There are two kinds of buyers, “have to” and “want to” buyers. When mortgage rates were under 3% (which meant that money was as cheap as it has ever been) everyone who considered buying a house, bought one. Then money got more expensive, mortgage rates went from 2.6% in 2021 to 5% in 2022 and today they are 6.64%. For every 1% increase in mortgage rates, monthly mortgage payments increase by 10%. Those increases over the past 4 years eliminated the “want to” buyers and left only the “have to” buyers.
For nearly 25 years we would see about 5M resale transactions a year, nationally. Those included both kinds of buyers. But with mortgage rates at their highest levels in over 20 years, most of those “want to” buyers opted not to buy. And we learned that those “have to” buyers make up about 4M of those resale transactions nationwide. This is why industry participants say we are in a soft market. Transactions are down about 20% below normal and this is the 4th year of that trend.
But there is light at the end of the tunnel. Sales are increasing over last year, if only by a small margin. Improvement is improvement. Slow and steady is what brings more buyers into the market. Buyers get spooked by big drastic changes. 2026 is better than 2025 and it is likely that 2027 will be better than 2026. As the market continues to improve, we will bring back more of our “want to” buyers. Onwards and upwards!
PS declining supply and small growth in demand drives stable prices. Stability may not be exciting, but it is what buyers love and we need to always offer love.
Bonus: Ever wonder why soccer players are sooooooo fit? It is because they run 6-8 miles in each 90+ minute match. 17 basketball courts fit into one soccer pitch.
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
Economist Dr. Peter Linneman said that the roaring (20)20’s would see continued asset appreciation, job growth, GDP growth, and other good things from a healthy economy until – the one thing that ends all healthy growth emerges – and emerge it did. He was talking about greed.
RIP Demand:
During the summer of 2021 before the ridiculous iBuyer nonsense started, the Greater Phoenix housing market was starting to normalize. The spring frenzy cooled as the last of pent-up demand was exhausted. Initial evidence of seasonality appeared but not for long.
Money was cheap so Opendoor, Zillow, and several other institutional investors were all flush with cash (AKA other people’s money) and were ready to spend. The investor frenzy commenced, and no one spent more than Opendoor and Zillow. Properties sold in minutes, far above asking. The median sales prices grew 1% to 2% a month.
Institutional buyers purchased from each other. Many properties never even hit the market. The intensity of the frenzy killed Zillow’s iBuyer business by Q4 2021. Zillow realized that Q3 2021 losses shouldn’t have been $422M during the most intense seller’s market in 16 years.
This Wall Street funded frenzy broke the emerging seasonality and pushed prices up and sidelined regular buyers. Inflation grew further and the Federal Reserve realized it wasn’t transitory. Demand peaked in early January 2022 as the increasing prices took their toll.
Mortgage rates rose and demand dropped below normal levels in early May. Prices peaked in late May. The relationship between supply and demand that had treated sellers so well for so long turned its back on the sellers. The demand finally had some supply to choose from, but the demand was now priced out.
The corporate investors and iBuyers outbid their competition, regular buyers, and now those same corporate investors and iBuyers are losing money on those investments. They forgot that in order to make a profit, their target consumer needs to be able to afford the product.
Disruptors Disrupted:
Eventually, investors expect profits or at least market sustainability. As the cost of capital increases and mortgage rates hang out around 7%, demand continues to fade further. The result, market caps decline and losses mount. Mike DelPrete shared this information on Opendoor’s Q3 results and Zillow’s final quarter of iBuying results. He also mentioned Opendoor shuttered its mortgage company, Opendoor Finance.
Inflation & Rates:
While the Federal Reserve is tasked with reducing inflation, it is limited to altering the Fed Funds rate. After artificially holding rates low for over two years, the Fed has increased rates 5 times this year which has pushed mortgage rates to around 7%. Unfortunately, despite the rate hikes, the inflation remains high.
One big cause of inflation, that isn’t lowered by increased rates, is the country’s significantly increased money supply. There is simply a lot more money flowing through the economy. According to Shadow Stats, September’s money supply was 121.6% above the pre-pandemic high. The way to reduce inflation caused by increased money supply is to remove capital from the economy.
Housing economists worry that the Fed has already over-corrected and is leading us to recession because the inflation data is a lagging indicator (tells us where we were). The Fed is expected to increase the Fed funds rate by 0.5% to 0.75% before the end of the year.
