Cloudy with a Chance of Change

Like much of the country, Scottsdale’s real estate market has been on a tear. Many buyers and sellers are wondering how long this will continue. We’ve compiled and analyzed some market statistics to help you make sense of what is happening in Scottsdale.

An Inventory Problem

On January 1st of this year, single-family homes for sale in the Scottsdale market hit an all-time low of 349. To put this number in a bit of perspective, in 2018 the lowest single-family home inventory ever dipped was 1484 homes. Since January, there has been a steady rise in home inventory. On June 4th of this year, available inventory had risen to 796 homes. Every market is a function of supply and demand. Over the past two years, demand for homes in the area has been exceedingly strong and inventory is at historic lows. The result of this was a rapid runup in price appreciation.

While the inventory has increased, it still remains below what would result in a balanced market. At least for now, it is still a seller’s market, but normalizing somewhat. You are unlikely to see multiple offers over list price, or the waiving of inspections and contingencies. You are also likely to see more price reductions. In the first week of June, there were a total of 123 price reductions in Scottsdale, while in the first week of January there were only 29, which is an increase of 324 percent.

Contract ratio, while a bit complicated to understand, is one of the best indicators of market strength. It is the number of homes under contract divided by the number of active listings. Since January of 2020, the Scottsdale market has seen some of the highest contract ratios ever. In December of 2021 for example, there were 1065 homes under contract and only 457 active listings, resulting in a contract ratio of 233. At the beginning of June, there were 965 homes on the market, with 1,015 active listings resulting in a Scottsdale contract ratio of 95. This is the first time since January of 2021 that the ratio was below 100. While 95 is still considered a hot market and still good for sellers, the dramatic drop tells us that the market is beginning to apply the brakes. There is still far to go before the market is balanced which usually is considered a contract ratio of between 30 and 60.?

Prices

The median home price in Scottsdale this year has climbed to $1,060,000 which is 24 percent above the median price for the same period last year of $850,000. The average year-to-date price per square foot has also gone up a whopping 30.5 percent from 353.92 to 461.92 per square foot during the same time period. The chart below shows the average price per square foot on a 12-month moving average.

Economic Factors

There are multiple economic indicators that do not bode well for real estate in the near term. First, everyone in our country is experiencing inflation at a level that many have never seen or had to contend with. As a larger percentage of the family budget is devoted to gas and groceries, there are fewer dollars for shelter. While there has been dramatic inflation on housing prices, as the rest of the goods in a family’s life rise, it is likely to damper the inflationary growth of real estate prices.

Interest Rates

One of the only ways the Fed has to tackle inflation is to raise the interest rate, which they did yesterday by .75 basis points.? This is the largest interest rate hike since 1994.??

The chart below shows the impact of an interest rate hike on the purchaser of a median-priced home in Scottsdale who has a 20 percent down payment and average credit rating. If they purchase the home today with a traditional 30-year mortgage, their rate will likely be about six percent.

Interest rates can go quite high as many of us who lived through the 1980’s can tell you. When we purchased our first home our interest rate was 14 percent. The highest mortgage rate in US history was 16.63% in 1980. At that rate, the buyer above would be paying $11,835 per month on their mortgage.?

Stock Market

Another economic factor likely to pull some buyers from the buying pool is the US Stock market. The S&P 500 has entered Bear market territory. The last time the market fell more than 20 percent was at the start of the pandemic, but it recovered very quickly. The economic news right now doesn’t point to a rapid recovery. Traditionally when the stock market falls, money flows to real estate as it is less volatile, so that may buoy the market somewhat.

Buy, Sell or Stay?

Every Realtor hears this question a lot when the market starts to get choppy. My answer is unless you are a real estate investor, your decision and thought process should be driven by a need more than the market. There is an old saying about investing that applies equally to real estate - “You can’t time the market.” If you are looking to sell simply because of appreciation, unless you decide to rent or move to a completely different part of the country, you will be buying something else in an appreciating market. Likewise, if you want to buy a new home and stay on the sideline because you think the market will come down, you may find even higher prices when you do want to buy.?

In this market, buyers can be more discerning and are likely to find more opportunities to make a deal rather than just throw out an offer above the list price and waive all inspections. In March of this year, 58 percent of the homes in Scottsdale sold above the asking price.? In May it had dropped to 48 percent and I expect this trend to continue. We are still far from where this number typically is, which is between 7 and 10 percent.

In this market, sellers need to be more strategic than they have been for the last two years. Pricing the property properly is more important than ever as days on the market will start to add up on homes that are overpriced leading to the inevitable price reduction or cancellation of the listing. In all likelihood, sellers will not be seeing multiple offers, all over the asking price, and with all contingencies waived.

We’re here to help you think through the market whether you are considering buying, selling, or both. We appreciate the opportunity to earn your business.?