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May 16, 2022

Phoenix Real Estate market update for May 2022

MLS Supply Up 45% in 6 Weeks
Rising Interest Rates Dropping Demand Quickly
 
For Buyers:
It’s the moment you’ve been waiting for, less competition and more supply in Greater Phoenix! Active supply is up 40% from this time last year, but all that gain has been achieved over the last 6 weeks with an increase of 45%. This is an enormous change from April’s report where supply was only up 16% over last year and still below the count reported on January 1st. As of this report, the supply count is 7,157, still 72% below normal for this time of year but rising quickly.
 
The annual change in inventory is impressive, but it’s the short-term growth that is sending shock waves throughout the market. Inventory listed between $400K-$500K is up 35% in just 3 weeks. Counts in all segments between $500K-$1M are up 99% in 6 weeks and the count from $1M-$1.5M is up 54%, also within 6 weeks. Not all price ranges are rising in inventory. Properties listed below $400K are still flying off the shelves and declining in supply.
 
The increase in inventory may seem like an early Christmas miracle, but it’s not coming from a massive flood of new listings hitting the market. Visualize supply counts as the level of water in a bathtub, with new listings coming through the faucet and accepted contracts going down the drain. The water level can rise if there are more new listings coming through the faucet, or if there are fewer accepted contract flowing down the drain. In this case, new listings are at normal levels and not excessive, but fast rising mortgage rates have reduced the number of accepted contracts and closed the drain. This is what is causing inventory in the “bathtub” to increase dramatically.
 
While recent interest rates are disappointing for many buyers, causing some to drop out and wait, history has shown us that they rarely stay high, or low, forever. While it’s near impossible to predict when interest rates may begin to decline, if we look over the last decade when interest rates have risen by 1% or more within a year, it has taken anywhere from 1 to 3 years for them to return to their original starting point. Even when rates increased by a whopping 5% over 14 months from 1980-1981, it only took 1.5yrs to drop back to where they started. Future expected interest rate drops over the next few years along with moderate home price appreciation and monthly principal reductions may provide today’s buyers the opportunity to lower their payments by hundreds of dollars down the road.
 
For Sellers:
The market is in the early stage of shifting out of an insane seller market and into a mere frenzy seller market. Before we know it, it could be a regular old hot seller market where properties still appreciate but take multiple weeks to sell, buyers don’t waive their appraisal contingency, and sellers happily pay for home warranties. But before all of that happens, it starts with one simple act from a seller, a list price reduction.
 
As inventory has risen at a fast pace over the past 6 weeks, so have the number of weekly price reductions as sellers compete for fewer buyers. Listings between $400K-$500K have seen a 103% increase, with the median price drop at $13,000. Price drops in $500K-$800K range increased 157%, with median drops between $16,000 and $20,000. Drops in the $800K-1.5M range increased 125%, with a median drop between $25,000 to $50,000.
 
So far, price reductions have proven effective in keeping the median days prior to contract around 7 days. However, as inventory continues to rise in the coming weeks, price reductions may not be enough to keep some properties from lingering longer in active status, creating more choice for buyers and strengthening their bargaining power.
 
While the market is still strongly in favor of sellers, it is changing rapidly. For those sellers waiting to sell close the peak of price, this may be the time to list. Prices are still projected to continue rising, but at a slower pace over the next few months.
 
If you are curious as to how this is effecting your home value, see my site at www.myphoenixvalue.com for your home value estimate based on MLS comps.
Posted in Real Estate News
March 16, 2022

Phoenix Real Estate Market update for March 2022

Short Term Rentals up 23% NE Valley
MLS Rental Supply up 60% in 5 Months
For Buyers:
Don’t be fooled by the small increase in supply and decrease in demand compared to last year. The Greater Phoenix housing market is far from weak and will continue to see prices appreciate in the foreseeable future. Housing market indicators move slowly, unlike other types of investments such as stocks or currencies. When events such as interest rate hikes or stock market fluctuations occur, there isn’t an immediate measurable response in housing prices. Consumers may “panic sell” stocks, crypto, or even their belongings; however, selling the roof over their head or a performing rental is typically the last resort. For this reason, jolts to the economy (like a sudden pandemic or economic sanctions) need to be in effect for many months without improvement for housing to see prices finally respond.