The Fed does not use the CPI to gauge inflation. Instead, it uses the Personal Consumption Expenditures (PCE). Both the CPI and PCE weigh housing (rents) heavily, the CPI at 42% and the PCE at 23%
PCE is currently up 6.2% year over year and has already started to stabilize.
PCE is a survey of businesses and adjusts over time.
A foreclosure crisis remains unlikely. The total number of residential notices of trustee sale declined by 2% from September to October. Notices of trustee sale and foreclosures remain below 2018 and 2019 levels.
Demand Isn’t Completely Dead:
In order to have a healthy real estate market, two things are required: 1) jobs and 2) inbound migration. Jobs and migration create new housing demand. While today’s demand has been sidelined by volatile mortgage rates and affordability challenges, it is important to note that the demand does exist. We saw a glimpse of it in early August went rates dropped down to 5% and we had a spike in new contracts for a few weeks. When rates went back up above 6% (and continued to rise) that demand cooled, waiting again. And we have jobs and people are still moving here.
The Greater Phoenix Economic Council (GPEC) has been busy this year bringing more businesses and jobs to Greater Phoenix. During fiscal year 2022 (10/1/21 – 9/30/22):
55 new businesses came to Greater Phoenix
10,859 new jobs
$635M+ in payroll was generated
Average high-wage salary: $76,000
Future prospects include:
214 domestic businesses
58 international businesses
A potential of 4,748 high wage jobs
Final Thoughts:
The Greater Phoenix median sales price peaked in May at $480,000. Through October the median is down to $436,000; a 9% decline in only five months. Prices will continue to decline through the end of the year. The high prices and high mortgage rates have sidelined most of today’s buyers.
Yes, it is true that this is the second largest price decline since the end of WWII. And that sounds scary, but it is ok. It will ultimately help our market normalize. The 2021 housing market was unsustainable and unhealthy.
We are going through growing pains, or shrinking pains, we need to go through in order to get back to a healthier, calmer market. It is only a matter of time.
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
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 12th 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.
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
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 14th 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.
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
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 August 17th Cromford Market Update with Tina Tamboer, click here.
OMG so much change!
Despite knowing that the market was going to normalize – no market lasts forever, especially not savagely unbalanced, unsustainable markets – but the speed of this change has been surprising, to say the least.
The Greater Phoenix residential real estate market has seen 15 weeks of change but in the past 4-5 weeks that change has been amplified by a lot.
What affects demand?
Population growth
Every person, whether a renter or owner, is an element of demand.
We still have population growth, but it is slowing, it is possible for population growth to happen without increasing demand, when there is household consolidation. That increases vacancies and roommates.
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.
The latest household formation data is from March. It is expected to fall in the next release.
Affordability
Employment/income – impacts household formation and affordability
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)
Lower rates increase affordability and increase borrower demand
Higher rates decrease affordability and decrease borrower demand
Over the past 4-5 weeks interest rates have been very volatile, moving from 5.3% to 5.8% and back to 5.2% in only a week. It makes it very difficult for buyers to lock in. Buyers will freeze because they are waiting for some stability, so they feel more confident locking in a rate.
Loose/tight lending practices (can offset effects of interest rates)
Loose lending practices increase demand.
Tight lending practices decrease demand.
The affordability rate was awesome right when the pandemic hit. 70% affordability. Then we dropped below normal within a year.
Many investors are only now learning that they cannot continue to push the prices up forever. Eventually, the population will need to be able to afford these prices. Not everyone can afford the properties that were flipped.
36% of homes that are currently active were bought in the past year.
25% of homes that are currently active were purchased in 2022.
Those who bought homes in 2020 or earlier are fine.
Consumer Sentiment – could the most important factor
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.
This is bringing out a lot of emotions. A lot of wealthy people are thinking about selling off their property. When people start to panic sell, more people will panic sell and create a self-fulfilling prophecy. If homeowners think the market is tanking, so they may sell at a discount because they think that is what is what they have to do so then it creates exactly what they are afraid of.
Intended Use:
Q2 2021 was the first time we saw owner occupied affidavits dipping below 70%. As of May, it was 62%. From 2015 through 2019, owner occupied purchases ranged from 70% to 76%. In May, 13% of buyers were second homeowners (slightly above normal), 20% were investors, and 5% iBuyers. The majority of the elevation is investor and iBuyer purchases.
