Greater Phoenix Real Estate Update 10/22/2021

Today is all about the AZ market. On Wednesday, Lawyers Title hosted a presentation with Tina Tamboer with the Cromford Report. She always shares pertinent and timely information. Below I have combined a lot of her information from her presentation, along with additional information from my research.

What Affects Demand?

• Population Growth
  • Technically every human being is an element of demand for housing, whether as an owner or a renter

• Relocation (Inbound)
  • Households relocating from outside the metro area bring one excess element of demand without adding to supply
  • Out of state buyers is the biggest source of new population in AZ
  • 18% of buyers are coming from out of state. The biggest feeder cities are San Francisco, LA, and Chicago.

• Household Formation (Growing)
  • When 1 household splits into 2 (growing), one excess element of demand is created
  • When 2 households merge into 1 (shrinking), one element of demand is removed
  • Work from home movement drove our market during the pandemic and now it is normalizing.
  • With prices going up, household formation is shrinking. It is responding to the affordability issues.
  • This formation rate is an indicator that means the lack of formations will not allow for a lot of price growth, it reduces demand. Do not assume we will have a giant year of appreciation next year.

• Affordability
  • Employment/Income
    • Increases or decreases in employment and income levels will affect Household Formation and Affordability
  • Appreciation/Depreciation
    • Appreciating home prices decrease affordability and decrease demand
    • Depreciating home prices increase affordability and increase demand
    • Tina thinks affordability will be flat from Q2 to Q3. When affordability is on a free fall, it is not a good time to buy. That is not the case today.
    • Prices went up in Q3 but at a much slower rate than earlier in the year. Appreciation slowed, sped up, and has slowed again. We are up 28.3% year over year. (24%-30% is accurate ballpark for everyone)
  • Interest Rates (Can offset effects of Appreciation/Depreciation)
    • Lower rates increase affordability and increase borrower demand
    • Higher rates decrease affordability and decrease borrower demand
    • Rising interest rates are a concern. With the Fed’s tapering likely to be scheduled in a couple of weeks, the markets will likely respond to the news of scheduled start of the tapering.
    • When a mortgage rate increases from 2.99% to 3.05%, payments increase by $12 a month (for the median house).
    • Loosening up is when lenders go to more desktop approvals (which Fannie and Freddie made permanent for refinances). When lenders hire more people, they are tightening up.
  • Loose/Tight Lending Practices (Can offset effects of Interest Rates)
    • Loose lending practices increase approved borrowers, and increase demand
    • Tight lending practices reduce approved borrowers, and decrease demand
    • Loan limits just increased by the largest dollar amount in history. For details, check out my update from last week, here.

Affordability declined in Q2 2021 and the US as a whole and Greater Phoenix fell below the ideal affordable range of 60-75 for the first time since late 2018. Through Q2 2021 in Greater Phoenix a household earning the median income ($79,000 annually), can afford 56.4% of what is for sale. A year ago, it was 70%.

• Consumer Sentiment
  • Emotions, such as euphoria or utter despair, based on speculative opinions or unreliable forecasts can cause some home buyers to make decisions that are not in line with market indicators.

What Affects Supply?

• New Homes
  • New construction adds more homes to overall total housing supply
  • Most not counted in supply for sale because most are not listed in the local MLS
• FSBOs
  • Not counted in supply for sale because they are sold outside of the local MLS
• Appreciation/Depreciation (Equity)
  • Appreciation creates more equity and allows more homeowners to sell without out-of-pocket costs, adding to supply
  • Depreciation creates less equity and restricts more homeowners from selling without out-of-pocket costs, restricting supply
• Foreclosures / Household Formation (Shrinking)
  • When 2 households merge into 1 (shrinking), one home is left vacant adding to available supply
  • When 1 household splits into 2 (growing), one excess element of demand consumes an available home, thus reducing supply
• Relocation (Outbound)
  • When a household leaves the area entirely, one vacant home is added to available supply
• Divorce/Illness/Death/Job Losses/Tragedy
  • Divorce increases Household Formation and reduces supply
  • Death leaves a vacant residence, thus increases supply
  • Illness, Job Losses and Tragedy can cause Household Formation to shrink due to financial distress, thus increasing supply
• Consumer Sentiment
  • Emotions, such as euphoria or utter despair, based on speculative opinions or unreliable forecasts can cause some homeowners to make decisions that are not in line with market indicators.

Rents:

It is not a great time to rent. It is not reasonable to expect rents to continue increasing as they have. Expect less rental rate appreciation. Rents will likely go flat for a bit and then go back up again. That is normal. They often go flat in Q4. Will they rise in Q1 2022? Probably not too much because of the extreme increases. Median rental price in Q1 2020 was $1,600. In Q3 2021 the median rental price was $2,200. That is a 38% increase!

Forbearance:

80% of the forbearance exits have stayed in their homes. With over 3 million borrowers having stayed in their homes after exiting their plan, the forbearance program has been very successful. There are 1.1 million borrowers still in forbearance, if 80% of those stay in their homes which is 880,000 homeowners, then we may see as many as 220,000 new properties come to market, nationwide. That breaks down to 4400 per state. And that would be overtime. There is no flood of listings that will come as borrowers exit forbearance. They will sell and it will not hurt the market. It could be why household formation is shrinking. We have over 10,000 houses sold a month.

Foreclosures:

Foreclosure filings are up. There are always foreclosures. Even during normal times there are foreclosures. On average, there are about 40,000 per month nationwide. There is a backlog of foreclosures due to the moratorium so expect increases but when you look at the chart shown, even with the current increase in pre-foreclosures, we are still way below 2019 numbers. In 2019 we never talked about foreclosures having an impact on the market.

