Greater Phoenix Housing Update 9/27/2022

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.

To register for our October 12^th Cromford Market Update with Tina Tamboer, click here.

Mortgage Interest Rates:

Interest rates have been very volatile and while inflation remains persistent despite the Fed’s continued efforts it is unlikely rates will decline any time in the near term. We need rates to be stable and boring and not bounce around like they are. This constant fluctuation is hurting the already tight affordability.

In March when rates moved above 4.4% there was a measurable weakening in the market. When rates reached 5% in May, we saw a bigger dip. Then in May rates hit 5% and we saw a bigger dip. The rate movement directly influenced the number of listings going under contract. When rates went from 5.1% to 5.89% in June there was a 28% decline in contracts. When rates dropped back to 4.99% there was a 25% increase in contracts. While rates hovered around 5.1% – 5.2% contracts stayed high. Then in the past few weeks, we have seen a substantial decline in contracts. Expect this decline to continue.

Rates have changed our perspective of what is a good rate. People are back to thinking that 5% is awesome. Low 5% are looking good to consumers now.

Accepted Contracts:

These accepted contracts include cash sales, which are up from previous years.

Emotional Cycle:

All of the volatility has created “FUD” standing for fear, uncertainty, and despair. Our contracts are at 2014 levels. Back in 2014 contracts were increasing and today they are decreasing which has put despair back into the market. This decline is much larger than seasonal shifts. There was hope and with rates creeping ever higher, the hope has evaporated.

This happened in 2009 when we had the first-time home buyer credit and we saw a pick up in contracts. But when the credit went away, so did those additional contracts. It gave us hope and then went back to despair.

Nothing lasts forever, the market changes always, so never expect anything in housing to last forever. That is true of mortgage rates too. They move up and down.

In every single recession since 1974 rates have declined. There is no declared recession right now. Many believe we are already in one or on the cusp of one. Recessions typically last anywhere from 6 months to 1.5 years. Based on the history it is reasonable to expect that at some point in the next 12 months rates will probably come down.

Fannie Mae’s latest forecast predicts a mild recession in Q1 2023 but they do not expect rates to decline as the Fed has made a commitment to taming inflation first.

Affordability:

In August the median sales price was $440,000. Based on a 10% down payment and basic assumptions, the estimated monthly payment was $2,616. But with September’s estimated median of $450,000 and increased interest rates the estimated payment (with the same assumptions) is around $2,844.

Buydowns are great but buyers still need to be approved at the higher payments.

Rents are up 2.2% over the past 12 months. Inflation is 40% housing and rentals carry a lot of weight. In the first 2 weeks of September rental rates declined. Would-be buyers are looking at rentals again. The median monthly rental payment for the median home is about $2,249. That $600 a month difference from a mortgage payment to a rental payment has played a role in the declining purchase demand. $2,249 is an affordable payment for households with an income of $96,000 annually.

Q2 22 affordability was 22%, which is terrible and with higher interest rates, this could get worse.

Investors:

With available rentals listed on ARMLS up 134% since September, a long-term hold strategy may be better on affordability for investors when offering their product (rental/flip) to consumers.

The 2005 crash looked similar in market movement to today but the fundamentals are very different. In 2005 many flip investors took advantage of very risky loan offerings which ultimately put the consumers on the hook when prices declined. Today, the stock market has taken on most of the risk. Due to the volume of cash purchases, investors may see less-than-expected returns. Today’s consumers are in good shape.

If the population cannot afford the prices, they will not buy. We are seeing the investors bringing prices down as inventory rises. Rental supply is up 134% in a year. Up 82% since January. Landlords are scaling back. Rents are only going up 2.2%. Expect rental rates to decline further.

Flip Investors are also struggling and left with more inventory and less demand. We are in a balanced market. iBuyers scaled way back in August. Acquisition to sales is down 60%. Of the flips, only 1/3 are iBuyers.

In 2012 – 2014 flips declined as the market normalized. iBuyers arrived in 2015 and didn’t really rock the market until 2021 when Opendoor and Zillow overheated the market.