Cash Purchases:
Not a crash. The vast majority of purchases in 2005 – 2008 included loans; only 10% of purchases were cash. Lots of risky loans. Foreclosure crises come from too many bad loans. Now investors own the properties free and clear.
Cash purchases have been growing. 30% of buyers pay cash. Cash doesn’t foreclose. We are not looking at a looming foreclosure crisis. News media is very far behind. The only way to keep up with the market is to follow exactly what is happening as it happens; ignore the noise.
Interest Rates:
By rapidly raising interest rates to tame inflation, the Fed pulled the emergency brake on real estate. Is Chairman Powell channeling inner his inner Chairman Volker? He was the Fed’s chairman in the 80s who rapidly increased rates. At the end of both of the 1980s recessions, mortgage rates declined. Many people already believe we are in a recession, or we are going into a recession very soon. Interest rates always tend to drop sharply at the end of a recession. The ability to refinance is likely if the recession happens soon or now.
The majority of owners have payments that are much lower than today’s rents. People are not going to walk away from fixed mortgage payments that are lower than rents. They won’t, even if property values decline by 10%. Predictions planning a mass foreclosure crisis are unfounded. No homeowner wants to walk away from their equity. It makes no pragmatic sense. Why walk away to pay more in rents because prices will come down from the peak?
Interest rates don’t stay high or low forever. They always change. Nothing is forever. None of our markets are forever. The only constant is change.
Buyers primarily focus on monthly payments. The only market that matters is the market we are in right now. We can’t know what will happen but we do need to understand how we got to where we are.
15 weeks ago, mortgage interest rates surpassed 4.4%. Supply started increasing slowly. It was a very subtle turn. By April, after rates increased above 5%. Supply shot through the roof. The rate volatility has created chaos for buyers. With the lack of stability buyers have sidelined themselves.
Also, about 15 weeks ago we saw a big stock market drop. Anything that is Wall Street based is impacted. Wall Street funded institutions started pulling out of escrows. Similar to what happened at the onset of Covid. Corporations act more slowly. They stopped writing contracts. How long will Wall Street stay on the sidelines? We do not know.
Contract Ratio:
Welcome to balance. Unfortunately, it comes with a high interest rate. Buyer’s markets are loser’s markets. Seller’s markets are winner’s markets. Buyer’s markets have fewer buyers.
Seller’s markets are a dump your junk market. Everything sells in extreme seller’s markets.
Buyer’s markets are great for buyers that need more help. We will see more down payment assistance, lower down payments, first time buyer programs, FHA loans, etc. This is great for buyers who need a little help getting into a home.
The contract ratio looks at how many homes are under contract relative to how many are on the market. And it moves faster than the Cromford Market Index (CMI). It is not seasonally adjusted, and the ups and downs are more visible. On June 2 the market was still in a frenzy. By July 11 the market was warm. A warm market is a balanced market.
15 weeks ago, the contract ratio was 249, last week it was 53.2. A contract ratio of 30 – 60 is considered balanced, above 60 is hot, above 100 is a frenzy. Below 20 is a cold market. We have been living in a frenzy for 1.5 years. It is not normal to have more under contract than what is available on the market.
Are we at normal supply yet? That is a very typical question that isn’t easy to answer. Inventory counts are not that far from 2018-2019 counts. 2014 was the last balanced market we had. There were 20-25K properties on the market in 2014. A balanced market is when the number of available listings and the number of properties under contract correlate.
With a contract ratio of 53 the market is in the warm stage, balance. The contract ratio is lower than 2018 and 2019. It isn’t about the supply number it is about how many are in escrow. We should have between 10-11K in escrow for July. But only 7700 are in escrow so we are moving towards a buyer’s are market.
Everything listed over $400K is in balance.
Days on market prior to contract is now at 17 days or 3-4 weeks. Expect it to continue to slow. For any new listings, prepare sellers for 4 weeks of active status. Expect price reductions and seller concessions. There are 143.9% more listings on the market this year than there were last year. The $400K-$1M price range has had the biggest increase in available supply.
The Market Cycle:
The market is cyclical. There are different emotions associated with the different stages of a cycle. Speed up the process and the emotions gain intensity. Capitulation is the action of surrendering or ceasing to resist an opponent or demand.
