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What the F*ck is going on - Tucson Housing Market Explained

Dated: April 8 2021

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What the f*ck is going on? The Tucson Housing Market Explained.

The Tucson housing market is the hottest that it has ever been with home values increasing at an annual rate of 26% since the pandemic started. And yes, hotter than 2006. I get asked everyday “Why is the market so crazy right now”. So, I wanted to take a couple minutes to explain what happened, why it happened, and when things will turn back to normal.

Why is the market so hot?

The rapid increase in home values since June of 2020 is all due to supply and demand. The pandemic caused the supply of homes for sale is plummet, while government action caused the demand (number of buyers) to increase.

In real estate, we measure supply and demand with “Inventory”. Inventory is simply the number of homes for sale divided by the number of homes sold. Inventory is how we determine a buyer’s market (More than 7 months of inventory), a balanced market (5-7 months of inventory), or Seller’s market (less than 5 months of inventory). Right now, there is less than 2 WEEKS of inventory. If we factor out the luxury market, Tucson is 1 week of Inventory. If Inventory increase by 10x, we would still be in a Seller’s market.  

 

Why did supply go down?

Here are the three main reasons supply went down in 2020. First, most of the people that were going to sell their home 2020 decided to wait until the pandemic was over because they did not want to risk having someone sick walk through their home.

Second, those who were planning to sell due to financial reasons could file for debt forbearance (the ability to stop paying your loan without being foreclosed on). Now that they did not have to pay their mortgage, their need to sell was temporarily gone.

And third, those who were planning to make a move but lost their job, or were put on temporary leave, could no longer qualify for a new mortgage. And since they would not be able to buy a home, they were forced to stay in their current home.

Why did demand go up?

 The biggest reason demand for housing increased in 2020 was because interest rates hit record lows. At the start of 2020, the average mortgage rate was 3.62%, by the end of 2020, the average interest rate was 2.68%. On a $250,000 loan, that equals a $128/mo savings, or 11.2%, or the same as getting the home for $31,500 less. With homes being more affordable, more and more people looked at buying a home.

Date

Loan Amount

Interest Rate

Payment (P&I)

Jan-20

 $                   250,000

3.62%

 $                    1,139

Dec-20

 $                   250,000

2.68%

 $                    1,011

Dec-20

 $                   281,500

2.68%

 $                    1,139

 

The second reason demand increased in Tucson, is because people started migrating to lower cost of living cities. When the pandemic hit, people were forced to work from home, and some employers plan to keep it that way. This means that people could continue to work at their same job (and make their inflated income from working in a high cost of living city) but move to a city with a lower cost of living, like Tucson. We are currently seeing waves of people moving to Tucson from California, Seattle, and Chicago.

The third reason is due to the massive political divide in the country, only made more extreme by the pandemic and related policies. People with different political views than their state’s policies, are leaving for states that are more aligned with their viewpoints. With Arizona being surrounded with states with opposing politic viewpoints, a lot of people are moving to Arizona.  

But the pandemic is almost over, why is the supply still so low?

The pandemic is coming to an end, so we should be seeing a wave homes hit the market, right? Yes, we should, but it is not happening because of a major roadblock for sellers. Because there is so many buyers and so few homes for sale, the homes that are for sale and getting multiple offers. Almost every home I have come across has at least 5 offers the first weekend. Heck, I have seen a home with more than 30 offers. With seller’s receiving so many offers, sellers can pick the best deals with the least amount of risk. This means that an offer that is contingent on the buyer selling their home, is almost immediately overlooked. And since seller’s can’t get their offer’s accepted, they can’t sell their current home. We know of a ton of seller’s that would love to sell their home right now, but they cannot.

When will this end?

When interest rates start to increase into the mid and high 3s. Why? For the market to balance out, the first thing that needs to happen is for buyer demand to decrease.  When there is less buyer demand, there will be less multiple offer situations. With less multiple offer situation, buyers, who have an offer contingent on the sale of their home, will have a better chance of getting accepted. Once sellers can start buying homes, we will start seeing a wave of new listings. This decrease in demand and increase in supply should bring balance to the market.  

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