As we come into the trailing days of the year and get prepared for 2025 (as crazy as that is to say), there are big questions about where the housing market might be headed in the new year. There is a new presidential administration coming in January and with that there will very likely be significant changes in broader economic policies and with respect to the housing market. With that being said, we cannot begin to predict what the impact of these changes will be, and most certainly cannot say how quickly the effects of these changes will be felt. Herein lies the reason the data we talk about every month is so important. It’s the “on the ground” data that comes directly from our local housing market and is far more relevant, at least in the short-term, at helping us forecast where we’re headed here at home. Of course, that is not to say that factors like mortgage rates, inflation, and global events don’t matter. They can just be very big, multifaceted, and quite complicated issues, so they’re less helpful as we try to predict the future with our non-existent crystal ball. Today we’ll focus on our trusty supply & demand Market Index here in the Phoenix Metro Area. This is a strongly reliable tool that we talk about all the time, and with decades of data behind us we can use it to see trends and to give us a good idea of what may lie ahead.
For those of you who have followed my newsletter for any amount of time, you’ll know that the Market Index is something I talk about most often. This is for good reason as it is what tells us the balance between supply & demand. If we understand balance then we can see who is driving the market and can forecast the trajectory of home prices. Simply put, econ-101 would teach us this basic principle: too much supply causes prices to go down and not enough supply causes prices to go up. For anyone unfamiliar, let’s do a five-second overview on how to understand the Market Index (specifically the gauge in the middle). The number 100 represents an equal balance of supply & demand, but between 90-110 is considered the balanced range. In this range, prices remain relatively stable. An index below 90 is considered a buyer’s market, which puts downward pressure on pricing, and above 110 is a seller’s market with upward pressure on pricing. The higher or lower the number, the more extreme the imbalance is and, therefore, the more extreme the change in price. In the chart below, we can see the strong correlation between this index (the line in black) and home prices (in blue), which is represented by a percentage change in appreciation or depreciation. The Market Index is what’s called a leading indicator, which means as balance changes and the index rises, so follows pricing, and as the index falls, so follows pricing.
Looking at the early 2000s, the index was in balance up until 2004 when the housing boom began and the following appreciation reached a whopping 45% year over year. Then, of course, the catastrophic collapse, resulting in a full reversal of a 44% depreciation in late 2008. During the recovery years of 2011-2013 the index regained steam, with appreciation again reaching double digits. Fast forward to 2019-2022 when the index sky-rocketed, and thus followed massive 30% + appreciation and then the subsequent drop as the market had an abrupt correction. The reason this is so important to discuss and understand is because, as we can see, the index is currently trending back down in favor of buyers, which means softening prices will follow. Even if mortgage rates drop considerably and demand picks back up, it could still take considerable time for the effects of this to be realized. Sellers should be prepared in the coming months to be much more conservative in their list prices and timelines, and recognize that they are no longer in the driver seat as they were in the previous decade plus. Times are different, indeed, but homes are still selling. Albeit, not for as much and not as quickly as they once were, but they are selling. If you are considering making a move next year and would like to discuss your specific situation please give me a call. I’d love to talk nerdy with you :)