There were signs in the fourth quarter of 2021 that the red-hot housing market was beginning to simmer down. In the month of October, only 60.3% of sales involved a bidding war down from a high of 74.5% in April. This is national data though, and I'm not sure it reflects the wild Seller's Market with Scottsdale real estate, where prices increased in the double-digit percentage points. While this trend could be attributed to seasonality, it could also be a signal that the real estate run-up may have passed.
Mortgage Rates Will Definitely Increase
Because I sell Scottsdale real estate for a living, I keep abreast of the market. I've been through multiple recessions, Buyer's Markets, Seller's Market (it went crazy when rates dropped to 8.5%), and when the real estate bubble burst. I'm still in the business.
I'm reading what many real estate "gurus" are posting. One man in a real estate Facebook group I belong to keeps preaching a shift is coming. We're still in a crazy market with Scottsdale real estate, so a shift would actually be welcomed. Agents showing so many houses and writing multiple offers only to get beat out by a cash buyer and/or an offer so high over list price no other buyer can compete. I'd welcome that kind of shift back to a more normal market.
No one has a crystal ball. They can only read current and past statistics to make an educated guess. As an example, Freddie Mac predicted that the 30-year fixed-interest rate would jump from 3% to 3.5%. Is that drastic news to you? Didn't that already happen? Today's rates for that same kind of conventional loan are almost 5%. I wish Freddie Mac was right!
The Mortgage Bankers Association says that rates will go up to 4% "by the end of the year". We've already surpassed that. Again, I wish their predictions were true.
But look at these rates in perspective. Even 5% is still low. When I purchased my first house the rates were 10.5% and we didn't bat an eye. Rates have gone up as high as 18+%. Of course, home prices were a lot less back then.
In order for the real estate sector to remain at all viable, there has to be a balance between home prices and interest rates charged for mortgage financing. Even though much of Scottsdale real estate is now considered to be at what used to be considered "luxury prices" years ago, most buyers still need financing.
We've been seeing so many buyers make great offers, including forgoing a home inspection and offering to pay the difference between an appraisal that comes in lower than the contract price. And they're losing out to cash buyers. Not everyone wants to spend cash on a house if they don't have to, even if they have the money. But for those buyers that wanted to get a new house, they had to make that decision in order to win in a bidding war.
Will the Market Finally Start to Balance Out?
We are still in a Seller's Market and have been for a very long time. I started seeing multiple offers before Covid started on homes at least 3 years prior. Most of the Scottsdale homes for sale that were receiving multiple offers were in tip-top shape and priced correctly. What happened last year and even in 2020 was that sellers didn't have to fix their places up, at least not in the lower price ranges (and by lower I mean $500,000 and into a million).
We purchased a house in 2020 (good thing we did, we got in when it just started going crazy). Even then, I couldn't believe the condition of some of the homes we were seeing. A lot of old-fashioned kitchens with old appliances. Little to no updates and needing a paint job. A house my husband liked had a kitchen with old cabinets that hardly opened and closed with a bad white paint job. Just a few years back these houses would have sat on the market while the nice ones sold around them, and only those nice ones had multiple offers. Now any halfway decent home was selling and usually in a day or two.
Here is the question I, and a lot of other Scottsdale real estate agents, are asking the doom and gloom predictors. Where is the inventory of available homes going to come from to create a more balanced market? I've read where it would take builders years to make up for the low inventory of new construction we've seen. New home builders are still faced with high costs of building materials and a lack of ready, willing, and able construction workers. I've seen many buyers back out when they are told that because of increasing costs to the builder, they now have to pay $30,000 more - take it or leave it. But there will be another buyer only too happy to take it.
Will there be a glut of short sales and/or foreclosures? Most anyone that owns a home in Scottsdale should have enough equity to be able to avoid a foreclosure. If they can't make up the difference of what is due, they can at least sell the property and start over again until they can make a purchase again in the future. At least their credit won't be ruined.