Contract Ratio:

The contract ratio is not seasonally adjusted so shifts appear more quickly. It is a great gauge in a quickly changing market. Ratios above 60 illustrate a seller’s market and below 30 a buyer’s market. This shows we are in a balanced market but with low demand and few listings so we are in a low velocity balanced market.

In June we had measurements as high as 100. There are still some hot spots but they are fewer and further between. Luxury is doing very well.

The contract ratio has stopped dropping. We have been here for nearly 8 weeks. The ratio rises when listings decrease and under contract increases. When listings under contract rose and so did active listings so they balanced each other out. It doesn’t mean that our inventory will keep rising.

The slide below really shows seasonality. Buyers should not wait until the spring. Every single year the contract ratio goes up in the spring. Mostly from January to March. Buyers looking for a deal should buy now. It is impossible to time the market. The best time to buy is when you have sad sellers, not when you have hopeful sellers. Don’t wait for the spring. Buy now.

Who are the most desperate sellers? iBuyers and builders. Go bargain hunting. New homebuilders want to sell before the end of the year.

For the industry, it looks like 2014’s market. But 2014 was a better market for the industry with more contracts written. Now there are fewer contracts. The only thing that fuels our industry is when people write contracts. It is what keeps us fed, regardless of price point.

For the consumer, the 2014 market and 2022 markets are the same. They are not impacting the seller, they do not have to come to the table with money to sell. They are making money on their sales. Owners have equity and the means to weather the price reductions and still sell for a profit.

The majority of buyers who have owned for 18 to 24 months are fine. The flips are struggling more and they are impacting our industry the most.

Cromford Market Index (CMI): 

The best tool for predicting future price appreciation trends available is 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 8.3% nationally, 13% in Greater Phoenix), below 100 is a buyer’s market, above 100 is a seller’s market, prices drop below 90, and prices rise at 110. 
• Between 90 – 110 prices roughly follow the rate of inflation.
• Yesterday we were at 104.7
• All-time high: 3/14/2021 at 514.9 
• 2022 High: 2/7/2022 at 474.6
• 3 months ago, 6/26/2022 it was 193.8
• CMI is the predictor, it moves first and then appreciation follows. Cannot predict the CMI. It tells us where we are.  

When CMI goes down that means it is dropping despite seasonality. When things are balanced homes appreciate at the rate of inflation which is now 8.3%.

It is a true supply and demand index and it shows that we are in balance. We have been here for nearly 2 months. This is why we keep talking about 2014, which was our last balanced market. Some say feels like a market crash. In 2007 we had a crash when there were 57,000 active listings and only 4,000 under contract. Today we are closer to 19,000 active listings and 7,800 under contract.

The demand index hasn’t been this low since 2008 which is where the stress of the market is coming from. This has everything to do with the industry fears. Expect the blue and green lines in the chart below to come together.

Demand increased when rates dropped to 5%. Expect demand to decline since rates are up again. The market is gliding downwards not falling off a cliff. Expect the glide to continue as things settle down. These numbers do not support prices getting back to 2020 numbers. The math does not support a crash but a correction. We are not crashing, we are on our way toward a regular buyer’s market.

There is a lot of evidence that the demand will come back. And it will likely come back strong when rates drop down to around 5%/5.5%. Sidelined demand emerged when rates touched 5%. This indicates that demand will likely come back quickly when rates are at an acceptable level. That acceptable level continues to change and move upwards.

We do not know when the market will turn but we know that it will turn.

Overall, we are in a balanced market. But it is not the same in all places. Paradise Valley has the strongest seller’s market. The strongest buyer’s markets have more to do with builders because they are adding more inventory. Strong builder activity means you will have a stronger buyer’s market.

Supply:

Supply is up 159% year over year. We normally see an uptick in supply this time of year. Interest rates are dampening demand which is allowing for increased supply, despite few new listings hitting the market. Expect listings under contract to bounce around as it follows the normal seasonal curve. Contracts are down 30% year over year.

