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.

The housing frenzy appears to be over. Multiple offers above list price, sight unseen all cash purchases, bidding wars, homes contracted prior to the sign installation, and real estate agents with a listing guaranteed a commission have been the "norm" over the past two to three years, but then April 2022 came along with rising inflation / interest rates / fuel prices. Being an appraiser and owning a real estate appraisal firm, we are tip-of-the-spear, per say, and we feel the market by changes in volume of orders. This time (April 2022), we were unsure if it was the new Fannie / Freddie desktops or the market slowing, but we quickly noticed the inventory increasing and even seeing "price drops" on listings. What????  That has not happened for years in Arizona, it was then I realized we have crested the mountain and are now going down the mountain.

This does not necessarily mean "Doom & Gloom" and actually is healthy.  Appraisers not only provide lenders with opinions of market value, but we are also mostly real estate market analysts. We see the interiors of multiple homes each day and review interior / exterior photos of hundreds of homes per day. We drive to properties, look at the neighborhoods and recognize changes. During the past three years, we seen a market that did not care what the property was, only that there WAS a property to buy. This would be like starving and when you finally found food, you really would not care what it was if you could eat it. So, why is it healthy? Well, because at the current rate of appreciation, 90% of American families would not be able to afford a home, not to mention the repair expense of the home they found and had to bid well above market value for. There needed to be a reset, and hopefully the days of appraisal waivers and desktop appraisals are gone. I have firsthand seen so many cases of home owners that chose the waiver path then went to refi and found out the home wasn't even worth what they paid for it, although the market has went up over 1%, per month, during the past year.

Interest Rates are a leading cause because it decreases the affordability curve in the wrong way for typical families.  Rising gas prices hurts us all because everything we eat, use, and consume requires diesel trucks / boats / trains and that transportation cost raises consumer prices. Companies have shareholders and shareholders want to see profits. In addition, the housing run just ran out of steam, there were too many factors pulling down on the run over the past six months, and in April, it became too heavy and now down it goes. Do I believe that we are in a 2008-2011 drop? Not even close. Most mortgage loans in today's market, the owner has a pulse and a job and has verified income. But a correction is coming and if you did not pull out 100% equity, it will just be a hiccup in the long term.  I am not going to estimate what I personally believe the drop will be, I will let the market be the market and will just report it as I see it.

So how can homeowners, realtors, investors, etc. get ahead of it. Well, one thing would be to get a real appraisal from a real appraiser. Have them measure the home using ANSI Z765-2021 standards to get a real (Fannie / Freddie) accepted livable square footage. Ask the appraiser to do forecasting for an acceptable window of time, review all the comparable listings and the marketing times of those listings (along with price drops), get a real market value based on the market as of the effective date (not using sales contracted in February, March, or April when there was no inventory). This can be a great marketing tool and provide some reality to sellers for Realtors or Investors and even Homeowners. Times are changing and being at the forefront of the change may save you tens of thousands.

We provide all types of residential valuations, measuring services, market analysis, and neighborhood observations. Visit our website and read the menu, not only does it explain our services it also has self-help guidance tips.

West Valley Appraisal Services