Where would they go once they sell the house if they've lost their job or got sick or whatever their financial issues are? Well, where will they go when they lose the house back to the lender? Now they have bad credit and will have a more difficult time trying to find a rental.
Will the impending death of baby boomers pave the way to a more balanced market? We've already been dying off (and yes, I'm a baby boomer). Millennials are taking over and Gen Z is between the two. Add up Gen Z and the Millennials, and you've got more potential real estate buyers than there were baby boomers.
I've written this so many times I feel bad to keep repeating it. It is simple supply and demand. High interest rates will definitely cut out a pool of homebuyers, especially first-time buyers. With Scottsdale real estate, most first-timers have been priced out for a while. Their choices will be to continue renting, consider lower-cost areas, or stay living at home with their parents. I think we're going to see more adult multi-generational living situations than ever before.
If the Market Balances Out, Won't Home Prices Go Down?
If you study up on real estate prices, including during prior recessions, prices did not decrease. They simply didn't go up as high as they did prior. If you own Scottsdale real estate and saw an almost 25% equity increase, are you really going to be sad if prices only go up 1-5%? I won't!
Some people are getting used to these double-digit annual price increases, but that won't last. If anything, I think with increasing mortgage rates and a recession, it will lower the rate of Scottsdale home appreciation, but there shouldn't be a bubble. What many people don't take into account is that when the real estate bubble occurred it happened because of faulty mortgage processes and approvals. We used to joke that if you had a pulse or there was breath detected on a mirror, you could get a mortgage.
Are Rents Going to Continue Going Up?
Just like with the supply and demand of Scottsdale real estate buying, the same goes for renting. Multiple "offers" also are happening with rental properties. At one point, I read that there were 20 or more prospective tenants for every one rental. When that happens, rents increase - because they can! Many of these renters are buyers that have given up trying to buy a home in Scottsdale because they kept getting beaten out by better and higher offers.
There are two sides to Scottsdale area rentals. Homeowners don't want apartment buildings in their areas and there wasn't really a huge rental market to begin with. It appears that most new multi-family construction is for luxury rentals, and some of these have outrageously high rents.
And speaking of rentals, many large investment firms have been buying up homes in Scottsdale to hold and rent them out as long-term investments. That is taking away available Scottsdale homes for sale, and they are charging rental prices that many families can't afford. In many situations, it would be less expensive to buy, if you could get your offer accepted. Plus, if you could buy something you could get some tax breaks and build up future equity.
I'm Here for You
As has been mentioned, I have been through the roller coaster ride of real estate. Many agents quit the business when the real estate bubble burst. Those of us with experience and knowledge were able to deal with a drastic market downfall. I became a short sale specialist and sold many foreclosures.
A lot of agents became licensed because the market seemed so robust. We have probably lost as many that gave up compared to those that have recently been newly licensed. Did you know that in any market that 50% of agents leave after a year? Of those that stick it out, another 50% leave in their second year.
It might look like a glamourous "job", but it is actually like running your own business. Most new agents don't understand that. They might even have some quick sales from friends and family, but once they go through their immediate sphere, they're left empty. Yet they still have to pay for MLS access, state and national real estate association dues, lockbox fees, ever-increasing gas prices, marketing, etc.
And a big reason for so many leaving the business is because they're simply worn out from showing so many homes to buyers that can't win in a bidding war. Some of these buyers end up giving up and continue to rent or stay living in their current situation. Some of these buyers will leave their agent and start working with others because they think their agent wasn't working for them. But until the same thing happens with the next agent they work with, they understand it probably wasn't their prior agent, but the market in general.
I can't predict what's going to happen in the future, but I do know that I will continue to be available for you. I bring 39 years of experience and knowledge (and I keep learning), honesty, empathy, and a sense of humor. Give me a call at 480-877-1549 if you're interested in buying and/or selling real estate in Scottsdale, Cave Creek, Carefree, North Phoenix, and Paradise Valley. If you're thinking of another town give me a call as we do expand our area and if not, we will find you a great local agent to help you out.
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