A unique player in the housing market is the short-term vacation rental. This product is specifically prolific in Northeast Valley cities such as Scottsdale, Paradise Valley and Cave Creek.  According to AirDNA, Scottsdale alone was estimated to have 5,400 active short-term rentals as of December 2021, up 23% from the 4,400 estimated just last September and equating to over 4% of existing housing supply for that city. This changes the game in evaluating the value of property in high tourist areas like Kierland and Old Town Scottsdale. Instead of the traditional route utilizing past sales and adjusting for amenities for residential occupancy, certain homes are valued as individual businesses that come complete with a revenue stream, furnishings, established clients, websites, advertising contracts and hired support services. Under these circumstances, appraisers have their hands full distinguishing between a business sale and residential resale when evaluating appreciation.

To compound the issue in the Northeast Valley, new construction permits are not as abundant as they are in the West Valley and Southeast Valley; meaning there is little relief in the form of future new housing supply to accommodate both full and part time demand in the area.

 

For Sellers: 
Greater Phoenix is not close to peaking in price for residential resale, not with supply of homes for sale 76% below normal for March and demand 13% above normal. However, be aware that the estimated payment for a 1,500-2,000 square foot home is now $77 higher than the median rent for a similar rental leased through the Arizona Regional MLS. The rental market responds to a shift in demand faster than the resale market does because landlords are faster to respond with a lease price reduction if their investment is vacant for too long.

 

In 2021, median asking rents jumped from $1,855 in January to a peak of $2,395 by September, an increase of $540, and have remained between $2,300-$2,400 per month since. Tenants accommodated the increases until about June, then the median for closed leases stalled at $2,100 per month. Despite the stall, landlords continued to increase their asking rent and saw the supply of available rentals rise by 60%. This is a significant development because the only reason a landlord would decide to compensate a real estate agent by listing their rental in the MLS is if they’re not renting it fast enough through other means.

You may be wondering why this matters to you as a home seller. The health of the rental market is often looked at as an indicator for the health of the resale market.  If lease rates continue to go up and are successfully closed at those rates, then that’s a good indicator for resale prices as well. When rental rates reach a ceiling and stay there for months, then it’s possible the resale market may follow, but as stated earlier, resale is slow to respond. It could take many more months before the shift is realized, so for today it’s business as usual.

Let me know if you have any questions, I hope all is well!   Keep me posted if you know of anyone looking to make a move in this crazy market! 
Posted in Real Estate News
Feb. 15, 2022

Phoenix Real Estate Market update for February 2022

Housing Market is Just as Tough for Buyers over $1M
Median Sale Price up 2.4% Over Last Month

 

 

For Buyers:
Affordability has been dominating the headlines as of late, however few have been documenting the plight of buyers in the luxury market over $1M. Typically, the higher in price one can go, the more they’d expect to see less buyer competition, more choice and more negotiating advantage.  Not so.
In more expensive areas such as the Central Phoenix/Camelback Corridor, Paradise Valley, Scottsdale, Fountain Hills and Carefree/Cave Creek, supply of homes is still not sufficient for the demand. This is true even for buyers with budgets from $1M to $3M where 31% of sales close over asking price and many buyers need to prepare to offer $50,000 or more over market value.

In Paradise Valley, on February 5th there were 85 active listings in the Arizona Regional MLS and 85 in escrow.  From 2015-2019, supply ranged from 370-450 active listings in February and 53-93 under contract.  So while demand is within range, the fact that there are so few properties to choose from means that competition remains tight. The median time prior to an accepted contract was 13 days and prices rose 34% in the past year; impressive for a city where the median sale price is currently $2.79M.

In the Central/Camelback Corridor of Phoenix, typically there would be 140-200 active listings over $1M and 19-52 under contract .  However, on February 5th there were only 55 active and a whopping 88 under contract. The median time on the market prior to contract was 10 days and property values have risen 28% per square foot since last year.

