Greater Phoenix Real Estate Market Update 4/19/2022

Today is all about the AZ market. On Wednesday, Clear Title hosted a Market Update with the Cromford Report’s Tina Tamboer. 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.

To learn more about a Cromford Report membership, click here.

Mike DelPrete often says that the real estate industry moves very slowly, and it has never moved this fast before.

Tina agrees, she said, “The market moves very slowly. Once you see a price change, the party is over.” Prices are the last thing to move. This is why prices continue to rise (our median sales price will reach $475,000 in the coming weeks) and yet demand is declining.

There is no need to panic. In order for the market to stabilize, it needs to cool. And while the market is cooling, demand continues to outpace supply.

What affects demand?

• Population growth
• Relocation (inbound)
• Household formation (growing)
  • The population doesn’t need to grow for demand to grow if new households are forming. You can increase demand without population growth. Household formation is mostly related to affordability.
• Affordability (based on the worst census data ever)
  • Employment/income
  • Appreciation/depreciation
  • Interest rates (can offset effects of Appreciation/Depreciation)
    • Because rates are going up demand may decrease, but prices will not decline. There is still too much demand for the supply, prices are still increasing, quickly.
  • Loose/tight lending practices (can offset effects of interest rates)
• 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.

All eyes are on interest rates right now. Nothing moves as quickly as interest rates, right now they are fluctuating wildly. We haven’t seen interest rates move this fast and go this high since the 1980s. Rising rates create more challenges for owner-occupied buyers and not the cash buyers who are usually investors. The higher rates hurt the demand of the people who need to get a loan in order to buy. Owner-occupied purchases declined slightly from Q4 2021 (64.2%) to Q1 2022 (64%). The majority of owner-occupied buyers purchased between $500,000 and $1,000,000.

Absentee owners are buying more houses and paying cash more often. Luxury buyers are competing with second-home buyers for properties. 27.3% of buyers paid cash in February, up from January’s 26.2%. While 72.5% of buyers purchased with a new loan in February, a decline from January’s 73.3%.

Affordability: 

The median sales price for the median home sold (1,500-2,000 square feet) is up $92,075 year over year or 25.2%. When you add in the increased mortgage rates (3.06% to 4.72%), payments are up $817 year over year which is a payment increase of 46%.

Using the baseline that housing costs should be about 28% of gross household income, the median household would need to be making $111,000 a year to afford the median house.

Maricopa County has a median income of $80,161 according to the latest from the Census. Now you have to have 2-3 earners to afford a house.52% of families can afford the median house in Maricopa County.

Homeownership Rates:

There are a lot of comments and fear-mongering on social media saying that we are moving towards a  renter society. The highest homeownership rate we ever reached was in 2005 when it reached 71%. Homeownership began declining in 2006 until it bottomed out in 2016 at 60% and has been growing since 2016 and in 2020 we reached a rate of 64.3%.

Today’s Borrowers: 

At 714, the average credit score in the US is at the strongest point since 2011. Subprime borrowers are nearly nonexistent. Credit scores are high, and today’s borrowers are the strongest ever but they still cannot compete with cash buyers.

Who is going to lend to these people? Only jumbo lenders are doing a lot of loans. Many lenders are not offering a lot of credit. Credit availability is not yet up to pre-pandemic levels. Lenders are working on new loans products but can’t keep up with rising rates and new challenges that come with those rising rates.

With purchase appreciation rates surpassing rental appreciation, it is trickier to explain the benefits of buying but there are still substantial benefits to buying instead of renting. As long as a borrower can afford the payments, then over time, they can refinance out of higher rates and PMI. This is using February’s rate of inflation. March’s inflation rate reached 8.5%!

Rentals:

It is now about $300 cheaper per month to rent than it is to buy.

From 2002 through 2005, rental rates declined. When home prices are increasing and rental prices are decreasing, we have false demand. If there is going to be a crack in the market, we will see it in rentals first. Rental rates are rising at a slower rate than are sales prices. The population cannot afford to rent at prices that match sales price increases.

