Homebuilding permits have dropped significantly compared to this time last year.
According to the Homebuilders Association of Central Arizona, new housing permits are down 17% year to date.
"It was a significant decline," said Jackson Moll, Vice President of Municipal Affairs for the Homebuilders Association of Central Arizona. "We're at the point where our monthly permit numbers basically put us at the levels we were to start 2015," he said.
Moll says this time last year, builders had pulled 26,700 permits through October, compared to just 22,200 this year. That's a decrease of 4,500 permits to build new homes.
"The one thing we do not think this is attributable to is a lack of desire for people to buy a home in Arizona," Moll said.
"Arizona still has a housing supply crisis, and people here still want to buy homes."
Moll says the decline comes down to affordability and uncertainty.
"For 33 consecutive months, between 2019 and early 2022, the Phoenix market led the nation in home price appreciation. But now we've reached an inflection point on affordability, because at the end of that 33-month run, mortgage rates basically doubled," he said.
"For the past several weeks, the average rate on a 30-year fixed mortgage has hovered around 7%. A year ago it was at 3%," Moll said.
"So when you have a combination of rapid increase in price and interest rates, it just makes it really hard to afford to buy home. So the end result, I read the other day from the Mortgage Bankers Association, that mortgage demand is at a 22 year low, and our builders are certainly seeing that," he said.
Moll says potential buyers are sitting tight right now, waiting to see if rates go back down.
"One of the first things that's going to have to happen for buyers to come back is interest rates are going to have to settle. Because even if prices continue to come down, if mortgage rates continue to rise, affordability doesn't really improve," Moll said. "A 7% interest rate looks very different when the median home price is $250,000, compared to when a medium home price is $450,000 or $500,000, which is kind of where we are in Phoenix right now."
Moll says you may not actually see new home construction halt on the ground until later next year.
"It’s going to appear as though there is still pretty significant construction activity going on in the home building space, at least for the first half of next year. And the reason for that is because the industry still has a labor shortage. We still have supply chain issues. And because of that, construction times have become elongated. So all of those permits that we pulled in the first half of this year, will be finished and closing in the first half of next year. So it’s going to feel a little like construction is still going on, but where you'll really start to see the slow down in activity is probably in the third or fourth quarters of next year," he said.
Realtor Connie Colla with the Connie Colla Group at Retsy, a Forbes Global Property Partner, says there is a silver lining, you just have to know where in the market to look.
"There is a lot of doom and gloom out there. Everybody's worried about where we're headed next, but there are some really good things when you dig down deep into the data," Colla said.
“Yes, Phoenix is down in new home builds, but when you look across The Valley, Mesa is still up by 1% in new construction over last year, it’s not a lot, but it’s a win. Scottsdale is up 9% right now over last year, so we have 445 homes that have been built here in Scottsdale vs 408 last year. And then Avondale, holy cow! Avondale is crushing new construction, they’re up at 100%. 483 is where they were last year. They’ve built 964 homes this year. That itself is a story, because that’s the part of the valley that has the most affordable homes for low and middle-class people. You can still find a home there in the mid $400,000 range, and that’s where they’re being built.”
"Interest rates are increasing, and the words inflation, and recession, and depression are all being thrown around. That's causing worry for people who are putting money down today, on a price today, but they won't get into their home for 18 months. They're worried about where things are going to look in 18 months if interest rates continue to go up, so there is a lot of consumer confidence erosion happening," Colla said.
Current inflation she says is also playing a role.
"The price of everything is going up, and that includes things like groceries, but that also includes concrete, lumber, petroleum-based things, paint, roofing Tyvek, copper, you name it. So homebuilders who pre-sold a home for say $1 million today, but see their price is going up over the next 18 months until they're finished being built, are seeing their profits decrease, so they're not building as much," Colla said.
Combine that with crippling interest rate hikes she says, and the current housing market was destined to cool.
And while she says don't expect rates to go down until next spring, there are some positive signs.
"Now here's the shocker... Of all of this bad news that we're seeing, Maricopa County overall is up 26% in new construction this year over last year. So we have 2,606 homes that we've built this year to date, compared to 2,075 last year, so we're ahead by 531 homes this year. So when you dig down deep into the data there's a lot of good news to share."
