With the Fed's fifth interest rate hike yesterday, the third at 0.75%, Phoenix real estate activity is set to collapse. The only question is how severe will the decline be over the next six months.

The reason is, the Fed has made it abundantly clear that they want the U.S. economy to turn down and they expect that borrowing costs will keep rising.

Analysts now expect that the Fed Funds rate, now set to be between 3.0% and 3.25% will rise to between 4.25% and 4.50% by the end of 2022. This is according to a recent Reuters analysis, which also said analysts see the rate rising to 4.50% and 4.75% by the end of 2023.

Photo by iStrfry , Marcus on Unsplash

Effect on Mortgage Rates and Phoenix Real Estate

This will have a very severe effect on Phoenix's real estate activity. Mortgage rates are now well over 6.20%. They could continue to rise as the Fed hikes rates.

The Wall Street Journal recently reported that sellers are now reluctant to list. Although the number of houses in inventory is rising, new potential sellers who don't need to sell are staying on the sidelines.

Most buyers of homes in the past several years now have low mortgage rates. In order to sell now, and capture their increased unrealized capital gains, they will have to reinvest in a home at a higher mortgage rate.

That reality is going to slow down both buying and selling real estate activity. In July construction permits in Phoenix's Maricopa County fell by 16.9% from 1,648 to 1370, according to a data query on the Department of Housing and Urban Development's SOCDS building permits data site.

HUD SOCDS Building data query

August data is likely to show even lower growth and Sept. data will show must lower levels.

A well-known Arizona real estate activity index called the Cromford Report Market Index was at 240.8 as of June 10, when the Fed started to raise rates.

As of Sept. 21, it was down to 104.9, a decline of over 56% over the past 3 months. This is down significantly from the mid-to-high 300s and low 400s from the peak of activity several months prior to June.

The Cromford Report Market Index

An index level of 100 indicates a balance or equilibrium between buying and selling forces. The trend is that the Cromford Market index will keep falling. If it falls significantly below 100, as is clearly possible, the level of activity and home prices could fall significantly.

Whether it will get to the levels of the 2007-2009 Great Recession is anyone's guess. But one thing is sure: the probabilities of this happening have just risen quite significantly.

Bottom Line: Arizona real estate activity is set to deteriorate significantly from here as the Fed has made it abundantly clear they will keep raising rates.

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