Why the Phoenix Real Estate Market Will Favor Buyers in Summer 2014

Home sales in the greater Phoenix area dropped 20% in March 2014, compared to the same time last year. This is largely the result of investor pullout and a lack of “native” demand to make up for it. As a result of these and other trends, the Phoenix real estate market will likely begin to favor buyers over sellers, as we move into summer 2014.

Home prices, on the other hand, were higher in March 2014 than the same month last year. The median sales price rose 17% during that 12-month period, climbing from $175,000 to $204,520. This is according to a recent report issued by the W.P. Carey School of Business at Arizona State University.

Meanwhile, inventory within the Phoenix housing market has grown considerably. Each month, Realtor.com issues a metro-level housing report with data compiled from their own property listings. According to that report, the number of homes listed for sale in the Phoenix metro area rose 47% over the last year. That put the city in the top ten for inventory growth, among 146 metro areas across the United States.

The median age of inventory also rose significantly over the last 12 months. This means homes are taking longer to sell today, compared to a year ago. It’s further evidence that a market shift is underway.

Current Home-Price Gains Are Unsustainable

Let’s connect the dots. Here we have a housing market where prices have risen sharply over the last few years, largely as a result of real estate investors like Blackstone buying properties while house values were low. But investment activity has dropped off sharply in response to rising prices and smaller profits.

“Institutional investors [such as Blackstone] have largely moved on to other housing markets in the country with more foreclosures and bigger bargains,” said Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School. “Other buyers aren’t rushing in to fill the void.”

So the level of demand that drove prices up has weakened considerably. Meanwhile, the number of homes for sale has risen over the last year or so.

What does it all mean? For one thing, it means the Phoenix real estate market is beginning to favor home buyers over sellers. Twelve to eighteen months ago, there was a serious inventory crunch across the metro area. Investors and buyers were competing for limited properties. This is what drove prices up so sharply.

But local housing supply is now growing, year over year. According to the ASU report mentioned earlier, home buyers had 64% more properties to choose from in April 2014, compared to a year earlier. This dramatic shift of supply and demand should decelerate price growth over the coming months.

The current trends will also cause a broader shift in the Phoenix housing market, where leverage is concerned. As a result of inventory growth and declining demand (particularly from investors), home buyers may soon have the upper hand when it comes to negotiating real estate sale prices.

Phoenix Real Estate Market ‘Weak and Flat,’ According to MiMi

Freddie Mac has created a new tool to shed light on housing market conditions at the local level, particularly in larger cities. The Multi-Indicator Market Index, or MiMi, offers data and insight for metro areas across the U.S.

MiMi uses a variety of indicators, including employment data and home-purchase activity, to evaluate local real estate trends. It is designed to “provide a unique picture of local housing market activity for professionals who care about real estate and follow the housing industry,” according to Freddie Mac.

As of May 2014, MiMi calls the Phoenix housing market “weak and flat.” Flat, in this case, means there has been “no sizeable shift in the local economy” in recent months.

MiMi for Phoenix housing market
Freddie Mac’s “MiMi” report for Phoenix, with data through Feb. 2014 (enlarge)

To learn more about Freddie Mac’s assessment of local housing conditions, visit www.freddiemac.com/mimi/ and click on the “metro” tab.

Foreclosures Down Sharply, Year Over Year

According to a recent analysis, the number of foreclosure starts in the Phoenix area fell by 48% in March, compared to a year earlier. This means fewer distressed properties will enter the foreclosure pipeline over the coming months, which is a positive trend for the local housing market and broader economy. Such properties are commonly priced below market value, which puts a drag on home prices across the board.

The number of completed foreclosures (as measured by recorded trustee deeds) has also declined considerably in the last year. According to Arizona State University, trustee deed recordings dropped by 43% between March 2013 and March 2014. Clearly, the Phoenix real estate market is returning to a state of normalcy, at least where distressed properties are concerned.

A Good Time to Buy a House?

Home buyers will digest these data points and arrive at the same question. Is it a good time to buy a house in Phoenix? As a general policy, we do not encourage or discourage home purchases. Instead, we provide facts and information to help buyers make informed decisions for themselves. So here’s a summary of current trends within the Phoenix real estate market, heading into summer 2014…

Home prices have risen considerably over the last few years, but this appreciation now appears to be slowing down. According to the S&P/Case-Shiller Home Price Index, house values in this metro area rose 12.5% from February 2013 to February 2014. This time last year, the annual appreciation rate was much higher at 23%. So when measured year over year, the price gains are clearly shrinking. This is actually a good thing, as the former rate of appreciation was simply not sustainable.

The bottom line is that home prices in Phoenix will likely continue to rise over the next few years. (Beyond that we are not even comfortable speculating.) But those gains will probably be smaller than in recent years — and arguably more sustainable.

More importantly, from a home buyer’s perspective, is the supply and demand situation. Local housing inventory has grown over the last year. Meanwhile, demand has softened as investors scale back their purchases. This means market leverage is shifting from sellers to buyers. So from a bargaining standpoint, summer 2014 could be a great time to buy a house in the Phoenix area.

Disclaimer: This story contains predictions and other forward-looking statements about the Phoenix real estate market. Such statements are presented as opinions, not as facts. We make no claims or guarantees about future economic conditions such as home prices and sales activity.