When trying to predict what lies ahead for the residential real estate market, we need to sum up where we are right now. The Arizona real estate market is an excellent barometer for the rest of the country because the dynamics of what happens in Arizona is mirrored in several other locations nationwide.
Right now, it is easy to see that there is very low inventory combined with high demand for housing in general. Why is this happening? If we take a look across the country, we see a pattern. People are leaving states like California (New York & New Jersey out east) that have high tax, high cost of owning your own business, are too expensive for retirement, high crime & dramatically increased homelessness.
You might say that all of these factors have been around for a while in these states, but that was before Covid. For many of these residents, Covid is the straw that has broken the camel's back. The way these states have reacted with their Covid policies has pushed the accelerator for folks that feel they have to move now. I don’t say this to be political, I say this because I talk with these people and they are from both sides of the aisle. When your kids are suffering in many ways from not being able to attend school consistently combined with your business being shut down or limited whenever the state feels they need to, you feel you have to go.
These families & businesses are fleeing these heavy handed states like California, New York, New Jersey & Illinois in record numbers. So much so that California, for example, has had a decline in their population for the first time in their history. They are bleeding into neighboring states that are mostly the opposite of what they are experiencing. California refugees are moving to Arizona, Texas, Idaho & Montana. Other states like Illinois see their residents moving to neighboring Indiana. New York & New Jersey are permanently relocating to the Carolina’s & Florida.
This mass migration has caused a severe inventory shortage that has pushed the cost of housing to record levels for both purchases and rentals. When rents increase dramatically, investors aggressively purchase homes and compete against the owner occupants. This situation makes it very difficult for an owner occupant who is purchasing with financing to compete with quick close investor cash. Local residents are happy with their increased equity but are reluctant to try to move for fear they will not be able to find another home.
Looking ahead to 2022 we know a few events that are sure going to happen.
Interest Rates: The Fed has said that they will be increasing rates during the first quarter of 2022. This is obviously to curb inflation which is currently a runaway truck. Supply chain issues are also pouring gas on the inflation fire. The increase in rates will limit a home buyers purchasing power. For example, a family might need to purchase an $800k home but the higher rate might only allow them to afford the payment of a $600k home. This could lower the amount of buyers, especially in the hot markets.
Forbearance: Covid forbearance allowed people to not have to pay their mortgage for up to roughly one year if their employment was affected by the pandemic. That grace period is over. Lenders are now sending out letters to these folks telling them their mortgage payment is now due. If the homeowner cannot make those payments for whatever reason, they cannot refinance or cash out refinance even if they have a lot of equity in their home. They will have to sell to realize that equity. The good news is that they will be equity sellers, the bad news is that they will have to find a place to live and will most likely have to rent. How much this increases the inventory in these red hot markets remains to be seen. I have seen reports of hundreds of thousands and reports that it will not be a large number.
These events will impact the housing market on the purchase side and more than likely slow down the number of buyers. However, I do not see an end in sight for a decrease in rents. Folks that cannot purchase due to increased interest rates or have been stigmatized by Covid forbearance will become tenants.
Please feel free to contact me for anything that involves Arizona Real Estate or anything else that is on your mind.
Bob Dickinson
NEST Realty AZ
Bobdickinson.com
602-527-8086
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