Greater Phoenix Blue Chip

THE SCANT GOOD NEWS NOW LOOKS LESS PROBABLE

Fourth Quarter, 2024

Elliott Pollack

Last quarter’s GPBC article probably said it all with the exception that the good news on future interest rates now looks less probable.  This is not because the spread between mortgage rates and the 10-year treasury isn’t likely to narrow.  It is.  It’s because the likelihood of the 10-year treasury declining much in the near term seems a lot more tenuous than it did 90 days or so ago.  It’s not necessary to go into the reasons for this point of view right now except to say that some of what President-elect Trump hopes to accomplish will have to go very well or very poorly for mortgage rates to reach 5% or less in 2025.  The overwhelming problem for the single-family market remains affordability.  Well, actually unaffordability.  And a major positive change with that problem just doesn’t look likely at the moment.

Historically, the “acceptable” or affordable mortgage payment is 30% of net household income.  On the positive, the payment level as a percentage of income is down from last year.  But the current U.S. average is 35%, and it is 40% plus in about half of the states (representing more than half of the population).  According to Goldman Sachs, it would either take mortgage rates declining to 5%, home prices declining by 15%, or some combination of both to get back to the acceptable/affordable level of payment to income.  Neither looks promising for 2025.  Not only is supply likely to remain limited, but the gap might get worse as fewer households can afford to buy so more will rent.  In addition, there is, as discussed in previous issues of the GPBC, a “Don’t Move” effect caused by the fact that 63% of U.S. homeowners are locked in at or below 4% on their mortgage.  Additionally, rapidly rising property taxes and home insurance, which now accounts for 32% of the average mortgage payment, are expected to continue to rise rapidly.

This will affect rental units as well.  It is now much cheaper to rent than to own, particularly for those newly entering the housing market.  The rub here is that building permits for apartments are down 74% from 2021.  In the near term, the large number of units already in the pipeline will cause vacancies to rise.  But, by 2027, the number of deliveries to the market will begin to slow, and vacancies will begin to decline.

It is hard to believe that a growing economy could be hamstrung between strong demographics, the need for a lot more housing and affordability.  But that is the case.  A significant portion of the problem is government at all levels running up costs.  That doesn’t seem likely to change either.  Something will give.  It’s difficult to see exactly what or when.  Look for smaller homes, smaller lots, and fewer amenities interspersed with more regulation.  Also, look for a continued shift from new-home ownership to rental until the bottleneck is relieved.

GREATER PHOENIX BLUE CHIP: RESIDENTIAL

THE 30-YEAR FIXED RATE MORTGAGE RATE SIGNIFICANTLY EXCEEDS

THE AVERAGE ON OUTSTANDING LOANS, DISCOURAGING MOVING