Price Reductions:
The first indicator of a balanced market is an increase in price reductions. The first wave of reductions makes a difference, but after multiple reductions the price drops don’t matter as much. Sellers have to do more to get their houses sold.
Price reductions have increased by 496% in 15 weeks. The overall median price reduction amount is $15,000.
Listings under $200K had a $10,000 median reduction
Listings at $200K – $400K had a $10,000 median reduction
Listings at $400K – $800K had a $15,000 median reduction
Listings at $800K – $1M had a $25,000 median reduction
Listings at $1M – $2M had a $50,000 median reduction
Listings at $2M – $3M had a $100,000 median reduction
Listings over $3M had a $152,500 median reduction
Interest Rate Buy-Downs:
As the institutions have pulled back sellers have to focus on traditional buyers. The median sales price is slightly down from $469,000 (May) to $459,000 (July). But the payments are about the same because the interst rates are keeping the payments high. Price reductions don’t have the same impact when rates are going up.
December’s interest rates and median price worked for the median annual household income of $88,000. They do not today with higher rates and higher sales prices.
The median monthly payment for the median house is $2,745. The median rental rate for the same median house is $2,295. We have to beat rent prices to make buying desirable. In order to do that we have to pull out an old tool that hasn’t been used in 10 years.
The 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. 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 of more desirable interest rates. Market the monthly payment, not the asking price. Explain what this means to buyers. Do something different than the competition. Advertise something different. Get creative.
This is an estimate only, talk with your lender for actual costs and details:
Scenario 1:
Based on the July 9 median price of $457,000 at a 5.3% interest rate the estimated PITI is $2,733, if a seller does the median price reduction of $15,000 it will save the buyer about $86 a month.
Scenario 2:
A permanent buy-down may cost around 3% of the loan amount, assuming a purchase price of $457,000 at 5.3% and a 10% down payment, a permanent buy-down of 1% could cost the seller $12,339. A 4.3% interest rate would save the buyer $248 a month.
Scenario 3:
A 2-1 buy down may cost around 2.2% of the loan. Assuming a purchase price of $457,000 at 5.3% and a 10% down payment, a 2-1 buy down could cost the seller $9,048. The 3.3% interest rate the first year would save the buyer $481 a month. A 4.3% interest rate the second year would save the buyer $248 a month.
If a seller is willing to give up the money in a price reduction, the seller may be willing to pay for the buy-down option instead.
Supply:
For sale and rental inventory is up!
The MLS rental supply is up 111% since September 2021.
The MLS rental supply is up 51% since January.
One investor increased the rental inventory by 12% in only 3 days.
Always check rental supply and rates. More people are renting, and we are seeing more roommate situations. So far in July, 37% of leases closed below asking. Last year it was only 22%.
Homes for sale on the MLS increased by 220% in 15 weeks.
Homes for sale on the MLS increased by 144% year over year.
Most price points have more competition.
Sellers are rushing to sell to get the peak price, but we are already past the peak. Weekly new listings are outpacing every year since 2000 except 2006 and 2007.
Investors and flip models are driving many of the newest listings. This is unusual.
25% of active listings were purchased since January.
11% of active listings were purchased in the second half of 2021.
36% of active listings were purchased in the past 12 months.
52% of all active listings are vacant. Not normal.
13% of active listings are new builds.
12% of active listings are iBuyer owned.
Owner occupied listings have an advantage. Showing a lived in house looks good. This is not your as-is market. This is the best of the best of the market. ibuyers are still buying homes right now. They are not positioned to hold properties.
Demand:
It is always important to watch new listings (supply) and new contracts (demand). When the market shifts there is always a change in either supply or demand. Buyer demand has fallen off a cliff, which ultimately was the intention of the Federal Reserve. 40% of inflation is housing.
5 weeks ago demand took a dive. Prior to that, in June, we were ok, hanging around normal-ish demand. And when the first institutional buyers not only stopped buying but cancelled existing contracts, demand tanked. Combine that with the interest rate fluctuations, most traditional buyers have been sidelined. We need to get more buyers into the market. Teach awareness of ways to make payments better.
15 weeks ago was a great market for sellers. And now there are fewer properties under contract than there were in 2014, our last balanced market. Based on the trends it is not going to get better before the end of the year.