Rental Rates:

Rents stopped increasing in August 2021. From August to April, rents are about flat. The current monthly pattern is not following seasonal trends. We are watching this closely.

Why aren’t rental princes increasing? Because rental supply is increasing, it is up 58% in the past 6 months. When rental supply increases, it means that there are vacant rentals. Renters have more options and are able to negotiate their terms.

Jim Daniel, President of RL Brown tracks build-to-rent communities, for more information visit https://rlbrownreports.com/.

The median asking rental price is increasing but the dollar per square foot price is declining which means that bigger houses are staying on the market longer. 1700 square feet is the sweet spot, above 1700 square feet, and the price per square foot decreases.

The median asking rent in the MLS is $2,400, up 15% year over year.  The median asking price per square foot has declined by 16% year over year, from $2.01 per square foot last year to year to $1.69 this year.

• For 0-1 bedroom rentals, inventory is flat, at $1595, the median asking rent is down 10% and the median price per square foot is down 9%, since October 2021.
• For 2 bedroom rentals, inventory is up 35% since October, at $2095, the median asking rent is up 5% and the median price per square foot is flat, since May 2021.
• For 3 bedroom rentals, inventory is up 64%, at $2338 the median asking rent is up 6% and the median price per square foot is flat, since May 2021.
• For 4 bedroom rentals, inventory is up 131%, at $2600, the median asking rent is down 7% and the median price per square foot is down 16%, since August 2021.
• For 5 bedroom rentals, inventory is up 142%, at $3800, the median asking rent is down 31% and the median price per square foot is down 39%, since January 2021.

Affordability challenges are more apparent in larger rentals. When the market softens, short-term rentals become long-term rentals or are listed for sale. Due to the location of the increased inventory, it doesn’t appear to be short-term rentals driving the increases.

Active rental inventory is up across the valley.

• Queen Creek and San Tan Valley combined are up 437% since May.
• Gilbert is up 231% since May.
• Pinal County is up 208% since September.
• Litchfield Park is up 145% since October.
• Buckeye is up 141% since October.
• Tempe is up 118% since September.
• Chandler is up 81% since May.
• NE Valley is up 25% since September.

Vacancy Rates:

Arizona’s rental vacancy rate is 4.8% which is very low. The most expensive areas tend to have more rentals because fewer people can afford to own. Arizona is in the second-lowest vacancy rate area which means we are getting closer to states like CA.

Exuberance:

Euphoria is among the final stages in a growth market. The depth of euphoria is measured by the level of exuberance in the market. Exuberance indicator, meaning something else is driving the demand. That something else is Wall Street.

Is it about flip investors? Flips only work in seller markets. Opendoor launched in 2015, and Offerpad in 2016; these ibuyers have never seen a balanced or weak seller’s market. Flips decrease in softening markets. We are seeing record flip counts.

Who are the iBuyers selling to? They’re selling to Wall Street. Wall Street is too euphoric. iBuyers have scaled way back. Expect ibuyers closings to decline over the coming months. The scale-back is another indicator of softening.

Water: 

Water is getting more media attention due to the huge decline in water levels in Lake Mead. Not a new issue, been dealing with it since 1999. We are starting to see areas struggle with water. For example, Rio Verde has to figure out where they will get water now that Scottsdale will no longer haul it. This is going to affect people in the outskirts of town. This is an issue in Pinal. This is a long-term challenge that will have to be addressed. Maricopa County is doing ok right now. 

2005-2008 Bubble Vs. 2022

2005: HIGH VACANCY & HIGH FORECLOSURE RISK:

• False demand leads to vacant properties and vacant properties lose value.
• Bad financing: 100% (or more) loans, interest-only loans
• Lots of speculation: no intention of occupying the property
• Overbuilding for 10 years

2022: HIGH EQUITY, LOW FORECLOSURE RISK, LOW VACANCY RISK

• Good loans with significant down payments
• Stable buyers
• Intent to occupy
• New home development struggles to keep up with demand
• Wall Street’s returns may be lower than expected, rentals/short term: moderate risk of vacancy due to potential pull back on rentals
• Lack of water creates a high risk of vacancy

Unfortunately, Wall Street money often creates big messes for the housing market. This time around Wall Street has taken on nearly all of the risk. They are not leveraged but will likely have more risk of a lower or negative return.

