Young businessman looking into a crystal ball seeks the Arizona housing market predictions for 2022-2023

What’s in store for the Arizona housing market? Let’s look at the data. (Photo credit: Ra2 Studio/Adobe Stock)

Do you like wild rides? How about intrigue and drama? For this storyline, you don’t need to stream the latest series on Netflix. Just seek out the latest Arizona housing market predictions for 2022-2023 and hold on tight.

We may be verging on the year’s close, but the predictions indicate more surprises are in store before we hit December 31. Skyrocketing prices have been the norm in Arizona for a while now. In Phoenix last year, median sale prices rose from $325,000 in January to $404,300 by October. That’s an increase of nearly 25 percent.

By March 2022, housing prices in Phoenix were up 21 percent year-over-year, and the median sales price had reached $460,000. In August, the price had reached $465,000.

Zonda Home has released its November market report for Phoenix-Mesa-Chandler. For the city’s strengths, Zonda said, “Phoenix has a diversified and growing workforce. Job growth has been strong across all sectors and there are more people employed now than before the pandemic started. This could mitigate the risk of significant job losses locally in the event of a recession.”

On the flip side, it added, “Affordability remains the key metric to follow in the greater Phoenix area. Rising mortgage interest rates are directly impacting affordability. This coupled with other inflationary concerns are decreasing disposable income and weakening consumer confidence.”

Checking the temperature

There’s an obvious pattern here; we know the Arizona market has been as maddeningly hot as its weather.

But is that heat going to keep burning through the end of the year? It depends on whom you ask. Housing shortages throughout the state remain a central sticking point, and the lack of materials available also hampered these efforts. Steven Hensley, senior manager at Zonda Home, noted that this was a significant factor in driving the prices in 2022.

“In terms of annual home appreciation, 30 percent is an outrageous number. Imagine the price of anything going up by 30 percent in one year,” Hensley told AZBigMedia.

Trevor Halpern, founder of Halpern Residential at North&Co, told AZBigMedia that the number of available houses remains shockingly low for Phoenix.

“If we look at homes that are not under contract or pending, we have about 7,700 properties available today,” Halpern said. “Two years ago, we had 14,000, and this time last year, we had 8,700. Inventory continues to trend down.”

Is seasonal real estate a thing?

Keep in mind that we are heading into a period of the year when priorities shift to the upcoming holiday season. Many people don’t like to move during this time due to weather changes or other seasonal demands. There’s also the factor of moving kids during the school year for those with families. Now, you may assume that the weather may play into Arizona’s favor in this case, and you’d be right — snowbirds want to flock to the balmier states when the snow is flying in the northeast.

However, Fit Small Business reports that median sales prices are more affordable between October and February compared to other months of the year. The website states that in January 2021, the average American sales price for a home was $329,242. It then peaked at $385,546 in June 2021. This year, prices rose from $376,559 in January 2022 to $424,146 in April 2022.

The Cromford Report is an excellent barometer to check the Phoenix market. The report rates the industry based on current conditions. Here’s how it works: When supply and demand are in perfect balance, the Cromford Report assigns a score of 100. If the number is above 100, it’s a seller’s market. If it’s below 100, it’s a buyer’s market.

In April 2021, the market index for Phoenix was 500, indicating a massive number of buyers compared to the available homes. By November of the same year, it had dropped to 345.

We can expect the temperature to cool further based on these statistics. As of November 1, 2022, the market index sat at 93.9. That’s quite a difference from 18 months ago.

Need more proof? The Knock Buyer-Seller Index recently reported that 98 percent of the largest U.S. markets experienced a decline in home prices during the month of September when compared to their peaks in 2022.

So, what does this mean? If you want to buy a home in the southwest, the Arizona housing market predictions for 2022 are in your favor.

Arizona housing market predictions for 2023

Just like all things involving some guesswork, we don’t know how long these favorable conditions will last.

In August 2022, Knock predicted that the Phoenix-Mesa-Chandler metro housing market would favor buyers in July 2023, shifting from its July 2022 ‘neutral’ position on the index. This was a noticeable change in direction from a year earlier when Phoenix’s real estate market was firmly in favor of sellers.

This week, the Federal Reserve approved a fourth-straight rate hike of three-quarters of a percentage point as part of its aggressive battle to bring down the scorching inflation plaguing the US economy. This latest monster hike brings the central bank’s benchmark lending rate to a new target range of 3.75 percent to four percent.