Similar stories can be heard throughout the luxury market.  Scottsdale would typically see 800-1,000 listings over $1M with 80-240 under contract in February.  On February 5th there were 274 active and 365 under contract.  Buyers have a median of 7 days before a listing over $1M is under contract and 34% of sales closed over list price.

For Sellers: 
The median sales price went up another 2.4% over the past month, which is impressive considering the average mortgage rate increased from 3.11% in December to 3.55% by the end of January, according to Freddie Mac. Buyers who have been waiting for prices to stop accelerating, possibly even flatten out or decline, have been disappointed for at least 18 months in a row as home values appear to defy the affordability limits of the population. Despite prices continuing to rise, there is still an expectation that rising interest rates will eventually influence demand, and thus prices, sometime this year.

Frankly, that’s not an unreasonable expectation under normal circumstances. However, the housing market is far from normal right now. Over the course of 30 days, demand has gone from 23% above normal to 19% above normal, so there has been some shifting in demand that can be attributed to mortgage rates and their effect on affordability.  But demand is still very high, and supply moved from 72% below normal to 75% below normal during the same time frame. This drop in supply mitigated any relief the drop in demand would have had on rising prices.

When the total number of homes in an area is insufficient for the number of people living there, the interest rate has less impact on rising home values. There are fewer homes for sellers to move to, so they choose not to place their home on the market at all.  Even if demand falls due to mortgage rate increases, if it remains above normal while supply remains below normal then property values will continue to rise.

Unless the supply of MLS homes for sale achieves a range of 16,000-24,000 listings, prices will continue to rise before demand drops low enough to stop them.

 

Posted in Real Estate News
Jan. 12, 2022

Phoenix Real Estate Market update for January 2022

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Cost to Rent vs. Buy in 2022
Owner Occupant Buyers Retreated in 2021
For Buyers:
As the cost of purchasing a home increases in Greater Phoenix, the question of whether to rent or buy becomes harder to answer for some buyers.  The overall median cost of a home is currently $425,000, and for a typical 1,500-2,000 square foot home, the median cost is $420,000.  The estimated payment, assuming 10% down and including principal, interest, taxes and insurance, is $2,123.  The median monthly rental rate for the same size range, recorded through the Arizona Regional MLS, was $2,195 in the 4th quarter of 2021; just $72 per month more.
  
Some buyers might question the advantage of purchasing a home in order to save $72 per month. However, the financial advantage of owning vs. renting is typically realized for those who own their home for at least 3-5 years.

Let’s assume, hypothetically, that a buyer purchased a home today for $420,000 with a $42,000 down payment (10%).  Over the next 5 years, their home’s value fluctuates up and down and in the end doesn’t appreciate. That may sound horrifying, however during this time the loan principle has been paid down to $336,000. The homeowner’s equity has doubled from $42,000 to $84,000 without their home appreciating a dime, and with 20% equity they no longer have to pay private mortgage insurance. Their payment declines $200.  Still a win.

Now let’s assume, hypothetically again, that while our homeowner is paying down their loan, the home value fluctuates up, down and sideways, but still averages a 6% appreciation rate over 5 years (close to the current rate of inflation).  The home would be then be worth $562,000, an increase of $142,000.  

After 5 years, this hypothetical homeowner went from $42,000 to $226,000 in equity, and their monthly cost was nearly the same as what they would have paid in rent anyway. For this reason, even when the monthly payment required to buy is close to that to rent, buying still wins in the long game.

 

For Sellers: 
Despite rumors of the U.S. housing market cooling off, Greater Phoenix has moved farther into a seller’s market over the past month. Growing disparity between supply and demand in our market means there is little evidence to suggest price appreciation will slow in the first quarter. After a strong summer, new listings slowed down in the 4th quarter of 2021, while the number of accepted contracts remained high. The result is 2022 starting off with another historically low supply level, and listings under contract, while 7.6% below 2021, still strong with the 2nd highest count since 2014.

