As is well-known, millennials have begun to come into their homepurchasing years, and COVID accelerated that trend. This large group of excited new home buyers have created some oddities, one of which is that low priced homes have moved up in price faster than high priced homes, and not by a little bit.

For data, S&P Case Shiller breaks out the Phoenix area into price tiers. The Phoenix area includes Maricopa and Pinal counties. By tracking the same home over time, the change in prices can be determined. Then those sales are aggregated, and broken into three tiers: high, medium, or low. That data is then made available on sites such as FRED, the data site from the Federal Reserve Bank of St. Louis, and the result you can see on the attached graph.

Homes in the Phoenix low-priced tier are more volatile than the other tiers, and this time is no different. Coming out of the Great Recession, the lower tier was especially hard hit. Then, with Phoenix job creation accelerating faster than the rest of the country, and lifestyle considerations, demand came back quickly, especially starter homes. And since 2020, that spread has widened even further.

Interestingly, these new home purchasers also are not entirely happy with their purchase. Bankrate teamed up with Yougov to understand how home buyers felt about their purchase. As could be expected, purchasers had regrets, and one of the most telling was what they felt bad about, with many respondents concluding they had bought the wrong house, either the wrong size or in a bad location. These are prime candidates for a move-up house, and if the home you bought has gone up in value faster than a move-up house, and you don’t really like it, why not move?

Chris Hodges, a realtor, investor and financier, points out another interesting phenomenon: “There is so much competition for these starter houses with not only people that want to live in these homes, but also the short-term rental and other kinds of investors, that firsttime buyers are now going right to the mid-tier homes for their first homes. With the new norm for the lower in the 400s, the 6-700s are really heating up.”

That’s very consistent with what we are seeing. While demand for finished (rehabbed) homes remains very strong at the lower prices, we are seeing increasing interest in areas like Arcadia Lite, Chandler, etc. that are more of second homes than starter homes. And they are selling much faster, in the same way the lower-end got in mid/late summer last year. In fact, a borrower last night had one bought out from under them last night while they were walking the property.

Of course, there are significant differences to consider when developing/fix-and-flipping a higher-priced home. While starter homes can all look alike, more expensive homes are expected to be customized, introducing risks as layout and design choices are made. These concerns manifest themselves in ways such as “What if the special granite counters I choose aren’t what the buyer wants, and then I have to discount the price to accommodate replacement?” By the same token, though, if you are purchasing a higher-priced house to update and fix and flip, those fashion whims are likely to create a dated home that can then be purchased at a discount to allow you to replace those black sparkly granite counters that were so fab just five years ago.

by David Nielson, Boomerange Capital Partners