Greater Phoenix Real Estate Update 1/21/2022

Today is all about the AZ market. Recently, Clear 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.

The AZ Market:

In order to be successful in real estate you need to know what is actually going on. Ignore fear mongering headlines. We are all in uncharted territory.

Typically, the Martin Luther King Jr. holiday weekend is the unofficial start to the spring selling season. While we have seen an increase in properties going under contract this week, it is still too soon to tell what will happen.

Wages and Demographics:

In April 2020 the US Census started collecting data. Unfortunately, the data that was collected is incomplete and of low quality. The US Census stated, “Despite our best efforts to mitigate the collection disruptions and modify the weighting adjustments, the outcome could not be fully evaluated until data collection ended. Unfortunately, even with modifications focusing on known sources of bias, the Census Bureau determined that the estimates did not meet our statistical quality standards. These inconsistencies led to the Census Bureau’s decision not to release the standard set of 1-year data products.”

The Census released experimental estimates for the 1-year data. Between the low quality, lack of data, and experimental estimates; establishing benchmarks, like affordability levels, is difficult. Garbage in, garbage out.

Without the household income data from the Census we have to use the HUD income data and that is focused on family income which excludes individual person households and multiple, unrelated people households. HUD updates this data every February. Based on the info we do have, which is likely on the low end, the annual median family income in Greater Phoenix is $79,000. This number was established by using the 2018 wage data and applying inflation over time (yikes!).

Based on that amount, affordability is suffering. The ideal affordability range is 60-75, meaning that of the families earning the median income were able to afford 60-75% of the homes sold over a period of time.

In Q3 2021, we dropped to an affordability rate of 51%. Lower than the national rate of 56.6%. How inaccurate is the wage data? Are incomes actually keeping up with house prices?

Rather than using the affordability index as a predictor; we have to closely watch all demand indicators. As soon as the population cannot afford an item, demand drops.

Buyer Mix:

All residential property owners are categorized in one of three buckets. 1. Owner occupied, 2. Second home, and 3. Landlord.

From 2015 to 2019 owner occupied buyers purchased 70-76% of the properties. In Q2 2021 a new trend emerged, owner occupied purchases declined from 67% to 63% through October. That is a big drop in a short time. And overall demand stayed strong and grew in Q4. Will this trend continue, and will this make up for lack of occupied demand? What if occupied demand continues to decline?

Wall Street funded corporate buy and hold investors remove inventory from the market for the long term. ibuyers add extra demand without removing inventory from the market.

What will impact the investor buyers? Miscalculations.

In October, a distressing trend for Zillow became undeniably apparent. Zillow’s median acquisition price was $435,294 while its median sales price was $411,000. In early November, Zillow shut down Zillow Offers completely.

Through October, Opendoor’s median acquisition and sales prices were about the same. Only Offerpad came out ahead with a median acquisition price of $380,000 and a median sales price of $400,000.

iBuyers are still buying, albeit more conservatively. They are selling about 20% of their inventory to institutional buyers. If those buyers pull back, the iBuyers selling strategy will be negatively impacted.

Traditional flip buyers working their program are still making a 30-40% profit. This has been the case since they started tracking the numbers. Good time to be a smart flip investor.

What could cause a stock market funding pullback? Strong consumer confidence leads to more spending which keeps Wall Street happy. For institutional buyers, when the stock market goes flat their purchases flatten. But if it goes down, sharply down, expect a potential draw back from Wall Street too.

Corporate profits remain high. When corporate profits are high, luxury real estate does very well. People are making lots of money and are spending it on high end luxury real estate.

Affordability:

In December, the median sales price for a starter home was $418,200. The 28% appreciation rate for the year combined with increased interest rates, has added $618 to the monthly payment. A 41% year over year monthly mortgage payment increase is unsustainable, despite lots of wage growth. In order for $2,123 a month to be affordable, annual household income needs to be at least $91,000.

The median rent increased by over 20% last year and as of Q1 2022 it was $2,265 a month. While the gap between median monthly mortgage payments and monthly rent is shrinking, the benefits of owning still far outweigh those of renting. Equity grows.

What affects supply?

  • New homes
  • FSBOs
  • Appreciation/Depreciation (Equity)
  • Foreclosures/Household Formation (shrinking)
  • Relocation (Outbound)
  • Divorce/Illness/Death/Job Losses/Tragedy
  • Consumer sentiment

What affects demand?

