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Those involved in the Greater Phoenix housing market are beginning to feel the fury of years of rapidly rising home prices and now rapidly rising mortgage interest rates. The latest Zonda data shows the average new-home base price sits at $697,135, which is 44% higher than two years ago. From year-end 2021 to today, the double whammy of rising home prices and rising mortgage interest rates results in an estimated monthly mortgage payment increase of 52%.

It is well documented that Phoenix area housing prices were rising at a pace well above the national average. It can be seen in the S&P CoreLogic Case-Shiller Index—until the most recent reading for March, home price growth in greater Phoenix led the index for nearly three consecutive years. Yes, almost 36 consecutive months. Logic says this cannot go on forever.

Today we know several indicators to help us understand what could be ahead. Resale listings are rising quickly, presumably related to investors looking to take their equity and put it elsewhere, households hoping to sell “at the top,” households with enough equity to downsize without the need for a mortgage, and, of course, the typical lifestyle reasons. Listings price cuts are occurring, likely due to an underestimation of how quickly affordability has eroded. Pricing a home based on March conditions stands little chance in today’s conditions. New-home demand is falling quickly as consumer confidence is starting to see fractures. Buyer traffic levels are down noticeably with modest incentives becoming more common. Isolated instances of new-home price cuts exist today, but it is not widespread.

Phoenix was often seen as a market that had all the fundamentals to prevent a housing slowdown, including positive domestic net migration, a lack of housing inventory, and a diversifying economy. We believe these factors support longer-term housing demand in the market, but the quick affordability shock is shaking consumer confidence and ability to pay.

That shock has showed up in recent conversations with industry participants about what is happening to the housing market in Phoenix. Collectively, these conversations suggest a home value correction could be in store. The extent of a possible correction is less certain. But, again, logic says what has occurred over the past two-and-a-half years is unsustainable.

A slowdown and possible correction could be exactly what the local industry needs, albeit the process may be painful. Home builder backlogs are still extended and will likely remain so through the end of the year. Capacity was not keeping up with demand, which resulted in drastic changes in a short period of time. A correction can provide some breathing room for a market that was operating faster than production capacity allowed. As those of us at Zonda look to the future, we acknowledge and are comforted by the longer-term economic and demographic tailwinds.