Greater Phoenix Housing Update 8/26/2022

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.

Before diving in, our first episode of Beyond the Transaction Podcast is available now. Our first guest was the illustrious Tina Tamboer! To listen and subscribe, click here.

To learn more about a Cromford Report membership, click here. To register for our September 14^th Cromford Market Update with Tina Tamboer, click here.

July was rough, but…

Nothing lasts forever and things are getting better. There is good news we have seen a week of improvements. Remember, it takes 3 weeks to make a trend so fingers crossed this is not an anomaly. Contracts are up. Cancellations are down. New listings are not coming to market as quickly. Demand is declining at a slower rate. The increase in activity is likely due to the few rate drops we have seen lately and shows us that the demand is there waiting for the right price.

The stock market overall actually had a great July despite builders not feeling as optimistic as they were only a few months ago.

Affordability:

Affordability remains a major issue. Sellers can only sell to people who can afford to purchase the property. The same goes for landlords who can only rent to people who can afford the monthly payments. If sellers sell for less than anticipated or landlords rent for less than anticipated, they are not losing money they are experiencing a less than expected return, not a loss. The challenge to affordability has slowed the market to a crawl and it has caused fear that the situation is similar to drops we have seen in the past. The majority of the liability is held by Wall Street and private venture capital firms and not individuals.

The US Census data we have to use for income is terrible (self-admitted). Bad data leaves a lot of wiggle room for variation. The data used in the affordability index is only released annually so take this with a grain of salt. In the past, Greater Phoenix was always more affordable than the country as a whole. We used to be the cheapest big city in the country. Not anymore. In Q2 2022 our affordability index dropped from 43.9 to 22.3. The normal range is 60-75. The national level for Q2 2022 was 42.8.

Intended Use:

Primary residence transactions provide market stability, which is why real estate is less stable than it used to be. Redfin’s CEO, Glenn Kelman explained why changes are speeding up in real estate, “I just think as Wall Street owns more of Main Street, the housing market will look more like the stock market, which is extremely volatile.” He went on to explain that investors are more likely to make drastic price drops to move inventory, which complicates selling for regular homeowners competing with institutions – which represent one-third of the available national market.

Q2 2021 was the first time we saw a huge decline in primary residence home ownership in Greater Phoenix. Many were pushed out of the market by cash investors who accelerated price appreciation.

• From 2015-2019 owner occupied purchases averaged 70%-76% of the market.
• In 2020, owner occupied purchases averaged 80%-83% of the market.
• In Q4 2021 that number dropped to 64%.
• Q2 2022, through June, the number declined to 62%.
• Q2 2022, through June, saw 36% of sales going to investor buyers.
• Second home buyers peaked in Q4 2021 at 13.5% and declined to 12.2% in Q2 2022.

Second homes are scaling back at a normal seasonal rate. In Q2 2021 iBuyers and institutional buyers went on a purchasing rampage leaving the consumers behind. The only way to make money from consumer spending is to stay within the general confines of affordability. Essentially saying, if no one can afford to buy the product, no one will buy the product. The group that is in the best position, owner occupied buyers. Anyone who purchased 12+ months ago remains in good shape in their ability to resell. Remember, prior to the pandemic, the rule of thumb for purchasing a property is that it takes two years to recoup the investment.

Investor Flips:

A property is considered a flip if it is acquired and sold within a 6 month period. It is tougher to turn a profit on a flip property in a balanced market. The savvy local investors know how to operate in shifting markets. Flip sales peaked in March and by June dropped by over 39%.

The iBuyer model has only ever operated in seller’s markets. Launched in late 2014, Opendoor, the first iBuyer, has only ever operated in seller’s markets and is struggling to manage today’s market. Opendoor currently has 10% – 12% of today’s active listings while it only has about 3% of the current sales. Opendoor seems to be slashing prices in order to get more under contract. Offerpad is not aggressively slashing prices and therefore continues to have far more active listings than pending listings. iBuyers are still acquiring property, offers are now coming in about $100,000 under what seller expectations.

The FTC’s $62M fine against Opendoor is about 2018 and 2019 advertising. Not for today’s current acquisition and sale environment.

