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 The High Buyer Demand in 2021/2022 "Stole" from 2023

The Three Factors that Affect Home Affordability

If you’ve been following the housing market over the last couple of years, you’ve likely heard about growing affordability challenges. But according to experts, the key factors that determine housing affordability are projected to improve this year. Selma Hepp, Executive, Deputy Chief Economist at CoreLogic, shares:

“. . . with slowly improving affordability and a more optimistic economic outlook than previously believed, the housing market could show resilience in 2023.”

The three measures used to establish home affordability are home prices, mortgage rates, and wages. Here’s a closer look at each one.

1. Mortgage Rates

Mortgage rates shot up to over 7% last year, causing many buyers to put their plans on hold. But things are looking different today as rates are starting to come down. George Ratiu, Senior Economist at realtor.com, explains:

“Let’s celebrate some good news. . . . mortgage rates are down. With inflation showing a tangible slowdown, I do expect mortgage rates to follow suit in the months ahead.”

Even a small change in rates can impact your purchasing power. Nadia Evangelou, Director of Forecasting for the National Association of Realtors (NAR), gives this context:

“With a 6% rate instead of 7%, buyers pay about $2,700 less every year on their mortgage. As a result, owning a home becomes affordable to about 1.4 million more renters and 4.3 million more homeowners.”

If 7% rates paused your homebuying plans last year, this could be the opportunity you need to get back in the game. Be sure to work with a team of experts who know the latest on mortgage rates and can give you the best advice for the current market.

2. Home Prices

The second factor at play is home prices. Home prices have made headlines over the past few years because they skyrocketed during the pandemic. When discussing home prices in 2023, Lawrence Yun, Chief Economist at NAR, says:

“After a big boom over the past two years, there will essentially be no change nationally . . . Half of the country may experience small price gains, while the other half may see slight price declines.”

So, while prices will likely be flat this year in some markets, others could see small gains or slight declines. It all depends on your local area. For insight into what’s happening in your market and how prices are impacting affordability, reach out to a trusted real estate professional.

3. Wages

The final component in the affordability equation is wages. The graph below uses data from the Bureau of Labor Statistics (BLS) to show how wages have increased over time:

When you think about affordability, remember the full picture includes more than just mortgage rates and prices. Wages need to be factored in as well. Because wages have been rising, many buyers have renewed opportunity in the market.

While affordability hurdles are not completely going away this year, based on current trends and projections, 2023 should bring some sense of relief to homebuyers who have faced growing challenges. As Mike Fratantoni, Chief Economist at the Mortgage Bankers Association (MBA), says:

“Rates are expected to move lower for the year, and home price growth is expected to cool, both of which will help affordability challenges.”

Bottom Line

If you have questions, reach out to a trusted real estate professional to explore your options. You may be closer to owning a home than you think.

The Hardest Working Agent in Arizona

This has been another week in which the balance in the market moved strongly in favor of sellers. The average change in the CMI over the past month is 22%, up from 21% last week.

Paradise Valley continues to improve for sellers at a rapid rate. Its supply index is down from 52.1 to 43.2 and its demand index is up from 57.6 to 73.2. So demand is still well below normal, but supply is below normal to a far greater degree. Surprisingly, the average $/SF in PV is already starting to rise, across active, under-contract, and even closed listings.

Also improving fast for sellers are Chandler, Mesa, Avondale - all up 39% or more for the last month. These are leading the charge.

Above 20%, we have Phoenix, Tempe and Glendale, while Peoria, Gilbert, Cave Creek, Queen Creek, Surprise, Fountain Hills and Buckeye are above 10%.

Scottsdale, Maricopa and Goodyear are below 10% but all improving, unlike last week when Goodyear was still going backward.

Remember that the Cromford® Market Index is the earliest of the leading indicators. It tends to go down before most people expect it to and it goes back up before people think it should. It can be up to a month before other market indicators follow suit. For example, last year it peaked on February 7 and started to weaken. During the bubble years, it reached an all-time low of 26.5 on November 6, 2007 and then rose very slowly over the following 2 years, not exceeding 100 until May 2009.

Among the 17 largest cities we see 6 currently in a buyer's market below 90, 4 balanced between 90 and 110, and 7 in a seller's market over 110.

Loan officers nationwide report that new mortgage applications are rising in volume. This could have something to do with the fact that typical 30-year fixed mortgage rates have dropped by 0.5% since the start of the year.

The time may soon come to replace skepticism with hope. Despair is so 2022, and no longer fashionable.

Data and commentary courtesy of ©2023 Cromford Associates LLC

Is It Time To Sell Your Second Home?

