Greater Phoenix Real Estate Update 2/25/2022

At 7.5%, inflation is at its highest rate in 40 years, the sanctions against Russia will lead to more inflation, combined with rising interest rates, rising (home) prices, low inventory, and solid demand; today’s home buyers face a lot of hurdles. We remind the buyers that real estate ownership is the number one wealth creator. With 28% year over year home appreciation in Greater Phoenix, a bullish Wall Street (with some recent corrections), and risky crypto/NFTs capital is flowing and is getting more expensive and more unpredictable. Yet, the average American homeowner with a mortgage has $185,000 in equity. Equity provides options.

Appreciation Rates:

As always, supply and demand dictate price. In Greater Phoenix, in 2007 when there were over 58,000 active listings (including UCB) demand declined to 43% below normal, and prices declined. Earlier this month there were about 8,300 active listings (including UCB) and at the same time demand was 21% above normal, and prices are increasing – a lot. The supply deficit is significant.

Tom Ruff with the Information Market recently wrote about the local median sales prices. He said, “ARMLS reported the median sales price for homes sold in January as $430,000. Our daily monitoring of pending sales contracts tells us that the median sales price for closed listings will hit $460,000 around April 1. In March 2017, the reported median sales price was $230,000. If our projection is correct, home prices will have doubled in the last five years.”

While we are seeing early signs of demand cooling and a slowing rate of appreciation, we have a long, long way to go to get to a balanced market. According to FHFA, nationwide from Q1 to Q2 2021 home prices increased by 5.1%, from Q2 to Q3 2021 home prices increased by 4.2%, and from Q3 to Q4 2021 home prices only increased by 3.3% (remember when that was an entire year’s worth of appreciation?) Nationally, 2021 saw a 17.5% appreciation rate.

Real estate is not just an investment, although the investment element has been almost exclusively our focus, it is also shelter, a basic human need. Because of that need, demand will never vanish completely, nor will supply. And here is the kicker, due to the incredible investment opportunity residential real estate has created, especially over the past few years, we no longer know how much of the supply is actually available for shelter. Short term rentals are not part of supply because no one calls them home.

Short Term Rentals:

Airbnb’s Q4 2021 revenue was up 80% year over year. That kind of revenue has garnered the attention of more corporate investors including Saluda Grade, a New York investment firm with plans to spend $500 million on short term rentals.

The total number of short term rentals is unknown. The New Times recently mentioned that there are 5300 in Scottsdale alone, which is over 6% of Scottsdale properties. Sedona and Paradise Valley have the largest percentage of short term rentals, pushing 20%. If 5% of Maricopa County’s roughly 2 million housing units are short term rentals, that would be 100,000 units. The Arizona Department of Housing recently estimated that the state is short 250,000-270,000 housing units based on today’s demand.

These numbers are based on assumptions. If and when demand declines, these properties will be sold and put back into available supply. The lack of data makes the actual shortage unknown. What we do know is currently demand significantly outpaces available supply.

Additional Supply?

Despite the fear-mongering headlines, foreclosures will not drive an increase in supply. Nationally, foreclosures are running 76% below normal and locally there were only 256 foreclosures last year. Yes, 2022 will have more but probably not a whole lot more.

New home inventory will also not solve our inventory problems. New home sales declined 4.5% in January from December and declined 19% year over year. The labor and supply chain issues are preventing new home sales to make a dent in today’s demand. While new home permits are up, completions are flat.

Institutional Investors:

Last year in Greater Phoenix 28.4% of homes went to investors. Smaller investors are struggling to keep up with the larger investors, thus driving up prices, not only for local buyers, but smaller investors as well.

In 2021, iBuyers sold 20% of their inventory to corporate buy and hold investors, up from 5% in 2020. Mike DelPrete recently wrote, “Selling to investors may be a sound business decision, but there are real world implications that directly affect thousands of American families.”

This year Zillow has sold about 200 houses in Greater Phoenix in three sets of bulk sales to Progress Residential. All three sales had an exemption code so an affidavit of property value was not recorded. Zillow’s acquisition price remains the most recent sales prices on all of these properties.

Lending:

Demand for purchase mortgages is down for the third week in a row.

At 4%, the increase in mortgage rates has reduced home buyer’s power by $52,000 since November.

Rates did decline slightly week over week. A 30 year fixed is now 3.89%.

Earnings:

• Freddie Mac reported a net income of $12.1 billion in 2021 and had a year over year increase of 65%.
• Zillow lost $528 million in 2021 a 226% year over year increase from a loss of $162 million in 2020. Zillow’s plan for the future is to better leverage premier agents, sell more of its mortgage and title services, which will then create the super app of the future.
• Opendoor lost $662 million in 2021 a 162% year over year increase from a loss of $253 million in 2020.
• Offerpad, the only iBuyer to turn a profit, did so for the second time in Q4 2021 (the first time was Q2 2021).

Real Estate News:

• Discount broker Homie, laid off one third of its employees. The company is shifting gears and has added Homie Cash, its power buyer option.
• Nationwide, single family rents increased 3x more in 2021 than they did in 2020.
• According to NAR, existing home sales were up 6.5% in January month over month while existing home inventory was down 16.5% in January, year over year.
• From mid-January to mid-February, 41% of homes sold for over asking. During the same time in 2021 it was 33% and in 2020 it was 19%.

Final Thoughts:

Jordan Levine, the chief economist for the California Association of Realtors summed up our current environment well when he said, “The broader economy is showing signs of continued improvement and the housing market remains an economic bright spot, yet inflation and rising interest rates are beginning to squeeze some buyers out of the market.”

Copyright 2022 Sarah Perkins