. This created a rapid, surreal, and unsustainable rise in real estate values.

So why a “deceleration” and not a “crash”?

The housing and stock market crash during the Great Recession was the result of easy money and woefully unqualified buyers. Locally, our homebuilders were carrying way too many lots and spec homes on the books while Metro Phoenix relied heavily on the real estate industry and tourism as its primary economic drivers. Net migration flatlined. Foreclosed listings dominated the resale market for several years, prompting builders to slowly eat through a backlog of 60,000+ finished and paper lots while competing with cheap bank-owned resale homes, investors selling previously unfinished properties, and rentals who took in credit-battered families.

Today, Metro Phoenix is more than 122,000 homes short of need. 90% of our mortgages sit at a 4% interest rate or lower (affordable and comfortable housing costs where the owners aren’t in a rush to sell/buy at a higher rate). People are working. The media reports listings have “dramatically increased” and new listings are “flooding the market” – but as of today, there are 11,835 active single-family homes available in Maricopa County. At least 20,000 are needed to achieve a balanced market. Our local economy is far more diversified and now ranks as the 16th best city for tech talent.

What does this mean for us?

I have noticed something in the past 30 days that I hadn’t seen in two years: people are wanting to move neighborhood-neighborhood again. Most of my clients over the past 24 months were relocating, downsizing, or making other significant life-changing moves. This is both exciting for the client and good for the local market. Expect a recession but don’t equate it with a crash. Higher rates are responsible for much of this slowdown. It will continue to pull borrowers into lower price ranges, or out of the market completely. Great rates and programs can still be found through experienced lenders and rates could be seeing stabilization. Buyers right now should goal sensible purchase pricing with the best rate they can find to approach a similar monthly investment as a year ago when prices were more inflated but the rates were lower. The deceleration of activity we just experienced also coincides with the normal Phoenix summer slowdown where July is typically a throwaway month and August and September get better week by week.

Although our average and median prices per square foot have slightly declined, one thing to keep an eye on is Metro Phoenix’s climb towards becoming unaffordable.

One last thing before the Power Lunch All-Stars video below – my top speed was 124 MPH. 🙂


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