Greater Phoenix Real Estate Update 11/6/2020

The way we look at information matters. The big picture or 35,000-foot view is very different from the more focused picture or 15,000-foot view which is very different from the detailed picture or 1,000-foot view. Each view is important and together they illustrate a complete story. For example, in 2008, when the subprime mortgage-backed securities failed, it took down the stock market, which then caused your neighbor to ask you whether they should do a short sale or let the bank foreclose on their property. Real estate is national and hyper-local at the same time. National influences what happens locally.

The 35,000 Foot View: Earnings Reports, GDP, Wall Street, and the Economy.

As real estate and Wall Street become more intertwined and brand awareness increases, quarterly earnings are becoming more important to real estate companies and consumers.

Third Quarter 2020 Earnings Reports:

• Zillow: year over year revenue increased by 24%.
  • Cash and investments reached a record high of $3.8 billion.
  • New record high of 236 million monthly unique visitors, a 21% year over year increase.
  • Zillow Homes segment continues to lose money.
• eXp World Holdings: nearly doubled year over year transaction volumes.
  • Transaction sides were up 95% year over year.
  • Agent head count was up 56% year over year.
• Realogy (parent company of Coldwell Banker, Century 21, Better Homes and Garden, Corcoran, Sotheby’s, ERA): year over year revenue is up by 20%.
  • Transaction volumes increased 28%.
  • At $1.9 billion, this is the highest revenue Q3 in the company’s history.
• Redfin: year over year revenue declined by 1%.
  • Gross profit was up 74% year over year.
  • Nationwide market share of resale homes increased to 1.04%, up 0.08%, year over year.
• Keller Williams: closed transactions increased year over year by 16% with a 25.4% sales volume increase, year over year, a Q3 record high.
• RE/MAX Holdings Inc.: year over year revenue decreased by 0.7%.
• NewsCorp, Realtor.com’s parent company: year over year revenue decline of 8%.
• Apple, Alphabet (parent company of Google), and Facebook all exceeded analysts’ projections.
• Amazon’s shares are up 74% year over year.

*Real estate transaction volumes are up 23% year over year. (NAR)

Gross Domestic Product (GDP):

GDP dropped by 31.4% (annualized rate) in Q2 2020. In Q3 2020 GPD increased by a whopping 33.1% (annualized rate). The economy is about 4% smaller than it was mid-March. (Elliot Eisenberg)

“Expressed as an annual rate, consumer spending on durable goods was up more than 80 percent, business spending on equipment increased more than 70 percent, residential investment increased almost 60 percent, and both exports and imports of goods were up over 100 percent.”

Mike Fratantoni, Mortgage Bankers Association SVP and Chief Economist

Real GDP: Percent Change From Previous Quarter

Economists expect a drop in GPD in Q4 2020 due to increased COVID cases and a lingering possibility of another shutdown. (Moody’s)

Wall Street:

More and more real estate companies are going public sometimes via initial public offering (IPO) but more often via special purpose acquisition company (SPAC). Spencer Rascoff, former CEO of Zillow, recently created a SPAC and is looking for a real estate company to take public. As this continues, investors expect revenue growth which can come from cutting costs. Costs like buyer agent commissions. In greater Phoenix, Zillow and Opendoor offer 2.25% when the MLS average is 2.8%. Between increases in technology efficiency and Wall Street demands, expect continued commission compression. (Mike DelPrete)

In Mike DelPrete’s recent article, The Economics of iBuying, he wrote, “The overall economics are improving; between 2019 and the first half of 2020, each iBuyer lost less money on each home. But the totals are still negative, and when buying thousands of homes, total losses add up quickly: in the first half of 2020, Opendoor lost over $118 million and Zillow over $178 million.

The iBuyers are playing by a different set of rules where profitability doesn’t apply. It doesn’t matter that iBuyers are unprofitable; to-date, shareholders don’t mind, and are happy to subsidize massive losses. Disruption in real estate is being led by companies — and shareholders — willing to bet and lose billions of dollars.”

