Greater Phoenix Real Estate Market Update 5/20/2022

Today is all about the AZ market. Recently, 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.

In light of all of chaos and headlines, it is imperative to focus on what is going on right now. As difficult as it might be to avoid predictions, that is what is necessary. The market is shifting quickly and it is dangerous to make assumptions. The best way to service today’s home buyers and sellers is to guide them through our current market.

Focus on the NOW.

What affects demand?

• Population growth
  • Every person, whether a renter or owner, is an element of demand.
• Relocation (inbound)
  • Households relocating from outside Greater Phoenix brings one excess element of demand without adding to supply.
• Household formation
  • 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.
  • 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.
• Affordability (based on the worst census data ever)
  • Employment/income
  • Appreciation/depreciation
    • Appreciating home prices decrease affordability and decrease demand.
    • Depreciating home prices increase affordability and increase demand (eventually but not immediately)
  • Interest rates (can offset effects of Appreciation/Depreciation)
    • Because rates are going up demand may decrease, but prices will not decline. There is still more demand than supply, prices are still increasing.
  • Loose/tight lending practices (can offset effects of interest rates)
    • Loose lending practices increase demand.
    • Tight lending practices decrease demand.
• 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.

Affordability:

Affordability is today’s biggest challenge for buyers. Interest rates are moving quickly and will hopefully settle down soon. When affordability is challenged, household formation shrinks, even if a population is growing.

When the external influence impacting interest rates retreats; demand will be released and will increase. During the height of the pandemic interest rates were artificially held down. Once they were released, rates jumped quickly.

Pricing:

The median resale home is about 1900 square feet. Through May 7 the median sales price was $470,000, up 25.3% year over year. The rate of appreciation is declining daily. Appreciation rates remain incredibly high but the speed in which homes appreciated over the past couple of years has pushed enough people out of the market that demand is no longer supporting the 28% year over year growth rates.

Interest Rates:

Over the past 10 years, each time interest rates increased by 1% it took about a year to go back down. We use this as a baseline only because in the 1980s rates increased by 5% and dropped in only 1.5 years. Rates will go down because they always fluctuate. They will come down again in the future, we just do not know when. For the most recent Freddie Mac data, click here.

Monthly Payments:

Home values are up 25% while rents are only up 13%. When rental rates decline while sales prices increase a big RED FLAG is raised.

A few weeks ago, median monthly rents were about $400 less than the median monthly mortgage payment. Now that spread is $555.

The monthly median payment for the median home is up 56% year over year to $2800. In order to afford $2800 a month; household income needs to be at $120,000 annually. The monthly median rent payment is $2250, which means household income only needs to be $96,000 annually.

Median Income:

The extent of the affordability challenge is seen in the actual household incomes. The darkest blue areas in the slide below represents households with an income of about $119,000+. The people with the highest incomes are in the least densely populated areas. Only about 32% of households make enough to buy a regular sized home. This is making people ask, is it really a good time to buy?

Long Term Appreciation: 

With rent vs buy spreads that large, it is making people ask, is it really a good time to buy? A way to illustrate the power of homeownership is to show the long term benefits. Homeowners who purchased 20 years ago have averaged an 8.6% appreciation rate per year (yes, including those years).

Looking at the slide below, homeownership is a hedge against inflation, which in Greater Phoenix in April was 11% year over year, and can be a bit of a forced savings account in equity. The potential equity gain in 5 years at 6% increases $159,000 in equity.

We have gone through over 2 years of 25% value increases. Markets can weaken without prices going down. Prices are not declining right now.

The Market Cycle:

Our market has moved from euphoria to unease. Do not make decisions based on emotion. There have been continuous market bubble headlines since 2013. And Tina said, “2013 was 9 years ago y’all!” The last time we had a balanced market was 2014 and there were bubble headlines then! Look at the facts, use reason, leave out emotion.

What if prices go down? Don’t sell. People should want to hold onto their homes for 2-3 years.

Bubble vs. Correction:

They are now calling it a correction, not a bubble. Now they are trying to slow the acceleration of price. That is not a correction it is pulling the emergency break. But it is hardly slowing it down, prices are still increasing. The past 9 years have not been a bubble.

