Afternoon Bite 9/14/2020 (Video)

Every Monday afternoon I spend 15 minutes discussing the economy, real estate, and lending. Today I focused on comparing and contrasting the 2005 and the 2020 greater Phoenix real estate markets.

Today’s Takeaways:

Despite listings being down nearly 40% year over year, our inventory is actually creeping up a bit, which is a good thing. The intensity may go down a little. Instead of getting 15 offers on a listing you may only get 3 or 4. We are also seeing an increase in overpriced listings that are just sitting. This is very normal in quickly appreciating markets.

Our median sales price is $325,000!!! This year is the first time we have been over $300,000 and we are already at $325,000. That is a 16% appreciation rate!! Not only that but 35% of sales in August closed over asking!

This speed of appreciation is unsustainable and pushes buyers out of the market. The increase in new listings is very good for the overall health of the market. It just may feel weird right now. Remember when you are used to going 180 MPH, slowing down to 120 MPH hour may feel like you are hitting a brick wall, but you are still going 120 MPH.

Luxury real estate is booming. The 2^nd half of the year always sells less than the first half of the year and a big part of that is luxury but rather than slowing, it is actually picking up. The potential of the millionaire tax in CA, which would bring income taxes for those who earn $1M+ a year upwards of 16%. In AZ it is about 4%. It is expected to see more CA buyers coming to the AZ market to “live” here and even commute back and forth to southern CA.

I expect prices to continue to rise. The appreciation rate may slow due to increased inventory but there is no indication of going backwards.

Today I want to spend a little time comparing and contrasting the 2020 and the 2005 real estate markets.

Lending:

In 2005 lending was loose. If you could fog a mirror you could get a loan. Lenders went as high as 120% loan to value. People bought houses with $0 out of pocket costs and were over-leveraged. Today’s lending requirements include higher credit scores, minimum down payments, and a job.

Today’s historic low-interest rates are driving demand higher as properties are more affordable now than they were in 2005 when the average interest rate was roughly 6%. Ivy Zelman with Zelman & Associates, a major national housing research and consulting firm, said low-interest rates are more important to the American consumer than is an economic recession.

Supply, Demand, and Appreciation:

In 2005, the easy loans drove up demand quickly. However, demand started decreasing in April 2005 and inventory started increasing in June 2005. Demand hit bottom in October 2007 when supply hit its peak. Demand was 43% below balance and inventory was 114% above balance, meaning we had 7 buyers for 27 listings. Today demand is nearly 23% above balance and inventory is 64% below balance, meaning we have 10 buyers for 3 listings.

In August 2005 we hit an annual appreciation of 45%. In August 2020 we hit an annual appreciation of 15%. With the appraisal the regulations implemented in 2010 the guidelines prevent collusion and steady the pace of appreciation. This is why appraisals often come in low during times of significant price increases.

True Demand vs. False Demand:

There is a significant difference between true demand and false demand. True demand is when a property is purchased for the purpose of being lived in, whether is it owner occupied or renter occupied. Given the out of control appreciation in 2005 people purchased properties for the sole purpose of parking money to appreciate and resell. There were a number of fraudulent schemes created that took advantage of the appreciation as well. These properties were never lived in. Today properties are purchased to be lived in or rented, i.e. true demand. According to the US Census Bureau, rental vacancy rates and homeowner vacancy rates in 2005 were double what they are today.

Another way to illustrate true versus false demand is with rent prices. In 2005 rent prices actually decreased due to lack of demand. Today’s rent prices are appreciating about as quickly as sales prices. This is especially true in the single-family market.

Unemployment:

Unemployment, of the roughly 22 million jobs lost, we have made up 10.5 million. Improvement is slowing but is still moving in the right direction.

Mortgage:

About 3.6 million mortgages or 7.16% are in forbearance, a 5-month low. There is a lot of misleading information surrounding forbearance. There are many different programs ranging in length of 3-12 months. Not all mortgages in forbearance are behind on their payments. Since this is not public data, I cannot confirm but have read that 25%-67% of mortgages in forbearance remain current. (MBA) Additionally, about 90% of loans in forbearance have at least 10% equity. The average American homeowner has $177,000 in equity. It is unlikely we will have a large wave of foreclosures. (KCM) From 2008-2010 there were 8.8 million foreclosures nationwide.

Resurgence?

Ivy Zelman also said, “Our home is our castle, more so than ever before.” We are living, working, and teaching our kids at home. And for the 160 million working Americans, during this time of change and uncertainty finding the right home is more important than ever before. She believes that our housing market will stay strong throughout the pandemic because of this. She expects a cooling, not a drop, once there is a widely used vaccine and regular life has resumed.