 

It’s an accepted opinion among local analysts that income levels in Greater Phoenix cannot sustain another year of 28% annual appreciation, especially if interest rates continue to increase. However, seeing there is little relief from home builders adding more supply to the equation, it’s reasonable to expect the market to respond with a softening of demand. This trend started to reveal itself in the 2nd Quarter of 2021 in a subtle manner. 

Since 2014, buyers purchasing their primary residence have made up 70%-76% of total residential purchases in Maricopa and Pinal County. In Q2 2021, that percentage dipped to 67%, and declined to 63% by October. While traditional buyers retreated, competing buyers for 2nd homes and institutional buyers made up of Wall Street-backed iBuyers, hedge funds and other investment groups stepped in. Price appreciation slowed from an average of 3.3% per month to 1.1%.

While 2022 is coming out of the gate strong, and the Spring is typically the strongest season for buyers, it remains to be seen how much control investors and 2nd home buyers will take if traditional home buyers retreat. The last time they ignored affordability issues within the community, everyone lost in the end.

I hope you've had a great start to 2022 so far!   Please keep me posted if you, or you know of anyone looking to buy or sell a home this year.  I'm happy to answer any other questions you might have!   

 

Posted in Real Estate News
Dec. 14, 2021

What Does a “Normal” Market Even Look Like Anymore?

What Does a “Normal” Market Even Look Like Anymore? 
Sellers: Look for these Measures to Shift in 2022

 

 

For Buyers:
Does anyone know what a normal, or balanced, housing market looks like anymore?  In Greater Phoenix, the supply and demand indices have only come together twice in the past 21 years to form a balanced market.  First from 2000-2003, then again from 2014-2015.  There have only been two buyer markets recorded during that same time frame, from 2006-2009 (extreme) and a brief 3 months in 2010 (mild).  Seller markets were recorded from 2003-2005, 2011-2013, and 2015-2021. The last 18 months have been extreme to say the least.

Over the past 21 years, Greater Phoenix has been in a buyer market for a combined total of 43 months (3.6 years), a balanced market for 55 months (4.6 years) and a seller market for 155 months (12.9 years).  This is important to discuss because the longer seller markets last, the more human beings change their definition of what “normal” looks and feels like.  

“Normal” for Greater Phoenix is not a balanced market, it’s a seller market. The years from 2015-2019 got us used to 2-3 months to sell a home, 15-19% of sales closing over list price, $2,500 over list considered an amazing offer, 25-28% of sales with closing cost assistance and 5-9% annual appreciation.

The last 18 months have shifted our expectations to 1 month to sell a home start-to-finish, 40-60% of sales closing over list price, $10,000 over asking price to start the bid, only 2-3% of sales with closing cost assistance and 27-39% annual appreciation.

So when national analysts suggest the housing market will cool off in 2022, many (if not most) local housing analysts believe it will remain a seller market, but a weaker one.  Prices don’t decline in seller markets, but listings may stay active for a few more days before accepting a contract. A full price offer may be enough to win a home. Buyers may have less pressure to waive appraisal and repairs.

However, after the last 18 months of extreme seller market conditions, anything less than sheer lunacy could feel like the sky is falling.

For Sellers: 
With all the talk of 2022 predictions and uncertainty, it’s important for sellers to stay in the moment and lean into what is known.  The reality of the Greater Phoenix housing market is that supply is 67% below normal and dropping.  Demand is 23% above normal and stable for now.  Until these two indicators start moving towards each other, the housing market will not see prices stabilize. If anything were to negatively affect Wall-Street-financed corporate iBuyers and institutional landlords, then that would cause a shift downward in demand.  That could happen someday, but it isn’t happening today.