2005-2008 Bubble Vs. 2022

The biggest risk to all housing markets is vacancy.

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, no equity
• Lots of speculation: no intention of occupying the property
• Over built for 10 years, no labor or supply shortages

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

• Good loans with significant down payments
• Cash does not foreclose
• 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

There is a common denominator between the markets = Wall Street. People always take more risk when spending other people’s money. A flood of capital in any sector often creates chaos. In 2005 investors put all of their money in lending and mortgage-backed securities (MBS).

Today only 23% of Americans are considered subprime, with scores under 660. That is a very small group. In the past it was much higher.

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. The risk is with short term rentals and second homes. If the investors cannot rent the property, they will sell. If short term rental owners can’t rent to vacationers, they will go to long term rentals.

With a potential recession on the horizon (not now, the economy is very strong right now), tourism often pulls back first when money tightens. Vacancy is what creates a decline in value. What could happen in the future, vacancy to short term rentals, then regular rentals

Other big risks are places with water sources that are lacking. People will not be as interested in buying or renting if there is a water shortage. Expansion will be restricted in areas with stressed water resources. It will likely push more density in areas with a solid water supply. Water supply could impact future housing demand in shortage areas.

Rentals:

Rentals are a precursor to sales, way in advanced of resale market. Lots of info on Crane Watch from Phoenix Business Journal.

Build to rent is going in every direction. It is in all areas around Greater Phoenix. RL Brown offers detailed information on build to rent to learn more click here.

MLS is the last resort for rentals. It also means that the property is currently vacant. When the counts increase, it means more houses are vacant. Even though it is not the entire rental market it is an accurate representation of the rental market.

Available rental inventory is up across the board and getting closer to normal supply. Since September we have increased by:

• Greater Phoenix is up 70%
• Phoenix is up 48%
• Northeast Valley is up 59%
• Southeast Valley is up 71%
• Pinal County is up 197% (huge rental supply)
• West Valley is up 82%

Could have some seasonality coming into play. Market is no worse than it was in 2018 which was a good market. Last August we saw the early shift in rentals. Now are seeing it in sales.

Of the 1,748 properties successfully leased in April:

• 38% closed under the listed rent
• 0.9% difference between the median asking rent and median closed rent, a difference of $20.

Just 2 months prior, in February, there was a 4.5% difference equating to a difference of $99.

The areas with the largest rental gaps between asking and closed amounts are the areas with the largest new build growth.

Supply:

April new listings:

• Coming Soon status = 296 Maricopa and Pinal County
• 10,379 Total Listed
• Total New Listings -4.2% from last year

Our new listing counts were low but are increasing. We are now at a normal level of new listings coming to market. However accepted contracts are 5.8% below last year’s.

Listings under contract, we are below normal range, if we are moving into seasonality, that means that this number will continue to decrease. We will not see what we saw last year.

A few things need happen before prices drop and remember markets move slowly and a softening market does not mean prices are declining. Rental market moves way faster than the housing market does. Rental rates haven’t dropped yet. First thing needs to happen is that supply needs to rise.

Active supply is up 41% above this time last year. Six weeks ago supply started increasing and has gained speed. But it is not equal in all price points:

• Overall inventory is up 117% year over year.
• In 3 weeks, inventory for homes priced $400,000 – $500,000 increased by 35%
• In 6 weeks, inventory for homes priced $500,000 – $1M increased by 99%
• In 6 weeks, inventory for homes priced $1M – $1.5M increased by 38%

Investors will not likely have a large sell off. Private investors will care more than the big institutions. Depends on goals, if they want to buy and hold 20 years, won’t care that rental rates are changing. Many are not looking to sell unless rents decline by 50%. If they do a sell off, it would be bulk sales to other investors.

We are still in a frenzy market. All supply is still very low (seasonally). When there are more listings under contract than active for sale, it is a frenzy. Prices do not decline here. They only increase less quickly as inventory increases.

Price Reductions:

List prices will have to come down first. Sellers want the moon right now. Price reductions are increasing to nearly 2019 levels.

