2021 Phoenix Housing Forecast - Buy, Sell, or Hold

For the faint-of-investment-heart, staring into an escalating real estate market and considering a change in residence is enough to make your head spin. As it should. With value increases topping off 2020 at an astounding rate, some may believe that the height of the market has come and is soon to be gone. According to renowned industry experts at The Cromford Report and their 2021 Phoenix housing forecast, there’s still a long way to go to the top.

I was fortunate enough to be on a call with industry expert researchers from Cromford, embedded in the tracking, statistical analysis and forecasting of year-over-year market facts and forecasting into what’s next. They always seem to get it right.

First, let’s shed some light on myths swirling around various media outlets and put those concerns in to perspective.

President Biden and the U.S. Rescue and Recovery Plan

The health of our economy looks different depending on who you ask. The stock market continues its bull run, despite gloom-and-doomers downfall predictions. All eyes seem to be focused on the future, with many investors hedging their financial bets on technology, green energy, and cutting-edge manufacturing. Cryptocurrency is an entirely different animal. But for many reasons, this escalation of wealth continues to bypass the middle-class and low-income earners.

Job loss or cutbacks in hours, the shutting down of small businesses, more Americans contacting the Department of Economic Security for unemployment, and long lines at food banks indicate a growing and perhaps pending economic crisis that puts a blemish on Wall Street’s current story.

The new U.S. federal administration looks to extend unemployment benefits and other programs to help those in need. Regarding the stress this puts on real estate, for owners and tenants, the key words that differentiate winners and losers are location, market desirability, and cost. Here’s why.

Forbearance, Foreclosures, Inventory and Absorption

Some homeowners sought relief from personal income setbacks by calling their mortgagor and requesting forbearance on their loan. In essence, it puts a hold on the collecting of monthly mortgage payments to resume at a time down the road. For others, forbearance puts a stop gap between keeping the property and propelling into foreclosure.

People who are hard hit with loss of income aren’t just homeowners but those renting residences from owners. These tenants cannot be subject to eviction due to Covid; however, the landlord is ultimately responsible for paying the loan each month.

With COVID-19, this mortgage initiative was served up by Congress and the Senate to help ward off an economic downfall until the country can reset into healthy balance—physically, emotionally, and financially. This is a far different response than what our country went through in 2008.

Experience is the mother of invention.

According to Tina Tamboer, Senior Housing Analyst at Cromford, “forbearance in Maricopa County will not lead to foreclosure.”

Since the start of the pandemic, forbearance requests rose. However, every three months, there has been a subsequent drop off, as homeowners reposition their finances, obtain jobs, and begin making monthly mortgage payments.

Cromford cites a demographic overview of the unemployed:

  • High school education level

  • Not current or viable homeowners

  • Impact felt by tenants, not homeowners

The month of April will be an indicator of how things shake out as the moratorium on foreclosures is scheduled to lift, starting the 90-day process.

Owners Can Come Out Ahead of Foreclosure by Selling

Because of the escalation in property values in the last handful of years, many homeowners are sitting on equity. Before foreclosure happens, they can put their home on the market for sale. If it is priced properly, it will likely go under contract within days of listing, receive multiple offers, and close long before the foreclosure clock begins. Seldom was that option available to owners in 2008.

But what if foreclosures do happen?

Most will be snatched up by investors waiting on the courthouse steps to capitalize on others’ misfortune. By the time those properties trickle down into the retail market, where most buyers hang their hats, they will be quickly absorbed. Our property supply is that low.

Everybody Wants Some

The term 20/20 defines personal reflection. How this played out in the year 2020 generated a multitude of epiphanies for each of us.

Part of the 20/20 process engaged our questioning of who we are, where we are, and how to improve our current state of being. Add the repositioning in how we work (remote) and geography by choice came to fruition.

Given the choice of where to work remotely allowed employees to live outside the city borders of one’s corporate headquarters, bringing a new kind of home buyer into the market.

Weighing the elements of real estate in metro Phoenix and surrounding areas, local and relocation moves tapped our market, already wrought with heavy demand and little supply.

Luxury Market Skyrockets in Unsuspecting Places

Scottsdale, Paradise Valley, the Central Corridor in Phoenix, and Arcadia have seen luxury homes sale closings surpass record numbers. In addition, new construction for $1M+ residences have popped up in Peoria, Gilbert, and Queen Creek for buyers wanting more square footage accompanied by larger lots.

