Phoenix Real Estate Market Price Breakdown

The last couple of week’s real estate market updates have shown what appears to be the development of a seller’s market in the Phoenix area.  But as I peal back the onion a bit, we can see how the price of the home is what is determining where the frenzy is actually occurring.

The chart above makes it abundantly clear where the buying activity is happening in earnest.  In fact, for homes priced below $100,000, that are close to move-in ready condition, (horror) stories of dozens of offers per listing are not uncommon.  Now, it’s always been true that lower priced homes sell quicker, but the sudden and dramatic jump in inventory levels for homes above $500,000 simply cannot be ignored.

As I’ve written in the past, the reason higher priced homes are not selling like lower priced homes today relates most directly to financing.  Jumbo loan rates are not quite as high, relative to conventional rates, as they were (the most recent quote I heard was 5.0%, which is reasonable).  However, down payment requirements are still considerably stiffer for conventional and jumbo loans, often requiring 20% and 35% down payments for the conventional and jumbo jumbo borrower, respectively.  Thus, for any loan amount over $346,250 (current FHA maximum for Maricopa County), the additional down payment requirements create a significant affordability imbalance, which today’s home buyers are far less willing to embrace.

A few specific financing examples help make the price/demand curve picture above crystal clear:

As you can see, for homes priced between $350,000 – $600,000, the monthly payment difference isn’t that great (though the tax/insurance impact would widen this gap).  The big difference is in the down payment requirement, which jumps from $12k to $210k.

Most buyers get their down payment from one of two places:

• Savings
• Equity from the sale of the current home

Saving $12k isn’t necessarily difficult for those with the motivation to do so, but saving $210k probably means the buyer will need to divest of another type of long term asset, for example, stocks.  And as we all know, the stock market has been hit very hard the last 12 months, so buyers that perhaps would sell stocks to buy a house, have significantly less savings to do that with.

And then there’s equity in the current home.  For a home seller in the Phoenix area, if that home was purchased more recently than 5 years ago, there is not likely to be a substantial amount (if any) equity.  Valley wide, current housing prices are very close to 2004 levels, depending on where in the Valley, and how good a deal was had at the time the home was purchased.  A home sale that could generate $210k in equity was likely purchased a very long time ago.

Thus it is the down payment requirement that is primarily stagnating the higher end market.  For loan amounts above $750,000, I don’t actually know any lenders that are lending.  Homes in the luxury and ultra-luxury market (any home above $1,000,000) are now being purchased almost exclusively by the cash buyer.

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