• Homes priced $400,000 – $500,000 had a 71% increase in price reductions in 3 weeks. The median reduction amount is $13,000.
• Homes priced $500,000 – $800,000 had a 157% increase in price reductions in 6 weeks. The median reduction amount is $16,000 for $500K – $600K and $20,000 for $600K – $800K
• Homes priced $800,000 – $1.5M had a 125% increase in price reductions in 6 weeks. The median reduction amount is $25,000 for $800K – $1M and $50,000 for $1M – $1.5M

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. 
• Between 90 – 110 prices roughly follow the rate of inflation. (through April it is 8.3% nationally, 11% locally)
• Yesterday we were at 323.1
• 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. 

Prices are still rising right now. CMI will change. It will take 3-6 months before prices weaken. Do not look at price, have to look at the market today to know what is going to happen. Demand and supply are going in different directions. The CMI has been declining for 6 weeks, market remains in a strong sellers market that is quickly weakening. Closing numbers are not reflecting the CMI, we will see if in 4 weeks. Everything will be different in a month. Things started shifting in mid-February.

It is still a strong seller’s market but weakening quickly. In a weak seller’s market seller concessions increase and days on market increase. The CMI is boring when it is normal. We are not in a normal market. We do not know what the indicator will do. It is changing very quickly right now.

This could be the top of the market; we are seeing the writing on the wall. Waiting longer means you could be less likely to get over asking and fewer people may waive appraisals.

Things are changing quickly but there is a big difference between a bubble and a correction. During the market crash there were 59000 active listings with 4000 in escrow.

Demand is still over supply, so prices are still going up. In 2014 when it was balanced, prices were flat

The buyer and seller care about price, we will sell a home at any price. For our industry we need to have a lot of buyers and sellers, volume of transactions is important for people in the industry. When demand is below normal, we see stress on our industry.

Phoenix has below normal demand, but supply is so low prices are still increasing, but there are fewer sales with declining demand.

Urgency is on the side of the sellers. Sellers should feel a frenzy right now in getting their houses on the market. What we experienced is not normal. This will not last forever.

Flips:

We do not have desperate sellers. But the most excited sellers are flip investors. 2015 was the first seller’s market. Opendoor has never seen anything but a seller’s market. Not even a balanced market.

Flip investors are looking to unload their properties right now.

Opendoor Activity:

• Opendoor made its first profit in Q1 2022.
• May through November 2021 Opendoor acquired 3609 properties and sold 1861. They acquired 94% more homes than they sold.
• December 2021 through March 2022 Opendoor acquired 1408 properties and sold 2149. They sold 53% more than they acquired.

Offerpad Activity:

• June through December 2021 Offerpad acquired 1050 properties and sold 742. They acquired 29% more than they sold.
• January through March 2022 Offerpad acquired 201 properties and sold 546. They sold 172% more than they acquired.

The iBuyers struggled to turn a profit during the largest resale year in history. The rest of the flip investors did very well. Regular, private flip investors hold properties for shorter timeframes.

Sales Prices:

Sales measures don’t tell us where we ARE, they tell us where we’ve ALREADY BEEN.  They reflect contracts written at least 4-6 weeks ago. Sale prices are a trailing result, not a forecasting indicator.

The median sales price is $470,000. It tells us where we were. Today’s 25% annual appreciation will slow down but not quite yet. Today’s prices reflect contracts signed in February and March. Do not expect these types of gains in the coming months.

57% of April’s closing closed above asking at a $20,000 median over asking, expect that to decrease soon.

Days on market is flat, the softening is just beginning. The price reductions are happening now and the reductions are allowing properties to sell quickly. Movement is still fast. Price reductions keeping DOM low. When inventory increases eventually DOM will go up too. Then seller concessions will increase.

Before prices decline we will see:

1. Price reductions (increasing)
2. Increased DOM (currently flat)
3. Increased seller concessions (not yet)

Appreciation is still very high. It is where we are now. The areas with the greatest increases in supply are still seeing small increases in prices.

Pre-Foreclosures:

Yes, they are up 306%. But that is not a foreclosure, it is a notice of trustee sale. There were only 337 properties in April and we are just coming out of a foreclosure moratorium. There were 32 foreclosures in April. They all sold to a 3^rd party. No bank-owned homes coming to market. There are no indications of foreclosure increases. We do not have desperate sellers, only motivated sellers.

Final Thoughts:

April outperformed March on about everything except appreciation. Expect this to change next month.