High Home Prices and Interest Rates Contribute to Tough Market for First-Time Homebuyers

High home sales prices and mortgage interest rates are squeezing out first-time homebuyers from entering the market, especially as incomes have not kept up, housing experts say.

In 2020, the housing market was in a frenzy. High numbers of homes were selling, agents’ inventories were low and offers were frequently being made over list prices, said Jason Giarrizzo, a realtor with West USA Realty, who has been in the industry for 31 years.

Coming out of 2020, during the COVID-19 pandemic, the market continued to surge as people began buying real estate, Giarrizzo said. “We weren’t sure where the market was going to go, (if) it (was) going to plummet because of you know, the shutdown and everything, but it was quite the opposite.”

A balanced market in the Phoenix metropolitan area would have inventory levels of about 30,000 properties, Giarrizzo said, but by the end of 2021 inventory began to shrink to about 4,400 properties in the area.

Then, home prices hit a high and interest rates began to climb as the Federal Reserve started raising rates in an attempt to head off inflation. “In all my years of real estate, I don’t think I saw the inventory spike to the level that it did in such a short period of time. We went from 4,400 properties just coming into spring to almost 20,000 properties for sale by summer,” Giarrizzo said.

Now, the inventory is at about 13,000, which is still half of what a balanced inventory is for the Phoenix metropolitan area, Giarrizzo said.

As mortgage loan interest rates have risen, that frenzy has subsided, especially for the first-time homebuyers market, Giarrizzo said.

Mortgage loan interest rates vary widely based on factors such as the individual market, credit score of the buyer, price of the home, down payment, rate type, loan term and type.

The current average rate for a conventional 30-year fixed mortgage is at or below 8.063% for a $430,000 home in Arizona for a buyer with a credit score of 700-719 who puts 10% down, according to the Consumer Financial Protection Bureau.

Chris Giarrizzo, a mortgage loan officer at Lennar Mortgage, who has been in the industry for over 23 years and is married to Jason Giarrizzo, said many hourly workers are struggling to afford housing, whether it’s a home purchase, or even rent.

The median home sale price in the Phoenix metropolitan area in September 2023 was $435,700, according to Redfin, a real estate firm that tracks prices and trends.

“I actually wouldn’t say necessarily it’s a bad time to buy a home, it’s just a challenging time to buy a home,” Chris Giarrizzo said.

Although mortgage loan rates have been this high before, high sales prices are providing little relief to buyers, she said, and there’s no relief anticipated until possibly sometime next year.

The last time 30-year fixed mortgage loan rates reached 8% was in 2000.

It was a combination of people who moved to the state and people who had more disposable income following the pandemic shutdown that drove the market takeoff in the Phoenix metropolitan area in 2020, Chris Giarrizzo said.

“We weren’t out shopping and weren’t traveling, and so I’ll be honest, not only in my industry, but in several industries, people had said that they had never been as busy. … We were all working a lot of hours,” Chris Giarrizzo said.

A “perfect storm” of high demand, low interest rates and not enough inventory drove home values up, creating the frenzy of people paying over list price because there was so much competition, she said.