All The Things

Greater Phoenix Real Estate Market Update 7/31/2024

You know when you have a million things on your mind and you want to talk about all of them at the same time? We went to the Jersey Shore, my kids started school (thank God!), we renovated our house, the August 1^st deadline is looming, Angela Gonzales just quoted me in the Phoenix Business Journal (see article here), and last week NAR stated that we are running 3.89M sales annually (YIKES).

These are my thoughts on a few topics.

Commission Changes:

August 1^st will be the start of some chaos that will not last forever, although I expect disruption for a number of months. The industry is changing. Like a lot. Regardless of your opinion on what happened, it happened. On 10/31/2023 the Sitzer verdict came down and the jury found in favor of the plaintiffs and not the defendants. The bottom line of what that means is that how buyer’s agents are paid now changes permanently. No longer is a buyer’s agent compensation regulated by the MLS and shared, uniformly, by the listing agent. It is now based on the buyer broker’s agreement with the buyer and their buyer’s agent which still can be negotiated with the seller via the purchase contract and addendums. The Arizona Association of Realtors released 18 new documents that may be used by licensees in AZ at their broker’s discretion to assist with this change.

On Thursday, August 1, all mention of compensation to the buyer’s agent will be removed from the MLS that serves Greater Phoenix (ARMLS). This is the source of active/under contract/sold data for essentially everyone in the real estate industry.  Needless to say, most industry players are bracing themselves for chaos, fear, change, and a new path forward.

Below illustrates the changes in co-broke offered to buyers agents in the 9 months since the Sitzer verdict. Commissions have been changing for many months and as of tomorrow we will no longer be able to track these changes.

New Construction:

While new construction is running about 20% market share for all closings in Maricopa County, it tells us a very clear story, one that is reflective of the overall market. Today’s buyers want to buy homes that are move-in ready. Historically speaking, new construction makes up only about 10%-14% market share for all closings.

These heat maps illustrate new construction supply (June’s permits) and demand (June’s closings). Unsurprisingly, both maps show new permits and new home closings are happening mostly in the southeast valley and northwest valley. I expect these areas to continue to grow and develop. It is where there is available land to build on and, particularly in the northwest valley, tons of new jobs.

2023 was a very good year for new home builders. The big public companies did very well on the stock market. Both the public builders and the regional builders did well due to lack of resale supply and the additional financing options many builders are able to offer. Several builders are now offering permanent mortgage rate buy downs for their buyers.

Year to date new permits are up 45% year over year, showing builders early 2024 enthusiasm. In June, permits were down about 1% year over year. Expect supply to continue to grow. Demand for new homes is a bit more muted than the coming supply. Year to date new home sales are up just shy of 2% year over year. While the June new home sales were down over 2% year over year.

Demand often moderates during the summer and July’s numbers will be interesting. The potential September Fed rate cut could stir some pent up demand into action. Meanwhile, the looming elections may create some headwinds against a Q4 bump.

Supply & Demand:

This is a snapshot of the overall market. Inventory is up over 50% year over year but it has flattened in the past few months. While new contracts still outpace the new listings, there is an above average rate of cancellations. Today’s market is stifled. There is pent up demand, waiting for lower mortgage rates. And price increases have moderated, and remain stable. Many analysts expect prices to soften through the rest of the year. Our current environment is a lot like the 2014 market. It was balanced with an above average amount of price reductions and cancellations. Both sides have negotiation power. The best houses are selling immediately. This is the time of making those updates and fixes prior to listing, versus offering a concession to the buyer. Buyers who are paying today’s prices at today’s interest rates are not looking for fixers, they want move in ready. This is another reason why new construction has seen so much growth. Buyers don’t want to fix anything.

Case Shiller Home Prices:

The Case Shiller Index for May’s home prices was released yesterday. As we have discussed in the past, this data is old so it isn’t great for anyone who is trying to buy or sell a home right now. They need to rely on more current comparables. However, for historic reflection and understanding long term trends, Case Shiller is great. The year over year changes are useful for gauging the overall market and its 12 month evolution. A lot can happen in 12 months. If interest rates dropped to 5.5% tomorrow everything would change, immediately. Anyway, I digress, the Greater Phoenix numbers are trending well below the national consensus. The May, year over year, appreciation rate is 4.4%. In May the CPI had a 3.4% year over year increase which means that homes effectively increased by 1% over the past 12 months. May was the high point in our spring market. The second half of the year tends to have a lag versus the first half for price appreciation. And the Q4 boost we often get when the temperatures cool tend not to happen during election years. Typically, we see Q4 slowness during election years. Consumers want certainty which means they want to know WHO will be in the White House. The ultimate winner has less impact than the uncertainty of the unknown. Those buyers typically defer from Q4 to Q1 the following year, because they have certainty.

I find the month over month data to be more compelling. Greater Phoenix is the only city in the seasonally adjusted 20 city composite to show a 2 month decline. Portland is the only other city to show a one month decline. Our local prices peaked around May 10^th this year and have been under pressure since. While, overall, our prices have shown resilience, more so than some expected, they are flat. Today’s buyers have more options than they had a year ago and they are exercising those options. Sellers are not desperate and may or may not agree to buyer’s demands. This is why prices haven’t come down in any meaningful way. I am a bit more bearish on the market than many of my colleagues so I do anticipate more softening as we go later in the year.

The recent Q2 GDP report may extend the period of strength but what ultimately makes me skeptical of lasting growth is the American savings rate, which has declined precipitously over the recent months.

Final Thoughts:

They say when it rains, it pours. Indeed. These are times of big changes and a lot is at stake. The dust will settle, and a new path forward will emerge. And despite it all,  I am optimistic about the future because we are resilient, creative, and tough.