In 2 years, the median house price in Phoenix went up 27% but the monthly P&I payment went DOWN 2%!
I’m becoming more and more convinced that the main driver of the crazy house price increases is falling interest rates.
Lower rates can put upward pressure on house prices for 2+ years. The impact is strongest early on after the interest rate decline, of course, but the decline will have an impact for many, many months – maybe 2 years or more.
We’ve had a huge interest rate decline. Last November, the 30-year fixed-rate mortgage interest rate had fallen 1.3% in a year – from 4.94% in November 2018, to 3.75% in November 2019. The Phoenix real estate market last year at this time was HOT. Single-family house prices were up 7% over that year.
We started 2020 with a surprisingly strong real estate market due to the 2019 rate declines and then in February mortgage interest rates started to fall again. When the market started to rebound from the pandemic, interest rates were almost a point less than a year earlier. Lower rates were driving the frenzy.
Interest rates kept falling. Today we’re at 2.72%. Two years ago they were 4.81%.
Your monthly principal and interest (P&I) payment per dollar of mortgage money borrowed today is almost HALF of what it was in November 2018.
Homebuyers in November 2020 could pay more but have a smaller monthly payment than in November 2018 so homebuyers bid up house prices.
Prices up 27%. Monthly P&I down 2%.
The median single-family house price in metro Phoenix in November 2018 was $280,000. With the 30-year, fixed-rate mortgage at 4.81% the monthly P&I payment on $280,000 would be $1,471.
Today, the median single-family house price is $355,000 but with a mortgage rate of 2.72%, the monthly P&I payment on $355,000 is only $1,444.
In 2 years, the median house price in Phoenix went up 27% but the monthly P&I payment went DOWN 2%!
Okay, if I had been focusing on interest rates instead of the pandemic, I might have foreseen the crazy house price increases this year.
[Here’s a look at how inflation and interest rates affect the Case-Shiller Home Price Index for 20 cities, including Phoenix.]
2021 Forecast
For 2021, the impact of the 2019 and 2020 mortgage rate declines should continue to dominate the market. In addition, prices have such strong upward momentum right now that the momentum will likely take on a life of its own and push up prices on its own.
Right now, we have the enormous tailwind of the past interest rate declines. Then we enter the Phoenix high season in January. It’s looking like it will be next summer at the earliest before Phoenix house price increases return to Earth.
Tell me in the “Comments” what you think.
This information can vary a lot in different parts of metro Phoenix. Your real estate agent can find the data for your specific city or zip code at The Cromford Report.
Note. This post was written on November 22, 2020 but the graphs will be continually updated.