Real Estate Analysis and Commentary in Peoria, Arizona

It has been nearly 100 days since our last blog post about the market changes happening in Maricopa County and all over the country for that matter.  

We get a lot of calls, asking us if the housing price drop of 2008 is here now, and that is a difficult question to answer.  It is yes and no, with a little grey in the middle.  Interest rates and rising basic living costs have skyrocketed in the past six months.  Rates have risen from the mid 3% area to 7%.  I will give a basic example of the dollar / affordability differences between the two.

A $350,000 loan amount, amortized over 30 years at a 3.5% interest rate would require a $1,572, per month, (principle & interest) payment.  At a 7% interest rate, the monthly payment would be $2,329, per month (principle & interest).  That is a whooping difference of $757, per month more for the same home.  So, for a typical family with a car payment, a few credit car payments, a college loan payment, and a house payment, the mortgage payment has to typically fit with-in a 45% to 50% loan to debt ratio.  So lets do the math, buyer A has a combined household income of $82,000 or $6,833 (prior to taxes).  45% to 50% of that income, per month, would leave $3,417 to $3,758 left for your revolving debt (car payments, credit card payments, loan payments, mortgage payments, etc.).  

So buyer A, has a car loan payment of $700, per month, a furniture loan of $150, per month, $250 in monthly credit card debt, and a $500, per month, loan on that fishing boat for a total revolving debt of $1,600 (not including the mortgage payment).  Therefore, in the best (50% loan to debt ratio) scenario, they would be able to qualify for a mortgage payment of $2,158.  So you can see at a 3.5% interest rate, buyer A would be able to afford a mortgage amount of around $475,000 (this is why home prices were higher).  Now, at a 7% interest rate, with the same Buyer A, they would be able to afford a mortgage amount of $320,000 (best case scenario).  Net difference in the affordability index of $155,000 less (mortgage amount).  This is huge, and this is why home prices are dropping.  Based on this simple affordability index example, home prices for the same home with a constant down payment, would have to drop approximately 32% at a 7% mortgage rate before Buyer A would be able to purchase the same home at a 3.5% mortgage rate.

Now, this doesn't factor in the higher prices of fuel, groceries, and basically every item consumed by consumers in the United States in the past two years or so.

So to simplify what is happening, it isn't that we had a housing bubble, it is that there was an interest rate bubble.

So will housing prices drop 32%?  We don't think so, but there will and has been a correction in the past six months or so, and this will continue until houses are at price-points that allow the typical homeowner to be able to qualify for a mortgage.  As always there are a lot of other factors in play, like rising income taxes, mass job cuts and/or unemployment, natural disaster, conflicts, etc.

We know personally that a lot of customers ask "is now a good time to buy", and the answer is yes if you need a home and don't need to sell.  It is a complete buyers market right now, selling a home is difficult and there is a lot of other listings to compete with.  If the dream house you are waiting to drop in price, drops in price, more than likely the home you need to sell will drop in price at a similar rate, so it will equal out.  If you don't own a home, now is a good time to bargain shop, as buyers have the leverage in negotiation currently.

Let's see what happens over this last quarter, and we should be able to tell some long term trends and we will update the blog in another 90 days or so.