The pandemic has revitalized the desirability of having more space with room to roam (hopefully not quarantine).

Where is this surge in luxury residential rooted? Turns out that the U.S. Bureau of Economic Analysis reports corporate profits rose 27.5 percent in Q3, 2020. The affluent had to put their money somewhere other than Bitcoin—housing.

Why Arizona Will Continue to See a Boom with No Bubble

Not convinced the 2021 Phoenix housing forecast won’t include a free fall?

Here is why Arizonans have a lot to be optimistic about. Let’s look at the last decade and how the real estate market evolved to today’s climate.

Our current housing shortage is a result of low inventory compared to our population growth. No bubble. No crash.

Corporate Relocations and Retiree Migration [H3]

In 2001-2009, we had overbuilt residential units compared to the population. From 2010-2019, shift happened.

  • Population grew 18%

  • Housing units increased 9%

  • California, New Jersey, New York, Illinois, and Connecticut lead population decrease

  • Relocation to Arizona is on the incline

Employees and their employers are planting their feet in Arizona soil. In fact, Arizona ranks number 3 in population growth. We remain a destination hotspot for retirees and snowbirds (seasonal visitors), as well as young professionals looking to start small businesses, and more.

Maricopa County is seeing record job growth and our new residents are highly skilled professionals.

  • 66% are ages 55+

  • 63% earn income $100K+

As if these numbers aren’t enticing enough, the State boasts some of the lowest property tax rates in the nation. Combine that with real estate market values in many cities and towns that remain affordable, and the cost to own property remains a sound investment.

But the proof is in the following pudding.

Understanding the Cromford Market Index

The Cromford Market Index (proprietary info) sets up a barometer in what is normal for supply and demand of property.

Market balance is achieved when the Index sits at 100 (at center). According to the 2021 Index, Sellers still have the power as the Index hovers at 454, the extreme far right of center. Using the Index, current supply is low at 28.9 while demand is at 131.

This heavily weighted demand in 2020 pushed price per square foot by 23 percent in less than six months.

The Home Buying Institute notes other statistics that extoll the virtues of growth and how Phoenix experienced a median home value increase of 11.4% as of October 2020. Since that time, 2020 numbers round out to near 13% overall and expect to repeat into 2021.

Here are the annual average sales price per square foot rates per city in Arizona, according to The Cromford Report. Keep in mind that they will fluctuate based on property condition, home size, lot size, and location within the city.

Is it too late to get into home ownership in Arizona? No, not by a long shot. Until the Market Index levels out, the value progression will continue at the same pace, if not more, for the next year. And, according to Tamboer at Cromford, when the balance begins to shift and supply can better meet the needs of buyers, it will likely take us a few more years to reach an Index at 100.

To be clear, these experts forecast that housing prices will not slow down or go flat in the near future, because the demand is great. Not based on speculation but genuine population growth.

There is one factor that could slow us down.

As long as the housing absorption rate stands below three weeks, it will continue to support increased property purchase prices and value. However, home prices rose while income did not.

At some point, affordability will come into question. What that means to an individual will differ.

Waiting for the Tipping Point May Be Too Late

Tamboer, smiling and eyes rolling to share the I-can’t-tell-you-how-many-times-I’ve-heard-this-before, gave special attention to the matter of would-be homeowners sitting on the sidelines waiting for the market to drop before making a purchase.

She shook her head in wonderment and simply stated, “Do not wait to buy…we are NOT at the height of the market. Supply is 71 percent below normal, while demand is 31 percent above normal.”

From there, Tamboer reiterated the consumer confusion regarding the when to buy, and the definitions of a buyers’ market and a sellers’ market. “Buyers really want to buy at the end of a buyers’ market, just as it converts into a sellers’ market. So really, the time to buy is in a sellers’ market. And we are not at the end of the sellers’ market.”

Tips on How to Navigate a Buy, Sell or Hold in 2021 Real Estate

Now that you know about the Cromford Market Index and where the overall real estate environment stands, making a decision about residential property holdings may come about from a more informed mindset.