If the American economy is plunged into a recession, housing market trends are bound to follow. Morgan Stanley initially predicted growth for next year but has since changed its tune by early October 2022.

“In this world, we do think that sales are going to fall steeper than we thought,” said Jim Egan, Morgan Stanley’s co-head of U.S. Securitized Products Research, on Morgan Stanley’s housing podcast.

Now, they’re predicting that year-over-year home price growth will tip negative in 2023 and finish the year at minus three percent.

“We had originally been forecasting a return to growth in 2023, but the change to the forecast that’s getting the most attention is that we went from three percent year-over-year growth in December of 2023 to minus three percent year-over-year growth by the end of next year,” Egan said.

“So if I buy a house today, it might be lower a year from now? That seems worrisome,” said Jay Bacow, Egan’s fellow co-head.

“Yes,” Egan replied but added positives and negatives to that forecast. While that would put U.S. home prices down seven percent from their current levels, “the positive headline is that even with that decrease in home prices from today, that only brings us back to January of 2022. That’s 32 percent above where they were in March of 2020.”

Moody’s Analytics looks frosty for 2023

If the recession is coming, Moody’s Analytics predicts that housing prices will fall from five to ten percent. Like Morgan Stanley, Moody’s also revised their housing forecast to trend downward in August and September. There are also markets that Moody’s deems to be “overvalued,” and those areas could experience drops of 20 to 25 percent.

So, who qualifies as an overvalued market? In late September, Moody’s put out a report that was carried by Fortune. According to the magazine, two hundred ten housing markets are vulnerable to these major plummets. Cities from coast to coast are covered, from Portland, Maine (overvalued by 33.61 percent), to Duluth, Minnesota (overvalued by 26.58 percent) to Santa Barbara, California (overvalued by 26.64 percent).

There is plenty of overvaluation happening in the western part of the country. Las Vegas, Boise, and Salt Lake City are all on the list.

Do you want to guess another city that made the list? Phoenix. It (along with Mesa and Chandler) sits at a whopping 57.47 percent.

Let’s have a closer look at Arizona as a whole:

· Phoenix-Mesa-Chandler —  Rick Palacios Jr., director of research and managing principal at John Burns Real Estate Consulting, referred to Phoenix as the “poster child” for the pandemic housing boom effect and one of the first areas to see home prices fall as the housing market corrects its course — as stated above, this area is over 57 percent.

· Flagstaff is estimated to be overvalued by over 65 percent.

· The Lake Havasu City-Kingman metro area is estimated to be overvalued by over 60 percent.

· Prescott Valley is estimated to be overvalued by over 51 percent.

· Tucson is calculated to be overvalued by over 34 percent.

Wait — what’s the “pandemic housing boom effect”?

The pandemic housing boom, or “bubble” as Fortune refers to it, was a two-pronged effect brought on by record-low interest rates combined with people who suddenly discovered they could work from anywhere. The pandemic forced millions out of their offices and into their homes, where they were working remotely. Many continue to do so or have entered a hybrid phase that involves spending some time in the office, with the remainder of work still handled from home.

When people realized they were no longer beholden to living in a particular city for work purposes, a massive shift began. You may remember stories from early in the pandemic of cities such as San Francisco and New York experiencing mass exoduses as people flocked to more affordable areas. The work-from-home phenomenon created an influx of buyers. Still, there wasn’t enough inventory to sustain it — and when demand outpaces supply, that’s the perfect recipe for housing prices to skyrocket.

It wasn’t just families looking to purchase, either. The average 30-year fixed interest rate grazed the bottom at 2.65 percent in January 2021. Those prices were enough to drive everyone into the housing market, from retirees looking to get into the Airbnb market to hardened international investors who wanted to explode their portfolios. Home prices have gone up 41.6 percent since 2020.

Boom vs. bubble

So, where does the boom become a bubble? It could be happening right now if you believe Fortune. “This might be a housing bubble. The evidence suggests it looks like a housing bubble. A little bit like a duck. It walks like a duck; it looks like a duck; it certainly might be a duck,” Enrique Martínez-García, a senior research economist at the Dallas Fed, told Fortune in June.