Even if demand were to decline tomorrow, sale price measures are the last to change in a shifting market. The first thing to go up would be the cost of the sale for the seller.  For example, days on market will increase, list price reductions will increase and then eventually seller concessions will increase before anything is reflected in the final sales price.  The pattern goes like this; homes are on the market longer than expected as sellers push the boundaries on price. If the market resists in the form of zero offers, a price reduction is recorded in response.  If demand dwindles to where only one offer is received instead of multiple offers, more pressure is placed on sellers to offer home warranties, do repairs, or consent to closing cost assistance in order to secure closing at their desired price. None of these indicators appear to be shifting at the moment, but that could change.  The key for sellers in 2022 is to stay on top of current market trends, listen to your REALTOR®, and be the first to shift expectations if buyer demand drops.  A wise REALTOR® once said, “If you can’t be with the buyer you love, love the one you’re with.”

Posted in Real Estate News
Nov. 15, 2021

Phoenix Real Estate Market update for November 2021

2022 Housing Predictions: Who to Believe?
Median Price Currently Rising 1% per Month on Average

 

For Buyers:
‘Tis the season for 2022 projections in the housing market and, as expected, there are conflicting opinions among national housing analysts. Zillow and Goldman Sachs predict home values will rise nationally 14-16% between now and the end of 2022. CoreLogic released their prediction that home values will only rise 1.9% next year, citing a concern with rising interest rates. Then there’s Zelman and Associates warning that investors are over-building and over-buying as household formation and population growth are weak, challenging the notion of a housing shortage.

 

 

 

Who do we believe?  Zillow recently pulled out of the business of buying homes after realizing their algorithm was failing to accurately value homes under current market conditions. CoreLogic’s prediction last year, that home values would drop 6.6% by May 2021, was a gross misfire as values soared instead. While Zelman is waiving a caution flag, the organization is stopping short of issuing a price prediction for next year.

 

In the meantime, prices in Greater Phoenix continue to rise. Prior to 2020, the median had been rising at 0.6%-0.8% per month on average (7-10% per year) which was in response to a milder seller market.  In the 2020-2021 extreme seller market, that average rose to 1.3% per month in 2020 and 2.3% per month so far in 2021, with a peak in the Spring between 3-5% and 1% per month average since June.  
Many local analysts agree the past rate of increase is indeed unsustainable. The payment for a 1,500-2,000 sqft home has risen 33%, or $500/month since last November, and the median rent on the MLS for the same sized home increased $372/month. At the rate prices have been increasing for the past 2 years, returning to a mere 7-10% annually would be considered a massive relief for buyers.

 

 

For Sellers:
While the caution flags are waving for a softer housing market next year, there are a number of positive indicators in Greater Phoenix that may keep our market appreciating, albeit slower. While interest rates, affordability, sluggish population growth and household formation are valid reasons for concern, here are a few counter-indicators to consider:

 

  • Lending practices have loosened up with the new $625,000 loan limit and more consideration of self-employed borrowers
  • Arizona is ranked in the top 10 states for population growth and household formation over the past decade due primarily to domestic migration
  • Per the Arizona Department of Economic Opportunity’s October Employment Report:
    • Jobs and the labor force have completely recovered from last year’s pandemic losses
    • Unemployment claims have fallen to pre-pandemic levels
    • W-2 Incomes have continued to rise and are up 3.4% YOY
 
Posted in Real Estate News
Sept. 13, 2021

Phoenix Real Estate update for September 2021

Contract Activity Spiked 20% In This Price Range
Luxury Sellers Over $1M Enjoying a Hot Summer

 