To better assess what is right for you in traversing through the 2021 Phoenix housing forecast, consider the following as you weigh your options:

1.      What are interest rates now; where will they be in 2-3 years?

2.      What are our housing needs now compared to in 3-5 years?

3.      What is the cost to purchase now compared to the net gain I will have on the sale of my current home?

To Upsize

Wanting to buy more for less is hard to come by right now. But remember that home values are perceived from a price per square foot. And the more square footage, the less cost per square foot compared to smaller homes in the same neighborhood.

If a larger property (house and/or land size) is on your wish list for the near future, waiting may only bring you a higher cost to ownership in price to be paid and mortgage interest rate.

To Downsize

Considering a move to venture into more minimalist living or simply removing the excess from your life? A smaller home can bring less stress, from the initial purchase and throughout the property maintenance day-to-day undertakings.

Remember to think about the primary residence capital gains law and put it to good use. If at all possible, utilize all the equity gain (less deductions from improvements) from the sale of your old property and move it into the purchase of a new property to avoid paying capital gain taxes.

Current Market Advantage - Purchase New Construction

Whether you are entertaining the purchase of a resale property or new construction, the common reality in each is that for the most part, negotiations are favored for the Seller. Why, because there are more interested buyers than the available product (homes).

Time is not on your side, but it could be.

Here’s a typical Seller-turned-Buyer dilemma:

1.      Frank wants to sell his home. He knows he can get top dollar for it, likely over asking price. That isn’t the problem.

2.      With little available resale property on the market and nothing that seems to be better than what he already has, he could close on his current home and have nowhere to go.

3.      Even opting to rent for awhile isn’t any easier and rental rates have escalated. In addition, from a financial standpoint, renting offers no tax advantages.

Many homeowners have multiple conversations about putting their homes on the market in search for something better. But what if better doesn’t come?

A new construction home can seem out of reach. Traditionally speaking, new homes are more costly to get in to compared to resale but there are benefits after the closing.

New construction allows sellers to bide their time and receive the benefits of increased property value on their current home. How?

28,000 new homes slated for 2021 construction.
It’s still not enough.

Builders are having to pace their construction starts to align with the short supply of materials and their coinciding price hikes: lumber, concrete, and subcontractors. The result is that the proposed build out to completion schedule has shifted from 6 months to a full year.

This delay may not make builders happy, but buyers can juggle an escalating market to their advantage and realize more on the sale of their current home. New construction can also bring added piece of mind with builder workmanship warranties, and system manufacturer warranties to include roofing, HVAC, and plumbing.

Reserve Early

Another point to remember is that once a buyer goes under contract in a new home subdivision, the agreed to price cannot be increased, unless due to a buyer-requested change order or from upgrades to standard design options, etc. In effect, as the real estate market values continue to increase, so too does the home under construction.

Getting in on a lot reservation and drafting an agreement for purchase on a new home will bring about more benefits if a buyer gets a contract in place within the first phase or initial rollout of lots.

Builders strategically increase their base price of homes and lot premiums with each subsequent phase.

Outskirts Today, Central Tomorrow

When a State is amidst growth mode, the hardscapes will change over the course of time. New residential developments will lead to institutional investments to increase infrastructure to better support these communities. Freeway ingress and egress, expansion of local roadways, and additional schools can be expected. Private commercial property investments will soon follow.

Unless new construction is located within a county’s already solidified urban sprawl, only achievable with vacant land or small infill projects, developers will seek outlying areas where land is cheaper and the margin for profit is greater.

The Answer in Affordability

Popular homebuilder DR Horton eyed and secured the purchase of the largest land acquisition in Arizona. The area (click on link and go to Development Projects on top left side of screen) abuts Gilbert, Queen Creek, Apache Junction, and Gold Canyon.

You may think that it’s so far out. The same was said about East Mesa, South Gilbert and Chandler, Maricopa, Sun Lakes, Surprise, Buckeye, Avondale, and Tolleson to name a few cities. Change happens in a short amount of time.

As new developments pop up in outlying areas in Northwest and Southeast Maricopa County, and Pinal County, builders can market homes at more affordable prices, including the $250K-$350K range.

The Upside Continues for 2021 Phoenix Housing [H2]

As we head into 2021, try to keep your focus in forward motion while learning from the transgressions of the past. Being cognizant of the pulse of real estate activity and how it may affect you in the short- and long-term is essential.

The quicker you own and hold, the more you can capitalize on value increases and low interest rates.

Want more insight about The Cromford Market indicators? Just ask.

 

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