We may see a boost as everything gets caught up. We are still below 1998 foreclosure levels were higher, with fewer houses and fewer people. March 2009 was the peak for pre-foreclosure notices at 10,558. In September 2021 we had 109 filings.

SFR Permits:

Single family permits are up 27.6% year over year through August. Permits always scale back in Q4. Nothing to be concerned about. What is happening with all of the permits that were pulled earlier in the year. We should see more houses that are added to supply. We are not seeing any impact of the increased permits turn into actual supply. This is largely due to labor and supply chain challenges slowing the process.

Non-MLS Sales:

Non-MLS Sales are at an all-time high. We used to call them FSBOs but now there are more reasons.

Non-MLS sales often turn into flip sales. Flip activity works the best in a seller’s market. We will be in a seller’s market until at least the middle of next year.

Ibuyers:

Affordability declined and the ibuyers went crazy and started paying way over asking. Ibuyers came in super high, creating new risk. They are now trying to sell to the buyers that they just outbid. And those buyers cannot afford the property.

They are not exiting the market permanently. Zillow came in too hot and is having to do a lot of price reductions. Click here for a great explanation of the iBuyer price struggles in Phoenix.

Opendoor is scaling back. They did not announce a pullback. They announced that they are still buying after Zillow’s announcement.

Flip sales are up 76% year over year in August. Opendoor’s flip sales are up 892% year over year in August. Zillow’s flip sales are up 638%. And Offerpad’s flip sales are up 86%.

The Market Cycle:

Lots of investors and sellers are at euphoria and buyers are at unease. Homebuilders are concerned about affordability and lenders will be concerned about it too. Appraisers cannot use a comp that is way off. They may throw them out if they are too far off. Often the highest and lowest comps are thrown out.

Supply:

Today’s supply movement is not seasonal. We are seeing a shifting market and not a seasonal market. Supply continues to increase and is up 78% since the end of February. Only down 11.2% from last year. In February inventory stopped dropping and started increasing. In May household formations started dropping.

Demand:

This is the time of year that buyer demand declines. Best time to be a buyer is in Q4 because supply is rising and less competition. Less ibuyer demand.  Not a lot of seasonal supply for low end, insane market. The $400-800K market has been stable and there are 44.5% more listings under contract than in 2020 and 190% up from 2019. $800-1M supply is low and demand is high. $1M+ starting seasonal demand dip and Q4 rally. Q1 2022 will see more buyers. Comparing year over year demand for the second half of the year will come in negative because of the spike in demand late last year. Currently listings under contract are down 12.5% year over year but we are ahead of 2019 by 13.3%.

Closed Sales:

MLS closed sales through September is up 9.2% over 2020. A little less than closed through September 2005. October 2021 is following the activity of October 2020. By the end of the month, we may exceed closings through October 2005.

Cromford Market Index (CMI):

The best tool for predicting future price appreciation trends and is available on the main page of the Cromford Report: https://cromfordreport.com/ (without a subscription)

• 100 is balanced and prices rise at the rate of inflation (currently 5.4%), below 100 is a buyer’s market, above 100 is a seller’s market, prices drop below 90, prices rise at 110. 2014 was a balanced market.
• On 3/20/2020 we were at 241
• On 5/15/2020 we were at 145.2
• Yesterday we were at 349.7
• We peaked on 3/14/2021 at 514.9
• Prior to this run, the previous peak was 312.9 in the spring of 2005.
• CMI is the predictor, it moves first and then appreciation follows. Cannot predict the CMI. It tells us where we are.

When the CMI weakens we see other weakening follow, like sales prices, appreciation, over asking, etc. We are now averaging a decline of 1.6 points over 30 days. Previously it was dropping much faster over 30 days. It is slowing due to the increased demand, 4.3 points over the past 30 days while supply has only increased by 1.4 points over the same timeframe.

Ibuyers do not affect supply. Only demand. There is a slight slowdown in demand due to ibuyer pull back.

Prices are rising. Will continue rising through the end of the year. We will likely not see any prices decline anytime. They will go up at a slower rate.

Demand below supply = buyer market

Supply below demand = seller market

Always trying to come together. Currently, there is an extreme separation between supply and demand.

Contract ratio:

Only looks at what is active and what is under contract and nothing else. Contract ratios are very seasonal. Right now we have an extreme seasonal market. Some is seasonal, some isn’t. Despite the decline in contract ratio, the data shows we are still in an extreme seller’s market that is just starting to weaken.

Final Thoughts:

The extreme seller market is still in a frenzy. Demand is being driven more by investors than owner-occupants.

• Annual Appreciation = 25.1% (down from 39%)
• Sales Over Asking Price = 48.2% (down from 60%)
• Median Over List = $10,500 (down from $20,000)
• Average Sale Price per SF = 0.3% over List (down from 1.8%)
• DOM Prior to Contract = 10 Days (up from 5 Days)
• Median Sales Price = $415,000 to Date +24% from Last October

Demand Indicators:

• Affordability Lower than Normal – projected to measure 56% again for Q3 when released in November
• Household formation is down over past 3 months, corresponding with affordability indicators
• 3^rd Quarter Sales down from Q3 2020, comparable to Q3 2019
• Interest Rates Up to 3.05%
• Lending Practices Loosening with Increased Loan Limits
• Jobs Good
• Corporate Profits Good
• Inbound Relocation Good, Population Rising
• Incomes (?) – To Come

Other Observations:

• Ibuyers = Zillow on pause. Opendoor and Offerpad are scaling back.