Are Arizona Homes Still Affordable?

Arizona home prices are currently surging, but are homes still affordable month to month for home owners? There are fewer homes for sale today then years in the past on the same day, with strong demand.  As you know when you have a home that is in demand and there is a shortage of supply, home prices will go up.  Home owners are gaining equity daily and homes that are getting listed at close to market value are selling fast and some over list price. A lot of home sellers are getting multiple offers and have to select an offer based on best qualified buyer.

Some real estate professionals have talked to home owners wanting to sell a home to move up or move down depending on the life situation.  But, they are waiting because home owners want to be able to sell and buy/move right into another home.  In this market it can take a few months to buy a home.  These potential home sellers are on the fence waiting for more homes to be available.  They also tend to feel it's important not to wind up without no home at all if finances are tight.

Competition to buy a new home is also very high, some home builders having buyers bid for the lot, basically the person that offers the most over asking price for the available lot will get to buy the new home.  According to a representative at Pulte,  they are releasing 6 or 7 lots a month with 40+ buyers wanting to make a bid on those lots.

A research analyst Ivy Zelman explained:

“Although the headwind of severe supply constraints in most markets has contributed to slight moderation in seasonally-adjusted and year-over-year new pending contract growth for two consecutive months (albeit still growing strongly), the underlying strength of buyer demand, particularly for this time of year, remains apparent.”

Experts are looking at the prices of homes in Arizona, along with the mortgage rates that buyers can get on a home mortgage to determine home affordability.  The Monthly cost of the home is the affordability index. As you can see on the chart below 2020 was an affordable year.  2021 will start out in the same category, but can change fast depending on rates, and income levels.

The National Association of Realtors produces a Housing Affordability Index chart which takes the monthly costs of a home into account and determines an overall affordability score for housing. According to them, the index:

“…measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data.”

Their NAR methodology states:

“To interpret the indices, a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment.”

So, the higher the index, the more affordable it is to purchase a home. Here’s a graph of the index going back to 1990:

Affordability index chart 1990 to today

Looking at homes 1990 to 2008 and 2017, 2018 Homes are more affordable monthly now.  This makes it a great time to buy a home if you are going to have a low rate mortgage.  Keeping your monthly outgo percentage lower than previous years. 

Looking at 2009 to 2015 the market was mainly distress properties driving prices.  These properties sold at huge discounts and a lot of them were in disrepair.  These discounted properties drove the market prices down.

How are Arizona homes still affordable today?

Experts are saying that last year rates were around 3.68%.  Now rates are being offered at around according to Freddy Mac 2.72%.  These record low mortgage rates are keeping the monthly cost of a home low.  These rates will save home buyers a significant amount of money in the cost of the mortgage, or interest over the life of the loan. 

Wait, this does not help home buyers that are paying cash!  How is this more affordable if homes are more expensive?  The key to this is over 90% of home purchases are financed with a new home mortgage. It is not a total cost, it is a monthly cost/payment that needs to be the focus.  If 90% of homeowners paid cash for home, could you imagine what the affordability index would look today?

So to add to the high demand for homes, with rates so low this is also driving the mortgage refinance market.  Home owners are taking advantage of the lower rates, refinancing, taking out cash/equity.  With this market booming it is putting a load of work on the Title/Escrow companies.  So this can cause delays on the home purchase process just out of sheer amount of work put on the title companies right now.  So when you are buying a home right now, expect potential delays from the HOA, from the title companies, and definitely some mortgage companies are burred in refinances.

 As Mark Fleming, Chief Economist at First American, noted in a recent post:

“Faster nominal house price appreciation can erode, or even eliminate, the boost in affordability from lower mortgage rates, especially if household income growth doesn’t keep up.”

Mortgage interest rates are an important factor right now,  but if prices keep going up the important factor for affordability is going to be the family income, or can the rates go lower?  So with the 2020 housing market just about behind us, 2021 home affordability/prices are going to be an interesting topic.

With prices going up, and possibly going down at some point.  The most important thing you can do as a home buyer is don't buy a home you can not afford.  Be conservative, reach out to your CPA, or financial advisor.  Make the decision based on what you can afford through an up or down real estate market. 

Photos from KCM