Greater Phoenix Real Estate Update 6/18/2021

The real estate market continues to shift and change, slowly moving towards normalization. Prices continue to increase, demand is slightly subsiding, and inventory is growing (and has a LONG way to go). The intensity is cooling (from 500 degrees to 350 – its still HOT), and fatigued buyers are writing fewer offers before one is accepted. The headlines attempting to explain the still very hot, yet cooling market seem to be causing more confusion than clarification.

National Real Estate:

A recent report from CoreLogic states that homeowners gained $1.9 trillion in equity in Q1 2021, which is a year over year increase of 19.6%. Going deeper that breaks down to an increase of $33,400 in equity per homeowner and is the highest gain in over 10 years. Arizona’s year over year average equity increase is $51,000!

Demand is slowing and the market is cooling. Pending sales are down (4.4% in April from March). Mortgage applications are down 7% from the average levels from January and February 2020. Redfin’s demand index is down 12% from the peak in late March. These shifts are not a bubble bursting but gradual changes towards a more normal market. Given the extreme imbalance during the winter and spring, it will take well over a year before we have a balanced market.

Active single family inventory climbed another 3.8% this week to 342,000. That’s now up 11% from the bottom on April 30, but still 51% lower than this time last year when inventory started falling 1-2% a week.

The Altos market action index is another tool to gauge demand. Any reading above 30 is a seller’s market. The notable change is that the weekly reading (dotted line) dipped below the 90-day rolling average for the first time all year. This shows that the market is not getting hotter from here but is still very hot.

The AZ Market:

-For a deep dive into the Greater Phoenix market, join us on June 22 for a Cromford Market Update with Tina Tamboer. For details and registration, click here.

-Greater Phoenix’s median monthly appreciation rate has declined by maybe 1%, down to 31% year over year. (yes, you read that correctly) Healthy appreciation is 3-6%. Today’s huge appreciation rates are due to low inventory levels and not super high demand. Demand remains solid but is only about 7% above normal.

-Inventory levels in Greater Phoenix have increased by 10% since the end of May, matching listings counts from the end of January.

-Habitat for Humanity is building its first 3D printed house in Tempe. The goal is to expedite the building process while reducing labor and construction costs. About 70% of the building will be printed and the remaining 30% will be built through traditional construction. The selected family will move into the 1,600 square foot, 3 bedroom, 2 bathroom home this fall.

-In Q1 2021 the Maricopa County Assessor’s Office received twice as many construction permit requests as in 2019 and 2020. A total of 19,232 residential and commercial permits were requested. This increase was expected.

“[We’ve] been seeing this trend now for a number of years, so I think we’re all scaling toward that. It wasn’t like one day the door got opened and a flood of water just rushed in, this has been just kind of a growing trend that we’ve been monitoring over the last several years.”

– Eddie Cook, Maricopa County Assessor

-NAR has identified both Phoenix and Tucson as top 10 commercial real estate markets in 2021.

–Phoenix took the top spot in Origin Investments’ machine learning database that identifies cities with “promising fundamentals for success.”

New Construction:

Lumber prices have declined by 40% since early May. Timberland industry executives, from several different companies, have been selling off company stock at unusually high rates indicating that Wall Street expects lumber prices to continue to decline.

“This level of selling is simply unusual and to have this type of alignment among peers like this is unusual. It shows a consensus within the group about how they are thinking about their stock prices.”

-Ben Silverman, director of research at stocks analytics firm InsiderScore

The speedy price appreciation of not only lumber but appliances and other materials needed for new construction slightly reduced June’s builder confidence rating to 81 in June, from 83 in May, the lowest level since August 2020. Ratings over 50 reflect strong market conditions.

Nationwide, single family housing starts increased by 4.2% from April to May while completions were down by 2.6% and permits declined over the same time period.

Housing Shortage:

According to a recent NAR report, construction declines over the past 30 years has created a 5.5 million unit housing shortage nationwide. NAR is calling for a “major national commitment” for more building of all housing types, especially for more affordable housing units. To close the gap, builders will have to build 2 million homes a year for the next 10 years. When you combine the underbuilding count with housing demolition (intentional or disaster) the shortfall grows to 6.8 million units.

NAR is asking the government for help. It will take federal policy to increase the rate of construction to the levels needed. Builders build homes to make money and after the 2008 crash, builders are even more careful with the bottom line. When interest rates rise, new construction takes a bigger hit than resale. In 2018 when mortgage rates moved up to 5%, new construction inventory grew to 6.5 months and builders stopped building. When rates declined in early 2019 inventory declined and builders started building again. When rates increase or demand declines, what will keep the builders building?

“Unless the government steps in to build when new home sales demand gets soft, we will not add homes to the builders’ demand algorithm. Builders have learned to tightly control inventory by retreating from construction when demand becomes slack. Building more homes is bad business during weaker times.”

-Logan Mohtashami, HousingWire’s Lead Economist

Rentals:

The average size of apartment units under construction is 50 square feet larger than the average apartment unit built over the past five years. The new units allow space for a home office.

In May, the median rent for multifamily properties increased by 2.5% year over year, matching the growth rate of March 2020. At 9.6%, Phoenix had the second-highest multifamily rent growth behind the Inland Empire, CA. San Jose, San Francisco, and NYC still have negative growth but are improving.

In April, single-family rents grew by 5.3% nationwide, more than double the April 2020 growth (2.4%). Phoenix’s growth led the country, again, at 12.2% year over year. Chicago and Boston both saw negative growth.

Remember when rental prices increase as quickly as sales prices the market is operating on healthy fundamentals. When rents decrease while sales prices increase it is a bubble market. Prices decline due to vacancies, which neither the purchase nor rental market have much of.

Real Estate News:

• Due to declines in pending sales and purchase mortgage applications, Fannie Mae downgraded its projections for year over year sales growth in 2021 for both existing (3.1% from 4.8%) and new (11.8% from 16.3%) home sales.

• Discount broker REX’s injunction, stating NAR and Zillow participate in anti-competitive practices, has been denied. The judge went on and told REX to stop calling Zillow, NAR, and other organizations a “cartel.”

• Last week real estate coaching company, Ramsey Solutions made a very unusual move when it told its coaching clients with eXp to either change brokerages or leave Ramsey Solutions. Very little information was given and Ramsey Solutions has not responded with any additional information.

• Zillow is now using machine learning and neural network technology to improve the Zestimate’s accuracy by 1% and estimates that the new technology will increase live offer amounts by 30%.

Final Thoughts:

Remember real estate changes slowly. Yes, it has never moved so quickly but it doesn’t change overnight, despite what it seems. By understanding the implications of the slight shifts, we can all better council our clients. And while Sean Black, CEO of Knock, believes that within 5 – 10 years buying a house will be like booking a short term rental on Airbnb, a lot has to happen first.

Copyright 2021 Sarah Perkins