Real Estate Market Update

Tina Tamboer, with the Cromford Report, recently presented on the residential real estate market in the Phoenix metro area.
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Here are my notes:
Forget everything that Tina said at the beginning of 2019, even forget what she said last quarter. Everything is different. Again.
Cromford Market Index (CMI):

• 100 is balanced, above 100 is a seller’s market, under 100 is a buyer’s market
• Cromford Market Index 184.2 (strong seller’s market)
• Supply 57.2 and dropping
• Demand index 105.3
• Every week the CMI has increased significantly
• we are higher than we were last year
• CMI hasn’t been this high since 2004
• Currently tracking 2004 demand

From February through June of 2019, we went from the weakest seller’s market in 5 years to the strongest seller’s market in 14 years! This happened in a span of 5 months (long term chart)!!
2005 PTSD?

• Despite the numbers tracking close to 2005, our market today is very different than in 2005
• We have real demand today
• 2005 was false demand
• we have today something we didn’t have in 2005, skepticism. We are not there now
• We are not in bubble range but are watching it closely

Supply & Demand

• When supply and demand move together, everything is great
• When they move together above CMI of 100, there are lots of listings, lots of sales
• When supply and demand move apart, things go crazy, everything becomes unstable
• February 2019 supply and demand broke up, despite expectations of a flat, calm, easy market
• 2004 saw higher transaction volume than today due to our low inventory
• Prices will continue to rise as long as supply and demand move apart
• Prices are expected to continue to rise through 2019 and into 2020

Appreciation

• We are not in a bubble but we are a bit high for regular appreciation
• We moved above the regular appreciation level at the beginning of 2019
• Properties asking $150-225K have the highest appreciation rate
• Properties asking over $500K, 1-3% appreciation rate (balanced market, equals rate of inflation)
• Properties asking $225-500K, 3-5% appreciation rate (above rate of inflation, seller’s market but not huge gains)
• Properties asking $150-225K, 6-10% appreciation rate (lots of fix and flip investors, area with the most appreciation)
• Properties asking under $150K, 2-5% appreciation rate
• first half of 2019 was tracking behind 2018 for amount in escrow
• turned in February, we are now tracking above 2018
• tracking volume of 2017 but with higher price points
• seasonally between May and December, we have a 30% drop of quantity of properties in escrow
• best time to buy is the 2nd half of the year, the very best is the 4th quarter, buyers do not give up on the market, this is true for all price points

What Effects demand?

• interest rates
• 2011-2014, 45% of purchases were for cash
• mortgage rates have dropped, again
• when rates went up slightly in March, buyers got off the fence. People thought rates hit the bottom.
• appreciation/depreciation (affordability)
• affordability index tracks affordability with the changes in wages
• recent wage increases have put Phoenix back to being affordable
• 2004 we were affordable, 2005 with a 45% increase we were no longer affordable
• relocation (inbound)
• employment/income
• 2.2M people employed, largest it has ever been
• Phoenix job growth is outpacing the rest of the country, by increasing 2-3%, nationally it is around 1%
• 3 continuous months of wage increases (April, May, June)
• click here for the interactive job-center map on the Maricopa County Association of Governments website: https://geo.azmag.gov/maps/azemployment/
• loose/tight lending practices
• population growth
• tons of inbound relocation
• Largest group is from southern California
• #1 source of incoming people LA county
• #2 San Diego county
• #3 Chicago
• Here is the map of to see where people are coming from: https://flowsmapper.geo.census.gov/map.html
• cost to rent vs buy
• people will rent when it makes more financial sense to do so
• 2018 prices are up 8.1%, so far in 2019 prices are up 6.5%
• people are thinking it is easier for them to rent
• cost of sfr rent has increased 7.1%/ patio homes rent increased 7.8%
• median rental $1700 monthly for 1802 square feet
• Tina used the Zillow calculations to estimate equity over 5 years (60 months)
• Using the median sales price of $288,000 for a 1805 square foot single family residence, here is the calculator: https://www.zillow.com/mortgage-calculator/ (schedule from Zillow, click full report, go to month 60)
• If purchased for $246,452; after 5 years with no appreciation owners now have $41,500 in equity
• Based on the current rate of inflation, with 5 years of payments adds $71,500 in equity
• 2005 purchase prices increased, rent prices did not, sign of false demand
• Today rents and purchase prices are rising, sign of true demand
• consumer sentiment (how you feel about the market, which could trump everything else)
• we are at historically low rates and everyone is getting raises
• consumer sentiment is going up when people get raises
• now people have moreconfidence and feel better about buying

Fix & Flips

• Biggest gains ($60,000 or 60% margins) in areas with cheap houses with up and coming employment centers
• See https://geo.azmag.gov/maps/azemployment/
• Luxury flippers are making up to 60% in Scottsdale on houses over $500,000
• Headlines define flips as: a property purchased and sold within 2 years
• 2013 was the biggest year for flippers
• Flippers love sellers markets and retreat in balanced or buyers markets
• iBuyers are doing most of their business between $200K-$250K
• iBuyer purchases are considered a FSBO, which is $127 per square foot for $200K-$250K
• iBuyer sells, on average, 7% more than the contract price. average on mls sales 9% increase between $200K-$250K

What Effects Supply?

• new home construction
• appreciation/depreciation (equity)
• foreclosures
• relocation (outbound)
• divorce/illness/death/job losses/tragedy
• cost to renovate vs move up
• consumer sentiment (feeling)

Supply

• 2019 brand new listings June-July 10.7% lower than in 2018. This is the first time this has happened since 2001
• we had roughly half the number of employed people and half the number of houses in 2001
• people don’t want to move
• when we have sellers turning and buying again, then it is a wash on supply
• 2010 lots of outbound relocation, loss of employment
• 2014 was the year for Canadian buyers due to beneficial exchange rates
• supply is plummeting, we are down 10.9% in supply, southeast valley 9.7% down inventory
• new home construction eases up options but not a lot
• properties over $2M inventory is up over 13%

Prices

• SE valley average sold price is between $100-400K
• South Tempe is the only place in the SE Valley with an average over $500K
• seller asking price is up 6.8% from year over year
• Pendings are up 12% through July year over year
• SE valley pendings are up 16% year over year
• decline in offering closing costs
• Q3 2015 27.9% of closings included seller concessions
• today it is way lower
• 30-40% of sales $150-250K have some sort of closing costs
• 24-28% of those houses are selling over asking (making up the concessions paid)
• outskirts of town sellers can negotiate more
• Tina suggests checking out renovation loans
• 19% sold over list price July 2019
• correlates with June 2004
• in May 2005 it was 38%

Short Term Rentals

• Are today’s false demand
• AZ recently adjusted the regulation to not regulate. now you get a tax id.
• PV & Sedona started the regulation movement
• #1 risk of airbnb: everything is wonderful all the time
• #2. we don’t know if this is the beginning of regulation. will taxes go up?

Final Thoughts

• interest rates dropped and everyone got a raise
• Our market is still considered affordable
• there is no end in sight for this seller’s market
• prices have not come down and they are not projected to come down anytime soon. definitely not this year.
• Next predicted recession is in 2020, will it effect real estate?
• first thing to drop is tourism during a recession, will make an impact on Airbnb
• 10% drop is the new definition of a crash. Always ask how a “market crash” is defined when people talk about a crash. Many of us think of the 50-60% days.