After the 2008 housing crash, the U.S. housing market took about five years to recover. By 2013, the market was slowly on the upswing. The forecast became brighter. However, home prices remained relatively affordable even as the market continued to improve. In the first quarter of 2020, Moody’s Analytics estimates that the median U.S. regional housing market was overvalued by only 2.1 percent.

But why the alarm? Over the past year, housing prices in the U.S have jumped nearly 21 percent while private sector wages were unable to keep pace. They rose only 4.8 percent. When there’s a significant disparity between working salaries and housing prices, the perfect storm for housing overvaluation is bound to occur. In the first quarter of 2022, Moody’s Analytics estimates that the median regional housing market was overvalued by 23 percent. That’s an increase of over 20 percent in two years.

More predictions, more drops

In early October, Wells Fargo predicted that home prices would register year-over-year declines in 2023, with the national median existing single-family home price expected to fall 5.5 percent over the year. Despite the course correction, Wells Fargo forecasted prices to remain above the average levels seen in 2021.

Wells Fargo also had a warning for Arizona and other portions of the “mountain west,” stating that “markets where home prices shot the highest, are now vulnerable to a disproportionate swing to the downside, notably in previously white-hot markets [such as Phoenix] where sales activity has slowed notably.”

And one final kick from the bank: “We note that a housing ‘correction’ is already well underway. Alongside sharply higher mortgage rates this year, existing home sales, new home sales, builder confidence, and single-family construction have all registered acute declines.

“We expect elevated mortgage rates and rising unemployment to lead to a further pullback in housing activity in the near term.”

Goldman Sachs has also been getting in on the predictions. In August, the financial institution forecasted that the housing downturn would have “further to fall” in 2023, expecting home price growth to stall completely and average zero percent in the new year. By September, the researchers at Goldman Sachs’ predictions had darkened further.

As mortgage rates have ticked up, Goldman Sachs researchers’ G-10 home price model in October showed that prices would decline by anywhere from five to 10 percent from its peak in the U.S, according to a post on its website entitled, “Why Home Prices are Poised to Fall.”

“While the drop in home prices may seem large, those declines are expected to only partly offset the jump in housing prices that happened after February 2020,” the post states, noting that American home prices skyrocketed 42 percent since that time. “But there are reasons to think the declines could be substantial: The housing market has already fallen seven percent in Canada and Sweden in just six months, and by 11 percent in New Zealand in eight months.”

Goldman Sachs economists also say there are “risks that housing markets could decline more than their model suggests,” partly because its outlook has “deteriorated sharply, based on signals from home price momentum and housing affordability.”

What does this mean for Arizona housing market predictions for 2022-2023?

Again, it’s a bit difficult to say. We know that things are trending downward as the market begins to cool for myriad reasons. Some of those reasons may be temporary (due to the holiday season), while others may last some time (potential recession).

However, it’s worth noting that Urban Land Institute and PWC named Phoenix as the ninth hottest city to watch in real estate for 2023, describing Phoenix as a “magnet market.” The city is also considered part of the “super sun belt”, along with markets such as Atlanta, Dallas/Fort Worth, Houston, Miami, San Antonio, and Tampa/St. Petersburg.

“Everyone seems to be aware now that Phoenix is hot, literally and figuratively,” said Steve Lindley to the Phoenix Business Journal. Lindley is the advisory board treasurer for ULI Arizona district council and executive managing director at Cushman and Wakefield. “Our market used to be dominated by our growth, real estate, mortgage companies, construction — and 70 percent of our recent private sector economic growth has come from technology, health care, bioscience, advanced manufacturing, aerospace, and financial services.

“Companies come here for the business-friendly environment, they know the demographics are high-growth, which is also in their favor and it’s affordable, but at the end of the day, they’ll go to a more expensive market or one that’s not quite as business-friendly if they can get the people that makes their companies thrive,” he said. “What’s really shifted in Phoenix recently is our ability to train, attract and retain a highly educated talent that these companies need.”

The ULI report continued, “Magnet markets are those growing more quickly than the U.S. average for population and jobs and are preferred for investors and builders, while super Sun Belt markets are large but affordable markets that are also attracting a wide range of businesses.”

In short, this could very well mean that Phoenix and the entire state of Arizona could remain popular for some time. The fire may have gone from an inferno to a slow simmer, but there’s plenty of reason to believe that Arizona will remain a popular destination on the housing market front for some time.

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