Supply:

Whenever there is uncertainty, lean into the numbers. Lean into what you know. You can only advise on what is happening right now.

Weekly accepted contracts are falling into line with 2021 and slightly below. Seasonally, we normally peak right now for contracts in escrow. Currently running 1.2% above last year but not showing the typical increases we would normally see right now, instead, it is declining. Looking at years past we are on the low side of demand for what is under contract.

New listings are down 6.6% year over year but overall inventory is up 13.4% year over year. Active inventory increases are very specific to price range.

• $500K – $600K is up 130% year over year
• $800K – $1M is up 57% year over year

In these ranges investors and second homeowners are not picking up the slack. The sub-$500K market remains extremely tight as does the luxury market.

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 8.5%), below 100 is a buyer’s market, above 100 is a seller’s market, prices drop below 90, prices rise at 110. 
• Yesterday we were at 420.7
• All time high: 3/14/2021 at 514.9 
• 2022 High: 2/7/2022 at 474.6
• CMI is the predictor, it moves first and then appreciation follows. Cannot predict the CMI. It tells us where we are. 

Sales Prices:

Annual appreciation rates will continue to rise. Price is a result; it is the last thing to move. It shows what already happened. We now can see that prices peaked about 6 weeks ago. Supply has been stable for about 30 days.

Demand is about normal. From 2015 to 2019 demand was higher than today. A month ago, it was 12% above normal and yesterday it was 4.6% above normal. The demand index is declining.

During week 6 in February, interest rates increased this is when we started seeing the decline in demand. Normally this indicator is a very slow-moving indicator. Last year demand declined quickly and then stopped and jumped up again towards the end of the year.

When the CMI reaches the 160-200 range is when prices will likely peak and will be the best time to sell. Currently, the supply/demand imbalance still benefits sellers. Today’s median sales price is $465,000 which is a 24% year over year increase. The average price per square foot, another growth measurement, is up 22% year over year. A normal seller’s market appreciates about 4%-10% annually.

Normal Market? 

We haven’t had a normal market in 21 years. 2014 was the only balanced market.

For prices to drop, supply has to be above demand. Supply is 75% below normal and demand is about 5% above normal. Prices will continue rising.

When demand drops below normal, we have fewer transactions. It hurts the business. This is the time to stay in touch with your clients and to stay top of mind. Competition for all of us will rise and it will be tougher to get business.

Institutions are running the show.

Sales: 

Still a very seasonal market. Listings under contract declined by 6.8% year over year moving the contract ratio from insane to a mere frenzy. Typically, we peak now but it happened in March this year. Buyers may get a little bit of a break. They may have a few extras houses to look at but nothing under asking price.

Seeing a shift in the market. The seasonality is looking sharper. It is normal seasonality and shifting due to interest rates spikes. Rates can shift down as quickly as they jumped up.

Before we see prices come down, sales over asking will decline. Currently, 57% of listings are selling over list price. The median amount over asking is $20K.

The average sales price per square foot is 2% higher than the average asking price. We are not on the cusp of a price decline.

When markets cool, days on market increase first. We are still holding strong at 7 days since early February. Then seller concessions increase. We are currently at 3.2% of homes sold with a seller concession. In March 2020 concessions increased from 17% to 22%. Then price reductions increase. While price reductions are up, they remain very low. During the first week of April in 2019 there were 2500 price reductions, the same week in 2022 there were 500 price reductions.

Final Thoughts: 

• Prices are expected to continue rising in the foreseeable future – the market is turning slowly, started around mid-February but may speed up given the interest rate increases.
• 64% of buyers = Owner Occupant (Normal 70-76%)
• Vacant active rental supply is up 58% since September – we are watching this closely!
• Market is not like 2005-2008 market, the risk is mostly shouldered by Wall Street and investors
• Long term risk of vacancies: potential water shortages in outlying areas
• For a great closing experience, send your next transaction to Clear Title.