Greater Phoenix’s weekly accepted contracts are trending lower than any week of 2021, aside from the very last week of the year. Listings under contract are down nearly 26% year over year.
The one sector that has not been crushed by fluctuating interest rates are homes listed at $3M and up. Typically, this market is not as rate sensitive, but it does tend to be impacted by stock market fluctuations. At this point, we haven’t seen the impact of the falling stock market, but we may still.
Properties falling out of escrow is increasing. It isn’t super high but is an important number to watch. Canceled listings is increasing rapidly, 2021 had very few cancellations. Despite the increase, the cancellations are not enough to significantly slow the increase of supply. Expired listings are also increasing rapidly.
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 139.1
All time high: 3/14/2021 at 514.9
2022 High: 2/7/2022 at 474.6
One month ago, 6/20/2022 it was 210.2
CMI is the predictor, it moves first and then appreciation follows. Cannot predict the CMI. It tells us where we are.
There is no number that defines normal. It is about the relationship between supply and demand. When the numbers for supply and demand are the same, the market is in balance.
Property value is declining while rate of appreciation is still positive. Values are declining but the seller (as long as they owned 1 year or more) won’t lose money. To lose money on a house a homeowner has to sell for less than they paid. Losing money if they are selling with in a 6 month period. Historically it took about 2 years of ownership before purchasing costs are recovered.
It is mostly buy and hold investors losing money. They are only getting slightly less than expected but a large scale. Regular owners are in really good shape. Watch what was actually invested in the property.
Supply is rising faster than demand is dropping. Month over month prices were flat from May to June and will decline from June to July. We are getting close to year over year declines but supply has to be bigger than demand for year over year prices to drop.
In 2007 it was builders and homeowners who couldn’t afford their payments who listed their homes and spiked inventory. Today’s homeowners are credit worthy, have great interest rates, and can afford their payments. They are not flooding the market with listings. Investors are listing property. Many investors paid cash, which does not foreclose.
Prices:
Sales prices represent what the market was like 4-6 weeks ago. In July there has been a sharp median sales price decline. The year over year appreciation rate in June was 19% up. So far the year over year appreciation rate is only 13% up. This is a bigger decline than normal. It usually drops off the second half of the year. Expect each month to have a smaller and smaller year over year appreciation rate.
Sale Price to List Price Ratio:
As of July 10, nearly 37% of listings closed over asking for a median of $10,000 above. Both the amount and percentage are dropping and will likely be down to 2%-3% of sales close for over asking in August.
June ended with a sale price to list price ratio of 100.0%. It is coming down now. Do not expect full price offers in July. Currently, the rate is 99.3% A decent seller’s market often sees a 98%-99% ratio. A balanced market has a ratio around 97%.
Seller Concessions:
25-28% of closings with concessions is normal. We are up to about 5.5% now. This is the third stage of a shift. First days on market increase, second price reductions increase. Third, seller concessions increase. Expect this number to continue to grow.
Distress? Nope!
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.
Mortgage credit availability will not increase anytime soon. Most lenders believe that people will be refinancing in the next 3 years. It is tough for investors to want to increase credit because they make all of their money in the first 3 years and the lenders know people will refinance as soon as rates decline.
Not seeing a lot of pre-foreclosures or foreclosures, we are still running below 2019 numbers. A notice of trustee sale is a pre-foreclosure. A homeowner is given 90 days notice. The current median days on market before a contract is 17 days.
Final Thoughts:
Buying is fun again. All month over month metrics are down. This can be scary for the industry yet it is necessary for the market. The severity of the previous year’s imbalance is unsustainable.
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
It happened. The residential real estate market was going so fast that the only way to slow it down was to pull the emergency brake. And boy, was that emergency brake pulled. It threw the market into chaos but this chaos won’t last long. It may feel as though we are spinning out of control. It is all in an effort to find normal.
Normal is not exciting. It is rather boring. And change is scary. But normal isn’t exhausting. Normal is healthy and sustainable. But we aren’t there yet.
We are in the chaos. Inventory is up, price reductions are up, and consumer sentiment is down.
National Real Estate:
Supply of unsold single family homes in the US increased by 5.6% last week, up to 396,000. We probably have 12 more weeks of climbing inventory before we see a peak. Inventory is up 16% year over year and is up 22.3% in the past four weeks.