Contract Ratio:

The overall market is in balance now. There are some lingering hot markets but those are cooling quickly as well. There are only 3 areas with cold markets, one in Gilbert, one in Avondale, and one in south Scottsdale. These are changing quickly.

The good news is that the contract ratio is no longer dramatically plunging, it has slowed into more of a glide down. The increase in contract activity offset the inventory coming to market. Hopefully, this is the beginning of a trend! We need more data to be sure.

The dramatic rate of change is slowing. The contract ratio is a bit colder than it was in 2014, the last time we had a balanced market. There is a difference between normal and balanced markets. Normal is based on long term averages. For example, normal supply (long-term average) is about 20,000 to 25,000 available properties. Normal under contract is about 9,000. Balance is when supply and demand meet. The under-contract count matters the most. The $1M+ is still a warm market. The contract ratio for the luxury market is around 38 when it normally is around 10-15. This is likely due to the extremely low inventory count in this segment. There are currently over 700 $1M+ properties in escrow.

Emotions & the Market Cycle:

The market is moving through the regular market cycle. Sellers are going through the stages of grief and are currently in denial. The sellers need to understand this market is different. They have to fix up their properties. They missed the peak of prices, and that is ok. Once sellers arrive at acceptance then they will be able to sell their home. The severity of each part of the cycle depends on the market. If we see a continued increase in contracts then despair may be short-lived.

Days on Market:

There are 3 stages in a market shift. The first is price reductions which have increased, further details are below. The second is an increase in days on market. That has definitely increased. On May 1 the median days on market prior to contract was 7. It is now up to 25. People are upset about it. When you see an increase like that it is unnerving but historically speaking it is great. In 2007 the median days on market prior to contract reached 130 days. And that was before prices crashed! The third stage is an increase in seller concessions, which we are seeing. More details on that are below also.

Price Reductions:

Weekly price reductions have increased 746% over the past 5 months. About 23% to 26% of active supply is dropping prices weekly. The median reduction is $13,000. This does not mean prices are crashing. These are list prices coming down significantly which are down 18% since the market began shifting 5 months ago.

Sales prices are down about 4% since May. List prices are coming down which is bringing the prices down to where the buyers are. It is not crashing the market. Sales prices are not as far down as list prices.

Mortgage rates declined and even dropped down below 5% which stirred buyer interest. When rates go down monthly costs go down. Combined with declining prices, payments fell 5.7% since June.

Payments: 

Our market is still not affordable. The median monthly payment for the median home selling at $450,000, with 10% down is $2,674. For that to be within the affordable range, household income needs to be at $115,000 a year. Based on the estimated Greater Phoenix median household income of $88,800, in order for payments to be affordable, they have to be $2,072 a month. The median monthly rental payment is $2,250 which is affordable for a household income of $96,000 a year.

Interest Rate Buy Down:

A great way to bring down the monthly costs for a buyer is to do an interest rate buy-down. A seller can buy down the buyer’s interest rate. There are different options for these and be sure to discuss the details with your lender as there are a lot of conditions. There is a permanent buy-down option or a 2-1 buy-down which drops the buyer’s interest rate by 2 points for the first year of the loan and 1 point for the second year of the loan. By year 3 there is the potential for more desirable interest rates. Market the monthly payment, not the asking price. Be sure to note that some of these concessions could actually be cheaper than a price reduction.

These are estimates only, talk with your lender for actual costs and details:

Seller Concessions:

In August 9.6% of all closings included a seller concession, up from 7.1% in July. The long-term average is 25%. Expect this number to increase. Offers are not as clean as they were but this is also allowing sellers to make fewer price reductions.

Weekly accepted contracts are up week over week but remain down 24.1% year over year. The percentage of seller concessions is increasing weekly. This is an unseasonal increase in weekly accepted contracts. It is likely due to interest rates and increased seller concessions. This tells us that the demand is there, but it is right below the surface, and likely will emerge when rates drop down below 5%. That is not a trend yet, but it is exciting.