Commercial real estate data company, CoStar is in talks to acquire CoreLogic, a residential real estate data company. With a market cap of $32 billion and CoreLogic’s market cap of $6 billion, together they have a combined market cap nearly double that of Zillow’s, which is $20 billion. In the past CoStar had shown interest in acquiring Zillow, before Zillow’s market cap tripled in a year. (Inman)

Economy:

On Monday, Elliott Pollack wrote, “The GDP report shows just how strong the underlying economy really is. It indicates that this is not a typical economic cycle. It is an aberration in history caused by the pandemic and has nothing to do with a traditional weakness in the economy. In fact, the spread between potential GDP and actual GDP is extremely large. This suggests that the recovery will be a long one. It will also likely be erratic. This is because the real issue isn’t the economy. It’s COVID-19.”

• In September personal income was up 6.2% year over year and up 0.9% month over month.
• Disposable personal income was up 6.9% year over year and up 0.9% month over month.
• Personal spending was up 1.4% month over month but down 0.6% down year over year.

15,000 Foot View: National Real Estate.

Residential Real Estate:

• According to a recent report from Zillow, 34% of would-be sellers are waiting due to uncertainty caused by the pandemic.
• Homes sold faster in October, normally a quiet month for home purchasing, than in September for the first time in 8 years. (Realtor.com)
• Fannie Mae and Freddie Mac are one step closer to their goals of exiting conservatorship after boasting huge Q3 gains.  
  • Fannie Mae: net income of $4.2 billion, up from $2.5 billion in Q2 2020.
  • Freddie Mac: net income of $2.5 billion, up from $1.5 billion in Q2 2020.
• A recent survey by Upwork shows that 14-23 million people may move to cheaper areas now that they can work remotely.

Commercial Real Estate:

• A recent survey by the Urban Land Institute found that 53% of real estate companies expect their company’s office space needs will decrease in the coming months.
• Publicly traded companies are seeing a cost savings in having reduced office space. When Microsoft and Facebook allowed their employees to work from home permanently they were outliers. Now companies like Boeing, engineering firm Tetra Tech, defense contractor Raytheon, and others plan on reducing their office space by at least 20% in the coming years. (Bisnow)
• Commercial and multi-family delinquencies declined again in October to 5.4% from 5.7% in September. (MBA)

Forbearance:

Equity positions continue to improve the situation of borrower’s in forbearance giving them more options. For more information on forbearance, click here to check out my AZ Forbearance Update video and post.

1,000 Foot View: the AZ market.

In WalletHub’s recent survey, Arizona has 4 of the cities that bounced back the fastest. Gilbert at 11th place, Peoria 18th, Scottsdale 19th and Chandler in 20th!

Cromford Market Index (CMI): Is the best leading indicator available (balance is 100, prices rise at 110, and drop at 90). Yesterday it was 357.4. The pre-COVID peak was 241 on March 20 then dropped to 145.2 May 15 and has been rising since.

Supply: Inventory is 63% below normal. Active listings excluding UCB crept up slightly to about 8,400 but is still down 43% year over year.

Demand: Pending sales are up 24% year over year, incredible considering the low inventory. Our demand continues to rise and is 34% above normal.

Southeast Valley New Listings: This a bi-weekly comparison of new listings in 2019 and 2020 for Tempe, Mesa, Chandler, Gilbert, Apache Junction, and Queen Creek. 2019 followed the typical annual cycle showing more activity in the first half of the year. 2020 is not following any typical patterns. Which makes it impossible to know what the orange line will do next.

Final Thoughts:

In times of uncertainty we have to create certainty. Do this by providing more data and information. Show strength, knowledge, and expertise. “Truth is attainable by laying fact upon fact.” Peter Kann, former publisher of the Wall Street Journal.

Please share this with your colleagues and clients.

Copyright 2020 by Sarah Perkins