It is time again to discuss the handy and ever-so-trusty supply and demand market index, and for continued good reason. This again is the index we use to understand the balance of supply and demand, the driver of all economies. I have given a recap of this a time or two, but for the sake of quick understanding, just remember that the range between 90 and 110 is considered balanced. That means we have roughly the same amount of supply as we do demand. An index above 110 is considered a seller's market, and below 90 is a buyer's market. This month, I thought we would do something a little bit different and take a look at this index as it relates specifically to the 18 major cities that make up the Greater Phoenix Metro Area. This will help us understand a few things, including which areas are doing better and which are worse, and what insights we might be able to draw from breaking down the economics of the different price points within the various cities.
To begin, let's take a look at the chart below, which shows the market index for last month for all of the 18 cities, and with a comparison change month over month. One thing that quickly stands out in this chart is the cities that are at the bottom of the list with the lowest index. The bottom six cities, which all have an index below 90, are the most geographically outlying, and they are also the most affordable. The main driver of this comes back to the higher mortgage rates and the effect they have had on the budgets of lower price point buyers, who are typically more budget-constrained.
Many of the buyers in the lower price ranges have been sidelined over the last few years because they simply cannot afford the higher mortgage payments. During these times, as buyer demand has struggled, listing supply has continued to accumulate, putting downward pressure on the market index. The converse was true during the lower mortgage-rate years of 2019 through early 2022, because not only were traditional buyers strongest in this end of the market, but so were investors looking to scoop up properties they could buy and hold for rentals or flip for profit. In those years, the market index reached staggering heights, reaching over 1,000 in some cities!
Now, to reiterate, one reason this index is important is that, in addition to helping understand balance, it is also a reliable predictor of home values. Simply put, home values rise during seller's markets and fall during buyer's markets. So, while homeowners in higher-priced areas like Chandler and Gilbert may continue to see their values appreciate, homeowners in more affordable areas like Maricopa and Buckeye will continue to see their values decline, and may even end up owing more on their home than it is worth, especially if they purchased at the peak of the market.
While the lower-priced cities have been hovering in buyer’s market territory for the last couple of years, the higher-priced areas have mostly remained in seller’s markets. Cities like Paradise Valley and Cave Creek, which are much higher-priced areas, saw month-over-month improvement, while the vast majority (15 of the 18 cities) saw deterioration in the market index last month. On the uber-luxury end of the spectrum, homes above $10m, the market is the strongest in years. These are high-net-worth, asset-rich buyers who are largely unaffected by mortgage rates and often pay entirely or mostly in cash for their homes. These extremely high sales prices can lead to misleading averages, inflating them when, in fact, many communities are actually seeing the opposite. Next month, we’ll revisit that topic in more detail, but it’s worth noting that many communities are seeing lower prices than at this time last year.
I said at the beginning of the year that I am optimistic about the year ahead, and I stand by that. There are still reasons to hope that conditions will improve this year, but there’s still quite a way to go before that translates to quicker, easier sales, higher prices, and fewer concessions. In the meantime, I’ll continue to report and interpret the data as it comes out. If you are considering buying or selling a home anytime in the near future and would like to discuss your specific situation, please give me a call. I’d love to talk nerdy with you :)