Supply & Demand:

Active listings are not increasing as quickly.  In July there were 1000 new active listings added a week and in August it dropped to 500 new active listings being added in a week. The decline in new listings help stabilize the market and will help the existing sellers. Not on the 2005 track anymore. During 2006-2007 there were about 3500 new active listings added a week. We are nowhere close to that. We could be reaching a normal realm though.

Demand has stopped dropping and the luxury market is showing signs of normal seasonality. WOOHOO!

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 9.1% nationally, 12.3% in Greater Phoenix), 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.
• Yesterday we were at 107.4
• All-time high: 3/14/2021 at 514.9 
• 2022 High: 2/7/2022 at 474.6
• One month ago, 7/25/2022 it was 131.6
• CMI is the predictor, it moves first and then appreciation follows. Cannot predict the CMI. It tells us where we are.  

Our market is officially in balance. When we are in balance homes appreciate at the rate of inflation. The math does not support a crash or lots of price declines. We could see a short buyers market. We won’t see a price crash but a price correction could be 10-15%. Right now, we are looking at a 4% decline so far since June.

In 2007 we had 57,000 active listings with only 4,000 under contract. That was a crash. Today we have about 19,000 active listings and 8,800 under contract, not a crash but yes to a correction.

The CMI’s decline is slowing and the curve is turning into a balanced market. Demand is declining more slowly and supply is being added more slowly, together this is creating some stabilization.

Broken down by city, the top seller markets are Fountain Hills, Paradise Valley, Scottsdale, Cave Creek, and Goodyear. The cities in balanced markets are Avondale, Phoenix, Mesa, Glendale, Peoria, and Chandler. The cities in a buyer’s market are Surprise, Tempe, Gilbert, Maricopa, Queen Creek, and Buckeye. New home communities add supply which brings them into a buyer’s market faster than the areas without new construction.

Prices:

The sale price to list price ratio is now 97.9% (from the last list price, not original) Sellers are getting about 98% of asking. A normal, balanced market is about 97%. In May it was 101.7%.

The median sales price in May was $480,000. August to date is $450,000 which is a 6.25% decline. Year over year prices are still up 11%. It is still higher than the rate of inflation. We are looking at about a 2% decline a month, not a crash.

Today the average price per square foot is ($293.79) up from July ($289.86) but down from May ($306.01). Sellers are getting more for each square foot. Year over year average price per square foot is up 17.3%. Averages change when there are fewer luxury sales. Overall we have seen a 4% drop since the peak in May, which is a 1.3% drop a month. If we stay on this trajectory, we could see another 4% decline by the end of the year. We could see a total decline of 8% this year. That is a correction, not a crash.

2005-2008 Bubble Vs. 2022

The biggest risk to all housing markets is vacant homes.

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
• Overbuilt for 10 years, no labor or supply shortages, built quickly

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

The common denominator between the 2005 and 2022 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). The Dodd-Frank Act prevents that from happening again. The risk for today’s investors is a lower than expected return, not a flood of foreclosures.

We do have to watch water, the outskirts are impacted the most. 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.

Distress?

Today’s desperate sellers are ibuyers. A balanced market is tough on iBuyers. Both Opendoor and Offerpad purchased far more houses than they are selling. And their model requires continuous purchasing. Both companies are seeing huge inventory increases and few sales.

Investors pushed the market further than it could bare so they are pulling back and that is why the market is crumbling now. Most price declines are leading to lower than expected prices but owners are not losing money.

In July there were 238 notices of trustee sale (pre-foreclosure) recorded. In July 2019 there were 465. In 1996 there were 515. In 1996 there were more than double today’s amount and back then Gilbert was a farm. Kierland and the 101 didn’t exist. The population of Greater Phoenix was significantly lower. Foreclosures are not currently posing a big threat to the market.

Final Thoughts:

Welcome to a balanced market. We are currently in stage 3 of the market shift, an increase in seller concessions. We will likely stay here for a while. It is important to set clear expectations with your home buyers and sellers. While the days of the runaway seller’s market are long gone, today’s sellers are not desperate (aside from iBuyers) and will not sell if they do not have to. We are working our way through the chaos and a stable market may actually be in sight.