Phoenix Real estate market September 2021

For Buyers:
Buyer demand has rallied sharply over the past 4 weeks, which is unusual for this time of year.  The rally is exclusively between $400K-$800K, spiking nearly 20% in contract activity since the end of July.  We have to wait until the transactions close and record to identify the buyers, but judging from July’s closing analysis we expect to find a surge in iBuyer purchases (aka “Internet Buyers”). The most notable iBuyers active in Greater Phoenix are OpenDoor, OfferPad, Zillow, and now RedFin. At least one of these organizations has increased their approved acquisition price to a $750,000 limit, which could explain the sudden spike in sales. iBuyers do not buy and hold property, they primarily engage in a short-term flip strategy and their activity does not constitute true demand. True demand is someone who will live in the home or rent it to someone who will live in the home. Flip investors are strictly the middlemen between the seller and the final buyer, which adds one extra closing to the books and makes true demand appear larger than reality by increasing the total number of sales without increasing the level of supply. The existence of institutional flip investors in the marketplace can be frustrating for buyers from a competition standpoint, but in the end these buyers still need to re-sell the home to someone. As prices have reached levels beyond the affordability threshold for a larger percentage of residents, the question is whether or not iBuyers will be able to flip their acquisitions with the same profit margins going forward. Permits for new homes are up 32% for January through July this year and are at their highest since 2006.  Considering the average build time for a new home is anywhere from 10-14 months due to supply chain disruptions, iBuyers and sellers in general may be seeing more competition from new construction starting in the 4th quarter 2021 and into early 2022. 

For Sellers: 
While the $400K-$800K market is seeing elevated activity, the luxury market over $1M is a different story. Make no mistake, the luxury market is still extremely hot but it’s not because buyer activity is rising. Listings in escrow over $1M have dropped 17% since June, but that’s normal for this time of year in this segment. The reason the luxury market is still hot is due to a simultaneous drop in competing supply.  It’s more prominent over $1.5M where supply has dropped 10%, also since June. So if contract activity isn’t rising, then why is supply over $1M dropping?  It’s seasonal.  Every year from May to July there’s an elevated number of cancelled and expired listings in this price point, which reduces the number of active listings. This year was no different.  Additionally, the number of new listings added monthly to supply dropped 26% between April and August, which meant there were fewer new listings to replenish those that cancelled or expired.  The result is a luxury supply count 31% lower than this time last year. This is good news for the sellers who remained active over the summer.  Even though luxury demand came down, it’s still 21% higher than it was last September with fewer competitors. If the market follows its seasonal tendencies there will be a rally of new listings coming to the party in October, possibly giving buyers more choice in the 4th quarter.

Posted in Real Estate News
Aug. 16, 2021

Phoenix Real Estate Update for August 2021

 

Supply Up 42% Since May, Price Reductions Up 131%
Affordability Dips Below Normal to 56%

 

For Buyers:
There is a little relief ahead for buyers in Greater Phoenix.  Supply continues to rise in price points between $300K-$1.5M and buyer demand has settled into a normal seasonal cool down that is expected to last through the end of the year.  What this means for buyers is the 2nd half of 2021 so far has more choice and less competition. There are two things going on right now in the market.  The first is a non-seasonal increase in supply, fueled by a high number of new listings hitting the market every week. Typically August is the low point of the summer season for supply. However this year it is the high point and continuing to rise, up 42% since May. That’s good news for buyers as it provides more choice. The second is a seasonal decline in buyer activity.  Typically buyer demand shoots up in the first half of the year, peaking around May, then it gradually declines in the 2nd half of the year. Last year the market saw the opposite due to the pandemic, demand dropped when it was supposed to rise and rose when it was supposed to drop.  The return to a normal seasonal rhythm in 2021 means that there may be slightly less competition from other buyers in the 3rd and 4th quarters.  This doesn’t mean the housing market has gone cold; it has simply made it a little more tolerable to navigate. To put it in numbers, on April 8th, there were 12,862 listings under contract and only 4,177 active. Today on August 9th, there are 11,743 under contract and 7,166 active.  Add a recent decline in interest rates keeping payments down and exhausted buyers have a little more room to breathe.
For Sellers: 
The Home Opportunity Index (HOI), published by the National Association of Home Builders every quarter, measures housing affordability based on the median family income per metro area.  Last quarter, the HOI for Greater Phoenix fell to 56 (we predicted it would be 57 based on preliminary MLS data).  This is below the normal range for the Phoenix metro area of 60-75. What does this mean?  This means that a household making the median family income of $79,000 per year could technically afford 56% of what sold in the 2nd Quarter of 2021. The last time the HOI dipped below 60 was in the 4th Quarter of 2018 when it hit 57. The market responded with a drop in annual appreciation from 10% to just 4% within 3 months. Since June of this year, annual appreciation of the monthly median sales price has declined from 32% to 28%.  As affordability declines, it’s reasonable to expect the market will begin to resist the prices sellers initially ask for their homes. In other words, there will be fewer buyers able to bear dramatic monthly increases in home costs like those seen over the past year. Meanwhile, exuberant sellers continue to list their homes at prices that defy comparable sales. As these homes sit for an extra day or two on the market without an accepted contract, weekly price reductions have risen 131% since May with a median price drop of $14,000. Typically, the median price reduction is $5,000. Of course, there are still properties closing over asking price. However, those contracts were accepted approximately 1-1.5 months ago when the market was hotter than it is now. The percentage of sales over asking price has declined from 60% to 55% over the past two months, with the median amount over list price declining as well from $20,000 to $15,000. We expect this trend to continue.

