I would like to be certain that the times ahead will become easier for buyers and sellers alike. Last year, around this time, I was fairly convinced that interest rates would lower significantly come the late Spring and early Summer. I had my reasonings, and it is true there was a little reprieve where rates came from the 7s and lowered themselves to almost 6%. I thought my prognostication was coming true. It seems I was dead wrong.
Interest rates have only gone up since then and are at this moment , not only higher than they were last year, but also the highest they have been in 20 years. This has put a great strain on not only buyers, but homeowners who would have liked to refinance. Sales are overall markedly down as a result. A thoughtful question might be, if demand is so weak, should we expect price drops?
My thinking? No. At least not significantly.
The part of the formula that so many miss is the other great problem in Phoenix real estate right now. That is the hugely significant lack of supply of listings. With this inventory dearth, even weak demand can feel hot where a small amount of buyers are competing over an even smaller amount of homes.
Even with the tamped demand, supply is too small for us to worry about price drops anytime soon. Now we have normal light season fluctuation around this time, but that is to be expected. For us to start ringing alarm bells, the supply of available housing would have to begin increasing dramatically.
Here are some reasons why this seems unlikely to us:
- The same high interest rates that are keeping buyers from the market are also acting as a disincentive for sellers. They do not want to trade their pre-2022 3-4% interest rates for 6-7% rates.
- The ibuyers (opendoor, zillow, Offerpad etc.) did not over-buy this year like they did last year. They spent the last half 2022 and the first half of 2023 getting rid of excess inventory and they are now back to normal levels.
- Foreclosures and short sales are still a miniscule slice of the market.
- Builders are still not building enough homes to meet the migration demand.
What could increase supply? To my mind, a strong recession that resulted in massive job losses would be the thing that could dramatically change the current status quo. Rates going to the high 7s or past 8 would also have a severe impact.
Barring either the above, my sense is that prices will continue to increase slowly, even in this languid market that frustrates all. If rates do come back down significantly, then we believe it will be back to spiking prices and bidding wars.