  • Population growth
  • Relocation (inbound)
  • Household formation (growing)
  • Affordability (based on the worst census data ever)
    • Employment/income
    • Appreciation/depreciation
    • Interest rates
    • Loose/tight lending
  • Consumer Sentiment

Population & Migration:

Population growth remains positive but is slowing. The declining birth rate is a long term red flag. Today’s declining population reduces future demand. Impacts are likely 10+ years out. The solutions are more babies and more immigration.

From 2020-2021 only six states had a population growth greater than the entire country’s. Those states are Arizona, Utah, Idaho, Montana, Texas, and South Carolina. 16 states saw population declines.

Unsurprisingly, the areas with the greatest inbound flow are from southern California, Chicago, and Seattle. Check out the interactive map at https://flowsmapper.geo.census.gov/map.html

U-Haul and United Van Lines both released their migration 2021 reports. According to U-Haul, Arizona is #5 for inbound migration for the second year in a row. According to United Van Lines, Arizona didn’t make the top 10 for inbound or outbound migration.

47% of the outbound migration are aged 65+ and are moving to be closer to family. Retirement remains the largest portion of inbound migration but the percentage of job relocation is growing.

Employment:

Arizona ranks 28th in the country for the unemployment rate. CA is ranked 50th, IL is 40th, and NY is 47th. There is higher unemployment in the states people are leaving. Utah has a 2% unemployment rate, the lowest in the country.

4.7% is great for us. We had one of the sharpest increases in employment in the country. We are normally slightly higher than the country in unemployment rates. We are now at pre-pandemic levels. AZ recovered our entire labor force last by last February.

Appreciation:

The median sales price in December was $430,000, up 28.4% year over year. Median sales price increases reached a year over year high of 38% from January to June and a 3.2% increase month over month for the first half of the year. Then from June to December the monthly appreciation slowed to 1.3% (which is still VERY high).

January is currently running a 1.7% monthly appreciation rate, slightly higher than the end of last year. While there is no guarantee of anything, at this rate we are looking at a 15% appreciation rate by June.

Supply:

In late summer/early fall, we almost had a supply increase but inventory started declining again in October and now we are at all time, record lows for available inventory. The question is: will it go up or down? All we can do is watch the numbers. There are no trends to help us predict, there is no seasonality to use as a baseline. Earlier today there were fewer than 4800 active listings in Greater Phoenix. These levels do not support our population of over 5 million people. The last time we had 20,000 active listings was 2016 and that was a seller’s market.

Why is it so low? We are not getting enough new listings each week. Over the summer our new listing count grew slightly but then in Q4 new listings dropped off and demand picked up. Demand is expected to continue to rise from now through May.

Closed Sales:

  • 2021 had the most MLS sales in history, outpacing 2005.
  • 2021 had the highest median sales price of $430,000.
  • 2021 had the lowest foreclosure activity on record.

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 7%), below 100 is a buyer’s market, above 100 is a seller’s market, prices drop below 90, prices rise at 110. 
  • On 3/20/2020 we were at 241 
  • On 5/15/2020 we were at 145.2 
  • Yesterday we were at 455.8 
  • We peaked on 3/14/2021 at 514.9 
  • CMI is the predictor, it moves first and then appreciation follows. Cannot predict the CMI. It tells us where we are. 

The current seller’s market is strengthening as demand stays consistent and supply further declines. Prices will be rising for the next 3-6 months. The amount remains to be seen. Expect (hope) the rate of appreciation slows but will continue to increase. As long as demand outpaces supply prices will go up. Currently, supply is 73% below normal while demand is nearly 23% above normal.

Past 21 Years:

  • Buyer’s market – 3.6 years
  • Balanced market – 4.5 years (2001-2003, 2014)
  • Seller’s market – 13 years

What we are used to is not a balanced market. We are used to a weak seller’s market, like 2015-2019. There were seller concessions and some wiggle room for negotiations.

Closed Sales:

  • Prices increased by 28.4% in 2021.
  • In December, 40.5% closed over asking.
  • Median amount over asking: $10,000
  • December’s sale price/list price ratio: 99.9%
  • December days on market: 18 (bottomed out at 5 in the spring)

Final Thoughts:

The real estate market in Greater Phoenix is not slowing down. Low inventory and solid demand will push prices up. 2022 is going to be another exciting year.

Copyright 2022 Sarah Perkins

Published by 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.

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