Price reductions continue to increase. Two weeks ago, we saw the largest weekly increase in price reductions and last week’s increase was even bigger. Now 25.5% of homes on the market are taking price cuts. That is a 1.4% increase, week over week, which is significant. We will probably be at a normal level of price reductions (30%) in July. Based on this trajectory, we could see above normal price reductions by the fall.
At 23%, immediate sales continue to decline, despite falling more slowly than expected. Expect this to keep dropping and to see more inventory, longer market time, and fewer bidding wars as we go deeper into the year.
Fannie Mae’s June forecast now predicts a 13.5% decline in total sales this year due to increased mortgage interest rates and another decline of 11.2% next year due to the Fed’s rate hikes which Fannie Mae believes will push us into a recession in 2023.
According to Redfin, luxury home (top 5% priciest homes in a market) sales declined by 18% year over year through the end of April. Non-luxury home sales declined by 5.4% over the same timeframe.
Consumer Sentiment:
The latest news of unexpected higher inflation which caused Wall Street to freak out and fall into a bear market and drove the Fed to increase rates by 0.75% instead of the expected 0.50% scared a lot of people. All of that happened in 4 days. And add that to the uncertainty with the war in Ukraine, gas prices, and still rising mortgage rates; people are nervous. This is why consumer sentiment is so important. If enough people freak out, it can stop the market, even when things aren’t as bad as they believe.
The most important thing right now is to not overprice listings. The perception with all of these price reductions is that prices are going down. That isn’t the case at all. The current year over year appreciation rates are about 15% nationally and 20% locally. As you know, sellers want the moon right now and many still believe they can have it. But as more and more listings drop their prices, buyers will pull back more waiting to see how much lower they will go which will further soften the market.
June’s preliminary Consumer Sentiment level dropped 14% from May to 50.2 reaching its lowest recorded value. Increased gas prices are the biggest cause. Gas prices are up 65 cents nationally since May. All consumers are feeling pitched. Fluctuations in interest rates impacts that housing sector more than any other sector.
Rates, Inflation, and the Fed:
Housing makes up about 40% of costs in the CPI so the huge appreciation rates of the past 2 years is considered the primary cause of inflation. When inflation increased in May, the Federal Reserve increased rates by 0.75 of a point, the largest increase since 1994. More rate hikes are likely ahead, as the Fed tries to cool off the U.S. economy without causing a recession.
Dr. Lawrence Yun, NAR’s Chief Economist, said, “The Federal Reserve set a big increase in interest rates and means several more rounds of rate hikes are on the way in upcoming months. So far, the short-term fed funds rate that the Fed directly controls has risen by 175 basis points. But the 30-year fixed rate mortgage has risen even more, by nearly 300 basis points. On the same $300,000 mortgage, the monthly payment has risen from $1265 in December to $1800 today. That’s painful and, consequently, will shrink the buyer pool.”
The AZ Market:
While the Greater Phoenix housing market follows the same trends of the national housing market, it does so first (currently running 4-6 weeks ahead versus the usual 6-9 months ahead). The cooling trend emerged 10-12 weeks ago locally, while nationally the trend became more apparent in April. Not only does the Greater Phoenix market run ahead of the national market, it has bigger swings. Our highs are higher and lows are lower. For example, over the past three months, the national single family inventory has increased by 64% and during the same time period, Greater Phoenix’s single family inventory increased by 148%.
Total active listing inventory is up 47% in the past month.
The median number of days prior to contract is now 11, up 4 days from last month.
Price reductions are up 471% since the beginning of the year.
The current median sales price is $475,000.
Sales prices are likely peaking now and pending sales prices peaked the second week of May. This means monthly price appreciation will likely go flat in the coming weeks (if not days).
Join us for our next Cromford Market Update with Tina Tamboer on July 13. For details and registration, click here.
Short term rental bookings increased by 2.6% year over year and yet occupancy rates declined by 8.6% in May. This is due to a 24.7% (57,000 properties) increase in Airbnb and VRBO listings.
Final Thoughts:
The imbalance in the market was caused by very low supply, not unusually high demand. This is the fundamental difference between the 2005 market and the 2021 market. In a market with already falling demand, drastically rising mortgage interest rates has pushed our current demand off a cliff.
