The answer is there are several reasons for it. But it is important to understand those reasons to make educated predictions for the housing market. A comprehensive look ultimately indicates that price increases will continue in 2022.
As we all know, once the coronavirus reached the United States it spread quickly, infecting people, and affecting businesses. These circumstances continued to factor, but additional influences then added to market pressure, and that continues to be the case into our third year following. Here are five reasons why we believe home prices will continue to rise:
LOW INVENTORY
Even before the pandemic hit the U.S., the nation’s home inventory was at record lows. While housing was more affordable in 2019, there remained a divide in the supply available to meet the demand of buyers.
In Arizona, this was especially true. Leading news stories were Census.gov reports that Arizona was the fastest growing state in the country. In a report published October 8, 2021, the population reached over 7 million in 2020, which was an 11.9% increase in one decade.
At the time this article was written, there were 4,347 active homes in the Arizona Multiple Listing Service (ARMLS). Of those, only 2,532 listings were single family homes in Maricopa County resulting in buyers scrambling for anything that comes on the market.
We recently asked Todd Menard, West USA’s Chief Operating Officer, how many homes should we be available on ARMLS for a balanced market: “To Properly answer this question the definition of a balanced market is when the month’s supply is between 4-6 months. <4 equals a Seller’s Market, and >6 equals a Buyer’s Market. That said, the most desirable markets historically are at a 3 month’s supply. To estimate the amount of inventory we simply take the current monthly closed unit production and multiply it by the number of desired month’s supply. In February 2022 ARMLS reported 8500 units closed. Since a neutral market would begin at 4 month’s supply, we would multiply 8500 units times 4 (the neutral market threshold) indicating a neutral market would not begin until inventory reached 35,000 active listings. However, if you multiply the 8500 times 3 month’s supply the most desirable market would begin at 25,000 active listings,” said Todd.
DISRUPTION IN SUPPLY CHAINS
Supply chains in myriad industries have been dramatically affected. Lockdowns, shifts to working from home and labor shortages that continue to plague the nation all factor into issues of obtaining and transporting necessary materials to build new homes. Some buyers who purchased a new home in 2019, were not able to move into the finished product until 2021. The new home market, then, is still playing catch up from years of delay and demand, again from an already low inventory.
HOMEOWNERS FEEL TRAPPED
Given the already high prices of homes and extremely competitive conditions of the market, many homeowners are now afraid to sell, for fear they will have nowhere to move. They are feeling intimated by having to possibly waive appraisal contingencies and agree to shortened inspection periods. They also know that buying a new home contingent on selling their existing home is less desirable for sellers. For these reasons many sellers are simply staying put.
INCREASING RENTAL RATES
Adding to the already large pool of buyers, is the growing number of former renters entering the market, as rent prices increase. While it has always been true that buying makes more long-term financial sense, as mortgage payments are an investment in home equity instead of a monthly payment then lost to a landlord, it is now increasingly true that renters are paying as much or more than homeowners, on a monthly basis.
RISING INTEREST RATES
Since interest rates have been particularly low for a few years, and this is now coupled with the fact that home values have increased markedly, homeowners are able to stay where they are, take out cash against their existing loans, and make wanted or needed upgrades and changes to the home in which they are already living, instead of selling.
Historically, decisions to increase interest rates help to slow demand; however, this takes time. The disparity between supply and demand is so great and still so affected by these aforementioned factors, that buyers will first recognize that the interest rate trend in an upward trajectory is only starting, so home prices will continue to rise this year.
This also can be good news for buyers. Though rates are increasing, they are still at all-time lows. Many are paralyzed to do anything leaving other buyers with great conditions to finally make a move.
Though no one has a crystal ball and can guarantee what the future holds for our local real estate market, the evidence to support that home prices will continue to rise is strong. These are among the many reasons that our team of real estate wealth managers and their clients are continuing to purchase primary residences and invest in real estate in the Arizona market.
