Greater Phoenix Blue Chip

NO IMPROVEMENT ON THE HORIZON YET

Second Quarter, 2024

Elliott Pollack

While most of the dynamics facing the Greater Phoenix housing market haven’t changed much (including the forecasts made by the panel), there are two new things worth mentioning.

The first is that the National Association of Home Builders and Wells Fargo have changed the nature of the very valuable Housing Opportunity Index.  It will now be called the Cost of Housing Index or CHI.  And while the measure is different, the intent remains to measure housing affordability.  The HOI measured the percentage of potential buyers in a market that could afford the median-priced home.  The higher the number, the greater the number of potential buyers that could afford the median-priced home.  The new index (CHI) calculates the ratio of mortgage payment (assuming a 10% down payment, adding in property taxes, insurance and private mortgage insurance) as a percent of median family income.  In other words, it looks at the percent of income needed to cover the monthly payments for a home (the norm has historically been 28%).  And the higher the index, the lower the number of people who can afford a home.  Unfortunately, the new index does not have any history before 2023.  Even so, going forward it will be a very valuable measure of what is going on in an affordability constrained market.

The second is that according to the Cromford Report, the Greater Phoenix single family market is seeing a surge in active listings, up 55% from last year to almost 18,000.  The highest growth was in homes between $300,000 and $2,000,000.  Greater supply would generally indicate more downward price pressure in the housing market.  Yet, that has not been the case because affordability pressures continue to be a problem. While this indicates more options across the spectrum of prices for buyers and increased competition for sellers, prices are still rising.  It does suggest that as interest rates start to decline the market will become more fluid.

As for single family permits, interest rate-driven weakness in permits pushed down permit activity in the Valley, especially between July 2022 and June 2023.  The new home market has improved some since the second half of 2023.  Comparisons, therefore, were easy in the second half of 2023 and the first half of 2024.  Indeed, the recovery from that interest rate shock has allowed permit activity to increase more than 44% in the first five months of 2024.  As year-over-year comparisons become more difficult in the second half of 2024, the rate of growth in new home permits will subside.  Even so, the panel believes that single family permits will grow by more than 27% for 2024 as a whole.  But that does imply more difficult comparisons for the rest of 2024.  Surprisingly, 2025 is expected to be relatively flat with the 2024 numbers.

New home builders continue to do better than the existing home market as can be seen by the ratio of the percent of new home sales to total sales.  That should continue into 2025.

As for apartments, permits through May are down 26% and vacancy rates are up from 8.9% in the first quarter of 2023 to 10.4% in the first quarter of this year according to RealData.  As long as interest rates and apartment vacancy rates remain high, apartment permits will continue to be weak.  Given the lag time between permits and actual construction, the result will be fewer new units hitting the market over the next couple of years.  That’s about when absorption could pick up.

GREATER PHOENIX BLUE CHIP: RESIDENTIAL

MARICOPA COUNTY MORTGAGE PAYMENT CHANGE

The monthly payment for the same house increased 94% for a new home and 82% for an existing home between June 2021 and June 2024 (90% LTV) 

Source: Freddie; Information Market