Greater Phoenix Real Estate Update 9/10/2021

A rising tide lifts all boats.

Real estate creates wealth. It has created long-lasting, multi-generational wealth, and it has done the opposite. Why? Appreciation. Home price appreciation, overtime, benefits everyone.

There is a lot of talk about softening, normalization, moderating, weakening, etc. They all mean the same thing; the real estate market is calming down. But before you exhale a sigh of relief, the market remains very, very hot.

“We are seeing some signs of softening in the housing market, but context is important here… We’re still very much in a sellers’ market, but we are seeing some early signs of softening.”

-ODETA KUSHI, DEPUTY CHIEF ECONOMIST, FIRST AMERICAN

National Real Estate:

The average American tenure in a home has increased substantially over the past 30 years and is now up to 10 years. A recent report stated that by 2037 we will be up to 15 years. At the rate we are going, we will reach that long before 2037. Less turn over = less available inventory = greater rate of appreciation (provided demand remains consistent).

According to Fannie Mae’s August survey of homebuyer sentiment, consumers think it is a good time to sell a home but a bad time to buy a home due to high prices and low supply. Without the buyers, who do the sellers sell to?

“The housing market has clearly become slightly more favorable to buyers. Homes are taking longer to sell, which gives buyers more time to make thoughtful decisions about whether to make offers. Home prices have plateaued, so buyers shouldn’t feel rushed to buy before prices rise further. And the fact that more sellers are dropping their list price is a sign that sellers have to be realistic about their price expectations.”

-DARYL FAIRWEATHER, REDFIN’S CHIEF ECONOMIST

While the market is normalizing, it is doing so from a very high level, so despite the recent declines in pending listings, we are still significantly above historic norms.

Commercial real estate is also benefitting from the demand for real estate. In July, commercial property sales prices were up 1.2% month over month and 11.8% year over year. Unsurprisingly, multifamily has seen the highest rate of appreciation at 1.6% month over month and 13.5% year over year, the highest annual appreciation rate in 15 years.

Prior to the pandemic, 60-75% of Zillow searches were for suburban homes, today it is 90%. At the same time, the number of suburban listings has declined 72% more than the urban listings.

The AZ Market:

Context truly is key. When the temperature cools from 514 degrees in March to yesterday’s 347, it is still super-duper hot (Cromford Market Index reference). The CMI measures the relationship between supply and demand and is the best leading indicator available. Anything over 100 is a seller’s market and prices rise at 110. Prices drop at 90. In order for prices to drop demand needs to be below supply. Demand is nearly 13% above balance while supply is 67% below balance.

Despite the normalizing of the market, it is not normal. Demand has actually increased recently which is unusual because this is the time of year demand typically declines. After a 44% inventory increase over the past three months, inventory seems to be leveling out again and the increases have flattened. Leveling out at 7,400 listings is less than ideal. The size of the Greater Phoenix market calls for 25,000 listings and we haven’t seen 20,000 active listings since 2016.

Jim Belfiore of Zonda is predicting that 35,000 new houses will be built in 2021, the most since 2007. There are 32,700 apartments in process but only 11,000 are expected to be completed this year. Apartment vacancy rates are close to 3% which is the lowest rate since the 1970s.

iBuyers & Appreciation:

In Q2 2021 iBuyers had a premium of 9.6% on their sales. Much of that gain was due to home price appreciation. This appreciation rate gave Opendoor and Zillow the confidence to move forward with extremely high offers, often significantly above market value. Acquisitions boomed and in July, iBuyers accounted for 8.1% of all home purchases in Maricopa County. This led to many flashy headlines about an upcoming giant Q3.

The iBuyers must have missed my market update a couple of weeks ago when I wrote about the declining rate of appreciation. I wrote, “In January the Greater Phoenix median sales price was $340,000; now it is $405,000. That is over a 19% appreciation rate in this year alone. Most of those gains took place at the beginning of the year with 15.5% of the gain occurring from January to May. The median sales prices from May to August increased by 3.15% and from June to August the increase was 1.25%. The appreciation rate is slowing, and this is good for the overall health of the market.” You can find the full update here.

On Wednesday, Mike DelPrete (with a little help from me) detailed how the changing home price appreciation rates are impacting iBuyer premiums in a big way. He wrote, “Home price appreciation rates are beginning to cool in major markets across the U.S., including Phoenix, where the median iBuyer home price appreciation has fallen 50 percent since May. Opendoor’s median home price appreciation for homes sold in August is just 2.7 percent, down a massive 75 percent from 10.7 percent in May.” Click here for his article and supporting graphs.

Lending:

The average mortgage borrower has $173,000 in equity which means that Americans as a whole have $9.1 TRILLION in equity, a record high. Cash-out refinances are increasing, interest rates are low and it makes a great headline. Keep in mind, while the refis are up, they are not near record highs and borrowers today have nearly double the amount of equity they had in 2005.

Real Estate News:

• Offerpad went public last week via merger with former Zillow CEO Spencer Rascoff’s SPAC. It launched with a $2.7 billion valuation and in recent days increased by 27% to its goal of $10 per share.
• A Federal Judge denied NAR and Zillow’s motion to dismiss discount brokerage REX’s lawsuit stating that NAR’s “no-commingling rule” violates antitrust laws. NAR’s current rule states that MLS listed properties and non-MLS listed properties may not be “co-mingled” in the same section on a listing platform, like Zillow.
• Opendoor recently acquired two home renovation companies, Skylight and Pro.com.
• California Regional MLS, the nation’s largest MLS, is updating its requirements for the listing agent disclosure on online listing pages. Now, on all online CMLS listings the listing agent, contact info, and brokerage are required. Will this spread across the country?

Final Thoughts:

Today’s low levels of inventory created huge leaps in appreciation. As that calms, skittish buyers will return to the market and more sellers will list their homes. It will be a long time before we see 25,000 listings, but maybe we could get up to 10,000 in Q1 2022, and what a market that will be!

Copyright 2021 Sarah Perkins