During the pandemic, second homes became popular because of the rise in work-from-home flexibility. That’s because owning a second home, especially in the luxury market, allowed those homeowners to spend more time in their favorite places or with different home features. Keep in mind, a luxury home isn’t only defined by price. In a recent article, Investopedia shares additional factors that push a home into this category: location, such as a home on the water or in a desirable city, and features, the things that make the home itself feel luxurious.

A recent report from the Institute for Luxury Home Marketing (ILHM) explains just how much remote work impacted the demand for second and luxury homes:

“The unprecedented ten-fold increase towards remote work since the pandemic is an historic development that will continue to fuel second home demand for many years to come.”

But what if you bought a second home that you no longer use? If you’re now shifting back into the office or are seeing your priorities and needs change, you may find you’re not utilizing your second home as much. If so, it may be time to sell it.

And if you own what’s considered a luxury home, buyer demand for it may be even greater. In another report, the Institute for Luxury Home Marketing explains:

“. . . the last few years have left their legacy for the luxury market. While it might only represent a small percentage of the overall real estate market, luxury homeownership’s influence is growing. Not only has the purchase of homes valued over $1 million (a figure considered by the National Association of Realtors to be a benchmark for luxury) tripled from 2.6% to 6.5% since 2018, but demand for multiple luxury properties has soared over the last two years.

This phenomenal increase has been driven by a growing affluent demographic who consider owning a luxury property a necessity in their asset portfolio. All indications are that this trend is here to stay, albeit that demand is set to return to a more sustainable level.”

If you own a luxury second home that isn’t being used as much anymore, now’s the time to sell. There are still buyers in the market who are looking for a home like yours today.

Bottom Line

Connect with your real estate advisor to explore the benefits of selling your second home this year.

The Hardest Working Agent in Arizona

Here are the basics - the ARMLS numbers for January 1, 2023 compared with January 1, 2022 for all areas & types:

• Active Listings (excluding UCB & CCBS): 16,298 versus 5,776 last year - up 182% - but down 14.9% from 19,155 last month
• Under Contract Listings (including Pending, CCBS & UCB): 5,456 versus 9,393 last year - down 41.9% - and down 14.1% from 6,352 last month
• Monthly Sales: 5,132 versus 9,265 last year - down 44.6% - but up 4.1% from 4,931 last month
• Monthly Average Sales Price per Sq. Ft.: $265.58 versus $267.92 last year - down 0.9% - and down 2.5% from $272.30 last month
• Monthly Median Sales Price: $410,000 versus $425,000 last year - down 3.5% - and down 2.4% from $420,000 last month

There are lots of small numbers in December's totals. We have very low volumes of closings because both buyers and sellers are discouraged. Monthly sales are down almost 45% from this time last year, and listings under contract are down nearly 42%. The numbers confirm that demand is very weak compared to normal for the time of year, and even weaker compared to the strong demand 12 months ago. However weak demand does not necessarily make a market crash. Excess supply is what really drives prices down hard. This is what we saw in 2006 through 2008. But in 2023 supply is low and getting lower. It is much higher than this time last year when it was abnormally low, but it is still a long way below normal.

Activity is very low across the board, but the market balance is normal. By that we mean we have an equal balance between buyers and sellers. The trend is now moving in favor of sellers, having been favorable to buyers a month ago. So although there is gloom and despondency almost everywhere, amid the murk there are clear signs of improvement. Because sentiment is so poor, there is psychological pressure to lower prices. However, there is no such downward pressure coming from the market. If all trading was done by unemotional computers, prices should be stabilizing right now.

In the real world, strongly influenced by human emotions, prices fell sharply last month, losing 3.5% in the monthly median and 2.5% based on the average price per square foot. However, sales prices are a trailing indicator and these moves reflect the balance in the market in November when we experienced a clear advantage for buyers. Leading indicators are looking more positive. This probably stems from interest rates being less horrible than they were six weeks ago. Demand is starting to stabilize and even showing a few signs of a slow recovery. With new supply very weak, we are not witnessing a market crash. This is merely a correction, with prices now just a tad lower than a year ago - the monthly average $/SF is down 0.9%.

We are still dependent on the whims of the Federal Reserve. If they continue to push the Federal Funds Rate higher in an attempt to curb inflation, then mortgage rates could move higher too, putting a quick damper on any recovery in demand. However if the 30-year fixed mortgage rate stays between 6% and 6.75%, then we should have confidence that the housing market can operate normally at this level. Prior to 2009, anything under 7% was considered a low-interest rate, and rates under 5% were unheard of.

To achieve confidence we need several months of interest rate stability. This is by no means certain to happen, but it is possible. Once the fear is removed, we should see more signs of a recovery in demand and volumes will rise back toward a more normal level.

New supply is still very low, but we will be watching closely for any change in this trend.

Data and commentary courtesy of ©2022 Cromford Associates LLC