The growth rate is impacted by supply and demand. Lots of new listings with lots of demand decreases inventory, like last year. Lots of new listings with not a lot of demand increases inventory, like in June and July. Now with less of everything the market is balancing out. This is why we are in a low-velocity balanced market. We were following the 2005 trajectory earlier in the summer and then stopped and dipped in August.

Many sellers are realizing that this isn’t the best time to sell. In 2007 we were adding 3500 to 4000 listings a week to the MLS. Now it is less than 200 a week. It is not the best time to sell if you don’t have to. The best way to stabilize the market is for sellers to hang on to their houses. Only serious sellers want to be in this market.

Both canceled and expired listings are normalizing to about where we were in 2014.

New home builders are scaling back on permits, from March to July permits declined by 49%. Preliminary data shows permits were lower than sales in August.

Seller Concessions:

Seller concessions are rising. In August 32% of new homes closed with seller concessions. During the same time period, resale homes closed with 11% seller concessions. Resales are competing with new homes. Builders are throwing a lot at buyers.

Expect seller concessions, both in new homes and resales, to continue to increase. It is typical to see about 25% of sales have concessions. The vast majority of seller concessions are in the $300,000-500,000 price range.

Days on Market:

In 2014 the average number of days on market before contract was 38-44 days. Today it is about 29. A buyer wants a tired, desperate seller, this fall is the great time to buy, we are seeing the most days on market in years. The best time to buy is October through December. We are adjusting back to a balanced market. Expect days on market to increase throughout the remainder of the year. This is the slower season and interest rates are slowing things down further and faster.

Price Reductions:

Price reductions are up 746% in the past 5 months. Historically speaking, we are seeing far more price reductions than usual. We have to get down to where the buyers are. The median amount of weekly price reductions is 1800-1900. Today it is about 3800 reductions a week.

Sale Price/List Price Ratio:

Lowest since 2019, which was a seller’s market. Things are getting more normal. 97% of the last list price is normal. Buyers are trained to offer list price. Now they are learning that they can go down. This is why we maintained 100% until about 1.5 months ago.

Price Appreciation:

Remember, the sales price of a property was agreed upon 30-60 days prior to closing. These sales prices reflect a past market. While they are a guide, they are a lagging indicator.

The median sales price through the middle of September is $450,000. That is up 9.5% year over year. That is also down 6.25% since May’s median reached $480,000. In May, the year over year appreciation rate was 22.3%. The rate of appreciation is slowing dramatically. With inflation at 8.3% any appreciation rate below 8.3% but is still positive is actually a loss. In a flat market, homes appreciate at the rate of inflation.

If we have a drop of 10-15% decline in prices that is a correction, not a crash.

Employment Report:

We do have some good news. Employment remains very strong. When employment is strong, there is demand for housing. Unemployment may be increasing but we are starting at a very low level of 3.3% in AZ in August. The labor force grew by 5.7% or nearly 192,000 which is good and more people are working. Hourly earnings are up 6.7% in AZ, ahead of the national increase of 5.3%.

In 2009 we had an employment crash. The majority of our local jobs were in hospitality or real estate, both of which were devasted by the Great Recession. Today our employment is very diverse, we have more of everything. Great diversity not only saved us during the pandemic because it was spread out, but it also actually grew. Despite the continued headwinds, the economy and employment are strong. And more jobs are on the way.

Final Thoughts:

Sales are down a lot. Expect low sales counts as long as we have low demand and low inventory.

This is a good time to buy for those not-so-perfect buyers. Don’t wait for better conditions, then there will be more competition, likely in Q1 2023.

The Greater Phoenix economy is doing great.

Expect to see more concessions and it will likely reach 25%. Prep sellers that it will take about 2 months to sell their houses. Sales over list will continue to decline. Sales per month are declining quickly. Prices will likely decline slowly. We do not have an oversupply of homes right now. The best (not needing a lot of work) homes are still selling quickly.

This too shall pass. It is always darkest before dawn.