Posted in Real Estate News
July 16, 2021

Phoenix Real Estate Update for July 2021

What’s Ahead for Sellers as Demand Weakens
Median Sales Price Up 29%, Fewer Contracts

 

For Buyers:

Buyers with budgets over $300,000 may be noticing that they have more listings to choose from compared to a few months ago. This is especially true in the price points between $400,000 and $800,000 where inventory has grown 92% since February. When a buyer has, for example, 4 or 5 homes available that meet their criteria instead of just one, they are less inclined to throw all of their ammunition into one home in order to win it. They may still offer full price or more, but may not be under as much pressure to waive contingencies and shorten inspection periods.

As this subtle change proliferates with more inventory, the buyer experience will become less stressful. As the median sale price continues to rise, affordability is something to pay attention to. Not what’s affordable to you necessarily, especially if you’re out of state, but what percentage of the local population can afford your home if you need to sell right away or sometime in the future. A family making the median income in Greater Phoenix could afford 63% of what sold in the 1st quarter of 2021. That was within the normal range of 60-75%, indicating a good time to buy or sell. While we wait until August for the 2nd quarter measures to be released, we expect the new measure to land around 57%, slightly below normal.  This does not indicate that the market will plunge into a buyer market causing prices to decline, but it does indicate a reason to expect prices to rise much slower going forward.

For Sellers:
The Greater Phoenix housing market continues to shift from an extreme seller market into a less extreme seller market. As prices continue to rise, more new sellers are motivated to put their home on the market and fewer buyers are able or willing to pay the higher price. Over the next 5 months, give or take, the market is expected to move into a weaker seller market, driven in part by dwindling affordability and buyer fatigue.

The first half of 2021 has been so insane with contingency waivers and exorbitant offers over asking price that many sellers may not know what a normal seller market looks like. Here are a few things to expect:

  • Sales price appreciation will not average 3.1% per month. April 2021 saw prices appreciate 5.1% within 4 weeks. May was 2.3%. June was 1.1%. From 2015-2019, a long-term seller market but much weaker than today, prices appreciated at an average of 0.5% per month with a range between 0.3% and 0.8%.
  • There will be more list price reductions. It’s important to remember that the sales price is the LAST thing to respond in a shifting market. One of the first things to respond is a list price, in the form of a price reduction. When a seller overshoots what the market can bear, they will get the silent treatment in the form of zero offers. That triggers a price reduction by the seller. Weekly price reductions have risen 112%   since mid-February from 317 in a week to 672. In a weaker seller market, expect between 1,500-2,000 price reductions every week.
  • Sellers will get their price, but pay more in concessions. If a seller prices their home high in anticipation of excess demand but only gets one offer instead of multiple offers, they are more likely to accept home warranties, do repairs and offer concessions. Currently the percentage of sales involving concessions is very low at 4%, up from 2.7% the week prior. In 2019, a good seller market, 25% of closed sales involved seller concessions.
Posted in Real Estate News
June 23, 2021

Here are tips on whether you should eliminate that mortgage in retirement

Here are tips on whether you should eliminate that mortgage in retirement

When it comes to whether retirees should pay off their mortgage in retirement, there typically is no clear-cut answer.

