The pandemic created involuntary savings. People simply couldn’t spend the way they had in the past, and all of a sudden they had money for a down payment. Along with historic low mortgage rates and the ability to work remotely; the extra savings enabled super strong demand. As the economy opens up and people are able to spend their money on more services like concerts, eating out, and traveling the buyer demand is likely to subside modestly. Today’s ideal demographics (see last week’s post for details) will keep replacement buyers steady through 2024. As the demand fades to slightly elevated from crazy hot, the market will return to normal sales cycles.
Despite movement towards normal, sales prices continue to grow. While yes, inventory has increased, locally it remains over 77% below normal and demand has decreased, it is still over 8% above normal. This supply/demand imbalance is so severe, it will take years to correct, and is why sales prices continue increasing at an appreciation rate of nearly 22%, year over year.
Bull versus Bubble:
There is a difference between a bull market and a bubble market. Real estate experts agree, we are currently in a bull market. Here are some basic indicators to illustrate the differences:
- Is it true or false demand? Are the properties occupied by either renters or owners? True demand is when people are living in the property. False demand is when investors park money in the asset with no plans of using the property. Today homes are lived in.
- Are rents increasing with sales prices? Rents, like sales prices, increase with greater demand and less supply and decrease with less demand and increased supply. Rental rates decreased during 2004-2006 and today they are increasing faster than sales prices in greater Phoenix. There are some markets, like San Francisco, where rents are falling while sales prices are increasing indicating the market is overvalued.
- Huge increases of speculative buying on credit (bubble) versus cash buyers and down-payment buyers (bull).
- What are the fraud levels? The higher the fraud levels, the higher the likelihood of a bubble market. If you were in the business during 2004-2006, chances are good you know someone in prison. Today, there are exhausted buyers and sellers who are unsure where they will go; the price appreciation is based on supply and demand, not collusion.
National Real Estate:
Existing homes sales declined by 3.7% from February to March, a smaller decline than the 6.6% decline from January to February. Both declines are attributed to the low inventory levels.
It happened – for the first time in 52 weeks – not only did inventory not drop last week, it increased by 5,000 listings so now we are up to 312,000 available single family listings nationwide, which is an increase of 1.6%.
Demand remains high; immediate sales also increased, up 3,000 from last week to 26,000 new single-family listings hit the market and went under contract in less than 24 hours.
The high demand delayed the normal season cycle by about a month, normally by mid-March inventory starts climbing for peak buying season, which is normally March – June. In housing, normal is ideal.
In addition to buyers having more options, an increase in available listings allows more time for appraisals. So appraisers can get caught up and increases the likelihood of homes coming in at value.
This week, the national median sales price increased by $5,000 week over week to $380,000 and the median asking price of new listings increased by $10,000 week over week to $360,000. Sales prices will keep climbing until about June 30th. Then they start to slow because cheaper homes tend to sell more in the 2nd half of the year.
In 2020, homeownership grew by 2.6% or by 3.9M new homeowners to 67.4% and the majority of that gain took place during Q2 2020 and Q3 2020.
From 3Q 2019 to Q3 2020, Arizona’s homeownership rate increased by 4.1%, up to 71%. Arkansas had the biggest gain at a 7.1% increase, while New Jersey’s homeownership rate declined by 4.4%. West Virginia has the highest homeownership rate at 78.6%.
The AZ Market:
According to Redfin, nationwide luxury home sales increased by 41.6% in Q1 2021, year over year. In greater Phoenix, luxury home sales prices are up 25% in Q1 2021, year over year.
Nationwide, single-family permits increased from February to March by 4.6%. Single-family completions increased from February to March by 5.3%.
Housing starts, considered an economic leading indicator, increased by 37% in March, year over year, and increased by 19.4% from February to March, though February’s level was lower than expected due to the winter storms.
According to Freddie Mac, builders need to build 3.8 million single-family homes just to meet current demand levels. The lag of new construction over the past decade has contributed to today’s low inventory.
In 2020 builders built about 65,000 entry-level homes while 2.38 million renters became first-time homeowners.
Commercial Real Estate:
- Industrial real estate remains strong in greater Phoenix, in Q1 2021 vacancies dropped to only 5.6%.
- The local office market has suffered four straight months of increased vacancies putting the vacancy rate at the end of Q1 2021 at 19.1%!
- Many major companies are making plans to reduce their commercial real estate footprint. JP Morgan Chase is planning to significantly reduce its commercial space as 10% of its employees will work from home permanently. CEO Jamie Dimon said, “Remote work will change how we manage our real estate.”
- In 2020, San Francisco hit its highest ever vacancy rate after starting the year at its lowest ever vacancy rate
- Office rents are expected to decline by 15% nationwide.
- Some experts forecast nationwide commercial vacancy rates reaching 19.4% this year, significantly higher than 2020’s 17.1% vacancy rate and beating the previous record of 17.6% set in 2010.
- For the third week in a row mortgage rates declined, according to Freddie Mac, the 30 year fixed rate is now 2.97%, dropping below 3% for the first time since February 25. One explanation for the declining rates (because a strong economy usually drives higher rates) is due to the world economy and despite the strengthening US economy, many other countries are still struggling economically.
- Purchase mortgage applications increased by 7% last week from the previous week and are up 57% year over year. We still have a few more weeks of year over year data comparing last year’s lockdown market to this year’s high demand/low inventory market.
- Despite expectations of interest rates reaching 3.7% this year, the Mortgage Bankers Association is forecasting a 16.4% year over year increase in purchase mortgage volume which would set a new record at $1.67 trillion.
Real Estate News:
- According to a recent Harvard report, due to last year’s lockdowns about 76% of homeowners completed at least one home remodeling project. The complexity and scope of the projects are increasing as homeowners are willing to spend more as home values rise. It is expected that in 2022 homeowners will spend $370 billion on home improvements.
- Proptech startup Fintor, which just raised $2.5 million in initial seed money, is an investment platform that facilitates residential real estate investing using small amounts of money. The entry amount can be as low as $5.
- iBuyer acquisitions are nearing their Q1 2020 numbers. While Phoenix remains the national leader in iBuyer activity, the margin of that lead is shrinking and Atlanta is catching up. Meanwhile, the two cities have significant leads ahead of the four remaining largest iBuyer markets in the country: Dallas, Charlotte, Las Vegas, and Raleigh.
As one of my favorite housing economists, Logan Mohtashami with HousingWire recently wrote, “The nature of yellow journalism in our society is that fear and loathing sell. Impending doom is somehow sexy and gets many eyeballs and clicks, whereas the standard economic truth does not. People like myself who spend their time yammering on about demographics, prime-age employment to population levels, and how much shelter inflation can move Core CPI, are pleasant to listen to when the double martini doesn’t do the job of putting you to sleep. I get it. Stick to the facts, don’t get sidelined by the sideshow, and we will all be better off.”
Copyright 2021 Sarah Perkins
Sarah has been in title & escrow sales since 2004. As an award-winning sales executive and now the Director of Strategic Accounts, Sarah’s role is to bring real estate transactions to Clear Title. To do this, she focuses on supporting her clients and helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.