Let’s start with the basics and talk about pricing. Whenever I talk about pricing I try to look at the big picture and one of the best ways to do that is to look at large companies. For example Opendoor. Opendoor reported some of its worst numbers since its inception in August. For August 2022 they lost money on 42% of the homes they sold nationwide. As we dig down deeper they lost money on 76% of the homes they sold in the Phoenix metro area. So make no mistake we are in a heavy market shift. Things have been moving very quickly in how the consumer is reacting to changes in the economy. I’m not trying to poke holes in their business model either, these are just the numbers.
Staying in that big picture theme I will talk about some of the builders now. Some of the largest builders in the county like DR Horton have slashed prices and created huge incentives for buyers and agents alike to attract more sales. During the last phase of the market when it was weighted to sellers some builders were not even offering agents a commission for bringing them a buyer. In a recent email from DR Horton, they are offering things like buyers’ closing cost paid, free appliance package, even huge interest rate buydowns. They are also offering agent bonuses like 4%-5% commission on their quick move-in homes. As the interest rates have increased over the last few months It has also been reported that some builders are cutting production by as much as two-thirds. Building 1 home for every three they were building during the last phase of the market where the sellers were in control. Not to mention the last update where they were cutting the prices of all floor plans of new builds by 40k across the board.
So far these are all good signs for home buyers, which brings me to interest rates. This is where all buyers are really feeling the pinch. As recently as April we were seeing mortgage interest rates as low as 3%. But now it’s September, and we are in a whole new world. I had a conversation today with Lori Smolke at People’s mortgage and she pulled up today’s rate sheet and let me know that 7% would be a fair basis without buying the rate down. That is a huge swing on someone’s buying power.
As you can see the same home at $500,000 will cost you an additional $1,200 a month in payment.
So what does it all mean? Make no mistake, I can’t see the future but I can read the signs. In April of 2022 what seemed to be the height of the market we had the lowest number of homes available that I have ever seen in my career, roughly 4,200 and here we are September 2022 and we have over 20,000 homes available. The principles of supply and demand are pretty easy to spot. People just can’t afford to buy at the current prices and rates. So will we see a market crash? I’m not really sure, but based on market trends I would say we will see a significant drop in home values. I would guess around a 30% reduction in value. That isn’t even necessarily a bad thing. One thing the housing boom exposed is that we have a huge shortage of affordable housing. According to Census data, the average household income in Maricopa county is roughly $68,000. It is higher in Queen Creek at a little over $100,000. However, that means that most people couldn’t afford to buy the home they currently live in under today’s market conditions.
That to me is a huge red flag.
Stay tuned for more updates.