Buying in Phoenix? Don’t Count on the Flood of New Developments Dampening Prices

Home prices in cities across the U.S. continue to climb at a breakneck pace, driven in no small part by a chronic lack of inventory in nearly every category. On the surface, then, it would seem that a rush of new construction might present a simple, straightforward solution.

But even in a city like Phoenix, Arizona—which recent data from realtor.com shows has the third-highest rate of new construction in the pipeline of any major U.S. city, with builders filing 8,614 permits, a 9% annual increase—a sudden injection of new homes on the market may only be a drop in the bucket. Local real estate experts say it will do little to ease tight market conditions for buyers.

“What we’re hearing from agents is these new homes get bought before they’re even finished,” said Daryl Fairweather, chief economist at Redfin. “I don’t think [new construction] is really going to tip the scales. New homes constitute less than 10% of the total number of units, so a big increase in construction will help a bit but not change market dynamics a whole lot.”

And given broader market conditions for new construction (a backlog of demand, ongoing supply issues with crucial materials like lumber and concrete), a high number of permits filed is hardly a guarantee of an instant crop of new, move-in-ready homes.

“I don’t think there’s going to be this huge glut of new building that’s going to change the dynamics for a place like Phoenix,” said Lloyd Fox, owner and designated broker of Long Realty/Luxury Portfolio International in Scottsdale, Arizona. “Many of the home builders right now can’t fulfill demand because of supply chain dynamics. Some are letting people out of their contract or asking if they can wait an additional six to 12 months for delivery of their home.”

In other words, even a market with a comparatively high rate of new construction will continue to suffer from the same supply crunch facing cities across the country.

“Phoenix is sort of like the best of the worst, in the sense that it’s keeping up better than most [cities], but everywhere builders are really struggling to keep up with demand,” said realtor.com chief economist Danielle Hale. (Mansion Global is owned by Dow Jones. Both Dow Jones and realtor.com are owned by News Corp.)

In the meantime, buyer demand continues unabated while supply shrinks.

“Right now we have about 4,500 active homes on the MLS for all of Phoenix,” said Wendy Walker, managing director of The Agency’s office in Scottsdale, using an acronym for the Multiple Listing Service. “Normally in the April high season we carry between 20,000 and 22,000. We’re seeing buyers from higher priced markets like Los Angeles, San Francisco, Seattle and Chicago coming here and paying cash, and I don’t see that changing.”

All of which means that buyers who might have considered timing the market until new construction soothed prices would be better served by making a move and getting in quickly, before prices climb further and interest rates potentially rise.

Low Interest Rates Help Drive Dramatic Price Hikes

While Covid-related demand helped kick off the current sales frenzy in 2020, historically low interest rates have also driven more buyers into the market, a dynamic experts say is unlikely to change without a significant increase to current rates. (The average interest rate for a 30-year fixed mortgage was 3.05% as of May 13, according to Bankrate.)

“The pace of the market is really not slowing,” said Leslie Jenkins, an agent with Russ Lyon Sotheby’s International Realty in Scottsdale“We’re seeing contracts come in with no contingencies, no inspections being done. People just want to buy, and prices are rising accordingly.”

The median price for single-family homes in Phoenix has increased by 8.4% year over year in the first quarter, Mr. Fox said, adding, “There are multiple bids, people paying over list price.”

Data for listing prices is even more dramatic. In the week ending May 1, the average asking price in the greater Phoenix metro was up 18.3% over the same time last year, according to realtor.com.

“That pace is unsustainable. But lower interest rates have made things more affordable than people realize,” Mr. Fox said. Even if the rate of price growth eventually slows, if interest rates rise significantly in that same timeframe, “the monthly holding costs for people who get in now will be much more desirable than for buyers who get in in a year and a half or two years.”

Even if prices in Phoenix do cool after the current period of growth, they’re almost certain to settle at a higher equilibrium than what’s available to buyers right now.

“I’m not saying [price growth] is going to continue at the pace that it has, but I don’t see it depreciating any time soon,” Ms. Walker said. “It’s not even been a year that we’ve been in this kind of active environment, and I don’t see that changing on a dime.”

Navigating a Game of Strategy

For buyers who do decide to brave the current market and get a foothold in Phoenix, success may well depend not just on the size of an offer, but a canny approach to strategy.

“Buyers have to be aggressive right now,” Mr. Fox said. “I think the market we currently have is the market we’re still going to be experiencing in six to eight months. It’s not going to change, it’ll just be more expensive.”

While all-cash offers are, unsurprisingly, often the most effective means of beating out the competition, they’re hardly the only option, and don’t necessarily mean forgoing financing in the long run.

“You can buy cash and put the loan on [the property] later,” Ms. Walker said. “I have lots of clients that are doing that right now. You can also remove the financing contingency if you have cash but just want to put a loan on it.” (This is a tactic that tends to work best for well-off buyers with established relationships with their bank or lender, Ms. Walker noted.)

“I just closed a sale where there were seven offers, mine was not cash and many of them were,” Ms. Walker added. “We were able to get it by removing all the contingencies and coming in really strong, a couple hundred thousand dollars over ask.”

Flexibility with the seller’s circumstances—whether that’s agreeing to take on furniture, or allowing them to stay in the home until they’ve found a new property to move into—can be a selling point as well, Ms. Walker said.

Backup offers have also become a more viable strategy than usual.

“In addition to this growth market we’re seeing, we’re having more cancellations of contracts, because of this panic-driven flight, where sellers accept the highest but not the best offers, or buyers jump in then decide this isn’t going to work after all,” said DeVon Connors, an agent with Coldwell Banker in Phoenix.

“Often people are hesitant to go through the process of executing a backup offer, but there’s no risk to the buyer, they can find another home in the meantime with notice,” Ms. Connors added. “But on the seller’s end, if their first buyer [falls through], they have to give first priority to the executed backup offer, they can’t just put it back on the open market and create another frenzy.”

And rather than fully waiving contingencies, which can be financially risky, on a recent deal, Ms. Connors said, “We had a shortened due diligence period, and made sure that the sellers understood that our buyers were true end users who were very knowledgeable.”

“We offered about $80,000 or $90,000 over the list price, and the seller’s agent said that we were not the highest offer, but the entire package of our buyers’ willingness to be aggressive and desire to live there full time made the sellers feel more comfortable that this was going to be a real, solid transaction,” Ms. Connors added.

The exact strategy required will inevitably depend on the specifics of the deal, but the broad message from experts in Phoenix’s market is clear: If you’ve been wanting to get in, don’t hold your breath for prices to cool, regardless of the potential for new construction inventory down the line.

“If you’ve been looking and you’re ready, now is the time,” Ms. Hale said. “It’s tough to buy when prices are high, but the best thing a buyer can do is buy a home they plan to be in for a long time, with a mortgage payment that’s sustainable. That will help insulate you from whether the value of the home goes up or down.”

Article Source: Mansion Global