Interest Rates are Falling, But Don't Expect a Rebound in the Arizona Real Estate Market

Mark Hake

Interest rates fell below 7.0% this week after soaring for much of 2022. According to Bankrate, the average mortgage rate for 30-year mortgages declined to 6.85% this week from 7.08% the previous week. They take this from a survey of large lenders.

The main reason seems to be that inflation, as measured by the CPI index, declined to 7.7% in the last year ending October 30 before seasonal adjustments.

This helps investors believe that the Federal Reserve will consider slowing its rate increases for the Federal Funds rate. This is the rate at which banks lend reserves to each other and tends to set the direction and level of short-term rates. The market sets the rate of long-term rates such as 15 and 30-year mortgages.

The problem is real estate markets will not rise much from this small drop in mortgage rates. Especially in Arizona.

Arizona Real Estate

An Arizona real estate index called the Cromford Report Market Index was at 240.8 as of June 10, when the Fed started to raise rates. By late September it was down to 104.21, as NewsBreak reported on Sept. 22.

But now the index level is at 89.2, as of Nov. 18, well below 100.

This is down significantly from a month ago on Oct. 7, when it was at 103.1.

https://img.particlenews.com/image.php?url=07eBsl_0jH3if3200
The Cromford Report Market Index

A level of 100 indicates a balance or equilibrium between buying and selling forces.

At levels well below 100, there is a significant lack of demand compared to supply. It could indicate that the prices and activity of Arizona real estate could stay depressed.

Moreover, a query in the Dept. of Housing and Urban Development's SOCDS database shows that the permitting for construction of single-family homes in Maricopa County fell to just 1,068 units in September.

This was down 27% in one month from August when they were at 1,463 units. Moreover, at the beginning of the year, there were 2,280 units in Jan. 2022. That means in September construction of new homes was down 53% below where it was in Jan. 2022.

Conclusion - AZ Buyers Waiting Until Rates Fall

That could be the situation at least until mortgage rates fall significantly from here. One reason is that many sellers are not under a significant amount of pressure to sell, given that they mostly have much lower mortgage rates than today. That applies to regular sellers other than the large "i-home" buyers who bought homes in bulk and now are trying to dump their inventory.

On the other hand, many buyers are not keen to pay anywhere near 6 or 7% for their long-term mortgage rates. They may be more than comfortable waiting until rates fall to 4.5% or 5%. That is well below today's rate levels, as shown by Bankrate.

For example, consider this. At today's 6.85% mortgage rate a $300,000 mortgage loan costs about 1,966 per month, before any finance fees, insurance premiums, and real estate tax escrow amounts.

But the same $330k loan at 5% costs only $1,611 per month for 30 years, a decline of 19.1% from a loan today. And a $300K loan at a 4.5% annual rate would cost only $1,520, or 22.7% lower than today.

That is why buyers are essentially on strike now. They can foresee a situation where, if inflation continues to decline, mortgage rates will fall as well. At that point, they will consider buying.

So, for all intents and purposes, most investors and buyers see 6.0% and probably 5.5% as the level where their interest in buying real estate in Arizona will return.

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Mark R. Hake, CFA, writes articles on national and local news, stocks, and market events at InvestorPlace.com, Barchart.com, Medium.com, and Newsbreak.com as well as TalkMarkets.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ
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