Buy in Phoenix? Don’t rely on the flurry of new developments to keep prices down

House prices in cities in the US continue to rise rapidly, not least due to a chronic shortage of inventory in almost all categories. So on the surface it seems that a rush of new buildings could be a simple, straightforward solution.

But even in a city like Phoenix, Arizona, which has the third highest rate of new construction in the pipeline of any major U.S. city according to recent data from realtor.com, home builders have filed 8,614 permits, which is a 9% annual increase – suddenly injecting new ones Homes in the market may be just a drop in the bucket. Local real estate experts say this will do little to improve tense market conditions for buyers.

“What we hear from agents is that these new homes are being bought before they’re even finished,” said Daryl Fairweather, Redfin chief economist. “I do not think so [new construction] will really tip the scales. New homes account for less than 10% of the total number of units. So a sharp increase in construction work will help a little, but will not change the market dynamics significantly. “

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Given the broader market conditions for new buildings (backlog in demand, persistent supply problems with key materials such as lumber and concrete), a high number of permits submitted is hardly a guarantee of an immediate harvest of new, ready-to-move-in homes.

“I don’t think there will be this huge spate of new buildings that will change the dynamism of a place like Phoenix,” said Lloyd Fox, owner and designated agent for Long Realty / Luxury Portfolio International in Scottsdale, Arizona. “Many of the builders are currently unable to meet demand due to the dynamic nature of the supply chain. Some skip people out of their contract or ask if they can wait another six to 12 months for their home to be delivered. “

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

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

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

“We currently have approximately 4,500 active homes in the MLS for all of Phoenix,” said Wendy Walker, general manager of the agency’s Scottsdale office, short for Multiple Listing Service. “We usually carry between 20,000 and 22,000 in the high season in April. We see buyers from higher priced markets like Los Angeles, San Francisco, Seattle, and Chicago coming here and paying cash, and I see that won’t change. “

All of this means that buyers who may have considered steering the market until prices calm down with new construction can be better served by taking a step and jumping in quickly before prices continue to rise and interest rates potentially rise.

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Low interest rates contribute to dramatic price increases

While Covid-related demand helped spark the current sales hype in 2020, historically low interest rates have also brought more buyers to the market. According to one dynamic expert, this is unlikely to change without a significant increase in current interest rates. (According to Bankrate, the average interest rate on a 30-year fixed-rate mortgage was 3.05% as of May 13th.)

“The pace of the market is really not slowing down,” said Leslie Jenkins, an agent at Russ Lyon Sotheby’s International Realty in Scottsdale. “We see that contracts are entered into with no contingent liabilities and that no inspections are carried out. People just want to buy, and prices go up accordingly. “

The average price for single-family homes in Phoenix was up 8.4% year over year in the first quarter, Fox said, adding, “There are several offers that are above list.”

The list price data is even more dramatic. In the week leading up to May 1, the average offer price in the Phoenix subway increased by 18.3% compared to the same period in the previous year, according to realtor.com.

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“This pace is not sustainable. But lower interest rates made things more affordable than people think, ”said Fox. Even if price growth eventually slows and interest rates rise significantly over the same period, “the monthly holding cost is far more desirable for people joining now than it is for buyers joining in a year and a half or two years.”

Even if prices in Phoenix cool after the current period of growth, they will almost certainly be in a higher equilibrium than what is currently available to buyers.

“I do not say [price growth] will continue at the pace it is at but I don’t see any devaluation anytime soon, ”said Ms. Walker. “It’s been less than a year we’ve been in such an active environment and I can see that won’t change in the blink of an eye.”

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Navigating a strategy game

For buyers who decide to brave the current market and gain a foothold in Phoenix, success may depend not only on the size of an offer, but also on a smart approach to strategy.

“Buyers have to be aggressive now,” said Mr. Fox. “I think the market we have right now is the market we’ll see in six to eight months. It won’t change, it will just get more expensive. ”

Unsurprisingly, all-cash deals are often the most effective way to beat the competition, but they’re hardly the only option and don’t necessarily mean missing out on funding in the long run.

“You can buy cash and take out the loan [the property] later, ”said Mrs. Walker. “I have a lot of customers doing this right now. You can also eliminate the financing option if you have cash but only want to take out a loan. “(This is a tactic that works best for wealthy buyers with established relationships with their bank or lender, noted Ms. Walker.)

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“I just made a sale that had seven offers, mine were non-cash and a lot of them,” added Ms. Walker. “We did it by removing all contingencies and going in really strong, a few hundred thousand dollars more than asked.”

Flexibility with the seller’s circumstances – whether they agree to take over furniture or allow them to stay at home until they find a new property to move into – can also be a selling point said Mrs. Walker.

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

“In addition to this growth market we’re seeing, we’ve got more contract cancellations because of this panic-driven flight where sellers take the highest but not the best deals or buyers step in and then decide they don’t said DeVon Connors, an agent at Coldwell Banker in Phoenix.

“Often people are reluctant to make a backup offer, but there is no risk to the buyer. In the meantime, they can find another home with advance notice, ”added Ms. Connors. “But at the end of the seller when his first buyer [falls through]You must give the executed backup offer first priority. You can’t just put it back on the open market and create another high. “

And instead of completely foregoing contingent liabilities, which can be financially risky, on a recent deal, Ms. Connors said, “We had a reduced due diligence period and made sure the sellers understood that our buyers were real end users, who knew their way around very well. ”

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“We offered about $ 80,000 or $ 90,000 above list price and the seller’s rep said we weren’t the highest offer but has the whole package of our buyers’ willingness to be aggressive and a desire to live there all day Made the sellers feel more comfortable that this was going to be a real, solid transaction, ”added Ms. Connors.

The exact strategy inevitably depends on the specifics of the deal, but the broad message from experts in the Phoenix market is clear: If you’re looking to get in, don’t hold your breath for prices to cool regardless of the potential for new home inventory across the board.

“If you’ve searched and are ready, now is the time,” said Ms. Hale. “It’s difficult to buy when prices are high, but the best a buyer can do is buy a home they’ll want to be in with a mortgage payment that is sustainable. That will help you isolate whether the house’s value is increasing or decreasing. ”

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