Let’s face it: 2020, 2021, and 2022 were all crazy for the Greater Phoenix real estate market, although not necessarily all in the same way. Now it’s time to review the action from those years, then discuss my market outlook moving forward.
2020
I know you might want to skip 2020 entirely in your review, perhaps relegating it to the “nightmare” category, but let’s recall what happened to our real estate market in that crazy time.
Entering 2020, 30-year mortgage rates were around 3.75% and had been dropping for a little over a year. That phenomenon, coupled with under-building in the valley following the financial crisis, had helped to propel the market into seller-friendly territory with a Cromford® Market Index of around 200. (For reference, the Cromford® Report considers a reading of 100 to be a balanced market).
Then Covid hit and things. just. stopped. After only a brief pause though, supply remained muted as demand exploded with falling interest rates. In fact, the average 30-year fixed mortgage rate dropped by approximately 1% in 2020 to a breathtaking low of around 2.7%.
This market dynamic led to a Cromford® Market Index of around 375 in December of 2020, reflecting the seller-dominated market.
2021
While one could say that interest rate cuts and stimulus payments carried great responsibility for the seller’s market of the second half of 2020, rates didn’t drop further in 2021. However, they did stay rangebound between approximately 2.7% and 3.2% as the economy recovered, allowing affordability to be strong.
Those factors, together with soft supply in the greater Phoenix area resulted in the Cromford® Market Index peaking at over 500 in March of 2021.
This trend eased somewhat through the remainder of the year, but housing here remained difficult to come by, with cash offers above list price becoming a commonplace reality. In that kind of market, it was fantastic to be a seller, but almost depressing to try to purchase a home.
2022
That seller-dominated market continued through the first few months of 2022, but then everything changed once again. The inflation that everyone had hoped would evaporate quickly seemed to be sticking around and the Federal Reserve responded with a campaign of interest rate hikes, raising their Federal Funds Rate by more than 4% over the course of the year.
When the smoke cleared, the average 30-year fixed mortgage rate had risen from around 3% to closer to 6.5% at the end of 2022, destroying the affordability that had been enjoyed for the previous few years.
Of course, this had a detrimental impact on home prices, with the monthly average sales price in Maricopa County falling by approximately 13% from June to December.
With such a wild ride under our belts over the past few years, it’s understandable for Phoenix area residents and investors to be shy about either purchasing or selling a home in the metro. However, please allow me to give you my thoughts on the year ahead, which I hope will provide some helpful clarity.
My Outlook: 2023 & Beyond
When it comes to both interest rates and home prices in 2023 and beyond, I would suggest that the most likely scenario is a return to (relatively) normal with less angst in our local real estate market in either direction. That doesn’t mean prices won’t swing up and down, but I believe it is reasonable to return to an expectation of property values generally increasing by a long-term historical average during the coming several years.
Although I could be wrong (as I have been previously), I would be quite surprised to see property values either increase or decrease by 10% or more in the year ahead. Much of my expectation for relatively mild appreciation revolves around my forecast for mortgage interest rates to return to what I will call the “new normal”.
If I had to guess, I might expect 30-year fixed mortgage rates to hover in the 4.5%-6.5% range through 2023.
Now, those who know their mortgage history might (rightly) raise their eyebrows at this statement, since the average 30-year fixed mortgage rate since 1972 has been around 7.5%-8%. What I’m talking about however is a “normal” for the more modern age of economic and central banking activities. Like it or not, intervention by the Federal Reserve in the management of interest rates is a normal activity at this point in our nation’s economic progression.
I may be in danger of getting too far into the weeds here (as a lover of numbers like myself may be prone to do), so let’s close this loop. I believe that, due to changes in federal monetary policy over time, the measurement of the “new normal” for interest rates should be an average that begins in the early 1990s.
Taking that figure yields an average mortgage rate of very close to 6%.
So, the top of my range at 6.5% makes sense, but how about the bottom of my range at 4.5%? I see the possibility of mortgage rates dropping to this level if economic data weakens sufficiently and/or inflation recedes sufficiently to nudge the Fed into rate-cutting territory. So, before we conclude let’s quickly cover…
The Elephant
I wouldn’t be doing this topic justice without addressing the elephant in the room: RECESSION. Now, recession is a big word and perhaps a bit of a loaded term given that recessions come in many shapes and sizes. A brief dip in economic activity may be enough to qualify in some cases, while the 2008 crisis might also be labeled with the same word. One of the biggest challenges with recessions as they relate to the housing market may be surrounding employment.
Excessive job losses due to a recession can mean fewer people able to afford to buy homes and more people being forced to sell or face foreclosure due to an inability to pay their existing mortgages.
The saving grace of this news is two-fold. First, it seems unlikely that we will descend to the depths of the 2008 crash for multiple reasons, including the quality of home loans and the equity-rich environment that some homeowners now find themselves in. Second, enough economic softness may result in rate cuts, which could ultimately propel mortgage rates down, increasing affordability.
Conclusion
To wrap things up, let’s run through my expectations for the coming year or two, rapid-fire:
- Market Crash? - No
- 10%+ Value Increase? - Also No
- 0-10% Price Increase In 2023-24? - Yes
- 7%+ Mortgages For The Next 2 Years? - No
- 4.5%-6.5% Mortgages? - Yes
- Recession? - I don’t know, why are you asking me?
Kidding, but not. I hope my thoughts have proven helpful and I’ll see you next time!
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Jesse Lowery
REALTOR® - HomeSmart
480.459.7341
Sources
https://fred.stlouisfed.org/series/MORTGAGE30US