That’s because like most things about planning for (and in) your post-working years, the decision depends on your specific situation.

Obviously, a couple of benefits come with paying off a mortgage: Your monthly obligations drop, which can provide more wiggle room in your cash flow. 

Yet depending on your tax situation and your available remaining assets — as well as where the pay-off money would come from — you may face financial implications that would need to sit well with you.

Here’s what the experts have to say.

The math

Sometimes, the calculation can be cut and dried. That is, if you’re paying more in interest on your mortgage than the interest you’re earning on the money you’d use to pay it off — and the tax consequences of doing so would be minimal — it may be an easy decision.

“Do you have the cash just lying around in a checking account? If so, then it may be a no-brainer to pay off a debt costing you a few percentage points when you’re earning nothing on cash in today’s rate environment,” said certified financial planner Brian Schmehil, director of wealth management for The Mather Group in Chicago.

Likewise, if you’re invested in bonds that are yielding 1.5% and you’re paying more than that on your mortgage, you essentially are negating the gains from the bonds, said CFP Allan Roth, founder of Wealth Logic in Colorado Springs, Colorado. 

He also pointed out that if you’re paying, say, 2.5% on your mortgage and you pay it off, you essentially just earned that rate on the money you used to retire the loan.

“It would be a risk-free, tax-free, 2.5% return,” Roth said. 

Additionally, you didn’t have to sell an asset for that return: Your home, whose value could rise, remains yours.

On the other hand, if the money you’d use to pay off the mortgage is invested through a retirement account, the interest-rate comparison may not work in your favor.

“If that’s the case, it may not be in your financial best interest to pull money out of a retirement account to pay down a debt that’s costing you less than what you otherwise might make by investing it,” Schmehil said.

Also, if you’ve been able to deduct mortgage interest on your tax return — you must itemize your deductions to get that break — keep in mind that this benefit will disappear. (Most taxpayers do not itemize, however.)

Taxes

There also may be tax consequences to taking a distribution from your retirement funds.

Unless the account is a Roth — whose contributions are made post-tax but distributions are generally tax-free — your withdrawals would typically be taxable. Traditional 401(k) plans and individual retirement accounts provide a tax break for contributions, while distributions are taxed as ordinary income.

“If that distribution moves you from the 12% to 22% marginal bracket, or from the 24% to 32% bracket, then you’re paying Uncle Sam a tax premium of 8% to 10% just to pay off a debt that may only cost you 3%,” Schmehil said.

However, if you do decide to use those retirement assets to eliminate your mortgage and want to minimize the taxes, you could spread out the payoff over several years, said Roth at Wealth Logic.

“If you’re in the 12% marginal bracket, I’d say withdraw an amount that keeps you at that 12% rate each year,” Roth said.

Additionally, be aware that when you pay off your mortgage, the cash you use essentially converts to equity in your home — which you may or may not be able to tap easily down the road.

In other words, if having an illiquid asset — your house — would interfere with meeting your financial goals, it may be better to keep the money elsewhere, either in a cash or investment account, depending on your goals and risk tolerance (how long until you need the money and whether you can stomach volatility in the markets).

Schmehil and other financial advisors said, however, that even if you determine the math suggests it would make more financial sense to continue paying your mortgage, there is the emotional factor in the calculus that can — and perhaps should — weigh heavily.

“Yes, clients could potentially make more money by leaving capital with us to manage and attain higher returns net of taxes than the interest cost of their mortgage,” said CFP Larry Ginsburg, owner and president of Ginsburg Financial Advisors in Oakland, California.

“Why speculate with their home equity? What major benefit does this furnish to a client?” Ginsburg said. “We generally recommend paying off the mortgage and receiving the emotional benefit of lowering fixed overhead.”

For instance, he said, it helps ease retirees’ anxiety level during market downturns because they worry less about how their income is affected, even when they have no reason to be concerned.

Ginsburg said that clients who have initially disagreed with his advice to get rid of their mortgage have later thanked him. 

“I’ve never had someone come back to me and say they were unhappy that they paid off their mortgage,” he said.