Source: Phoenix Business Journal | Angela Gonzales
Homebuyers are seeing a dramatic drop in purchasing power as a result of rising mortgage interest rates surpassing 5% — but for now homebuilders still can't keep up with demand.
In his recent quarterly housing update for homebuilders and clients, Steven Hensley, senior manager of Zonda Advisory said homebuilders were still seeing so much demand between March and April that 90% of them surveyed said they were continuing to raise home prices.
Plus, the rising home prices have helped cover rising costs as supply chain issues and labor shortages continue.
Hensley warns that rising mortgage interest rates could create a growing risk for homebuyers who realize they no longer can afford a home they signed a contract on several months ago under lower mortgage interest rates, leading them to cancel their contracts.
Of the homebuilders surveyed by Zonda, 58% reported buyer hesitancy, and 41% reported qualification issues or cancellations, Hensley said.
One thing keeping the housing industry growing in metro Phoenix is that many people are moving here from California, where they sell their overpriced homes and are able to afford the home prices here, even though Phoenix continues to lead the nation in home price growth.
Phoenix has been in the top 10 of domestic net migration every year since 2015, Hensley said, and those coming from out of state aren't experiencing sticker shock.
While much has been said about potentially cooling housing prices as a result of interest rate increases, it does help to have some historical perspective, said Thomas Brophy, research director for Colliers International.
The largest interest rate increases occurred during the hyper-inflationary days of the late 1970s and early 1980s, Brophy said.
"While my crystal ball is as opaque as everyone else's, it would seem answering the value question in relation to rising rates is more complicated than it first appears," Brophy said. "It is certainly harder to say that home values will precipitously drop, even in the face of rising rates, against the backdrop of the demographic and by default economic, diaspora from the coasts to the interior/Sun Belt regions. How long will the diaspora last? No one truly knows other than it has, thus far, not mitigated."
Don Barrineau, Phoenix division president for Mattamy Homes, said he's been seeing a small cooling effect lately.
Plus, he's starting to see some homebuyers not able to qualify.
"At the same time, there's still an abundance of prospects who do qualify, and want to buy," he said. "That, combined with limited supply of lots and trades/suppliers, still leaves quite a strong demand side. Not manic like a year ago, but still strong."
Last month, the Canadian homebuilder closed on another parcel of vacant land in the southeast Valley as part of its long-range plan to build more than 1,000 homes in the area.
The weakening buyer demand will cause an increase in housing supply, predicts Greg Hague, founder of 72 Sold.
"Rapid rising interest rates have significantly curtailed buyer demand," Hague said. "But we must evaluate buyer demand in light of homes for sale inventory. We have been so out of balance in that regard that while diminishing demand and increasing supply will slow the rate of home appreciation, it will not result in homes actually declining in value. Therefore, nobody should sell out of fear, but only because they have a real reason."
Ashley Bowers, president of HomeSmart Holdings, said her team is still seeing a high demand for transaction real estate despite rising interest rates.
"Many potential homeowners are paying very high rents and therefore are still exploring the purchase of a home," Bowers said. "As a brokerage, we're attempting to provide any assistance we can with the process."
HomeSmart's mortgage company, Minute Mortgage, offers first-time homebuyers assistance as well as the ability to lock in an interest rate while still shopping for a home, she said.
In the last month, existing housing inventory increased over 25%, said Carson Eilers, designated broker for Original Realty Co. in Scottsdale.
"Our agents are helping buyers get under contract at near record rate," he said. "Buyers who thought it wasn't possible for them are jumping back in the market and finally getting into their new homes. This is a great opportunity for people that want to own a home."