The data line to watch is active inventory. If inventory continues to climb at its current rate, we will be in a buyer’s market soon. However, at roughly 13,000 active listings, if inventory slows or flattens we will stay in a weak seller’s market.
We are once again, in uncharted territory. Hopefully, the chaos clears soon.
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
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.
A lot is happening in housing and there is no reason to panic. The market of the past two years is unsustainable. In order to get to the calm of a more balanced market, we have to go through the chaos of change.
In order to really see what is going on in Greater Phoenix real estate, we have to take a granular look at exactly what is happening right now.
Interest Rates:
Interest rates are never low or high forever. Sometimes they come down as fast as they go up. In 2018, it took 10 months to go up and 6 months to come down.
The speed of movement hasn’t been like this since the 1980s. The speed is comparable to the 80s but the actual rates are very different.
Look at the changes during a recession. What do interest rates do during recessions? At the end of all of the past recessions, interest rates dropped. If we are going into a recession, then we will likely see rate drops towards the end. Aside from 2008, most recessions last only about a year.
In time rates will likely come down. Remember people buy payments. They are watching payments. Potential buyers should buy now, start building equity, and refinance later when rates drop. Homeownership is the greatest creator of wealth in the US, this is true regardless of interest rates.
Active Supply:
This is the chaos. Active inventory is up 86.2% year over year and up 108% in 10 weeks. Listings are rising and demand is down, causing inventory to grow even faster.
New listings are up 11.2% year over year. We are just coming in over 2021 but not higher than 2005. Before the crash of 2008, we had a ton of new listings. This does not mean the market will crash. We are at an inflection point though. Are the numbers turning seasonal or will there be an acceleration of new listings? It is important to watch these numbers.
Accepted Contracts:
There is always a drop in accepted contracts over Memorial Day weekend. Newly accepted contracts were down 11.3% year over year. There will be another drop off for the 4th of July weekend. Expect the decline to continue. The accepted contracts are matching the pace of 2019. This is another metric to track.
Pending listings have declined in each of the past four months. 10 weeks ago, listings under contract started coming in lower than in 2021. Now that count is 15.9% below last year’s count. About a year ago the market started normalizing when Zillow and Opendoor both went on a purchasing rampage, creating the frenzy of the second half of 2021. That will not happen again this year.
29% of buyers in April paid cash. Investors are not buying everything.
Supply & Demand Changes:
Overall, active supply is up 92.4% year over year and at the same time listings under contract is down 15.9% year over year. Buyers are seeing inventory rise after two years of rejection. Now is the time to prepare your sellers for what is happening right now. Today’s market is very different from the market of only a few months ago.
$300,000 – $400,000 listings
Active supply up 23% year over year
Active supply up 84% in 10 weeks
Listings under contract down 45% year over year
Listings under contract down 36% in 16 weeks
$400,000 – $1.5M listings
Active supply up 174% year over year
Active supply up 105% in 7 weeks
Listings under contract up 29% year over year
Demand is still quite high but there are way more listings coming on the market, many sellers do not want to miss the top of the market. If it were following seasonal patterns, demand will flatten.
$1.5 – $3M listings
Active supply is still low compared to previous years
Active supply up 38% year over year
Active supply up 112% in 10 weeks
Listings under contract up 6% year over year but on a steep decline, will fall below 2021’s numbers in the coming weeks. If following normal seasonality, this will decline through the end of the year.
Over $3M listings
Active supply up 20% year over year
Active supply up 34% in 12 weeks
Listings under contract up 19% year over year
Flip investors, private landlords, and first time home buyers tend to buy below the median. The current median is $480,000. There are not very many listings available below $480,000. This has impacted first time buyers and investors on a budget, there is both a lot of competition and profits are lower for flippers in the lower price ranges.
If this market slows down enough, down payment assistance programs will likely increase. There is aid available but only when demand is low enough will sellers accept offers from buyers utilizing the programs. This is not seasonal.
Price Reductions:
Price reductions are often the first indicator of a market shift. When buyers believe they can afford the asking price is when they will come into the market.
$300,000 – $400,000 listings
Price reductions are up 208% in 10 weeks
Median amount reduced: $10,000
$400,000 – $1.5M listings
Price reductions are up 302% in 10 weeks. In the same 10 week period listings under contract are down and inventory is up. Sellers need to adjust accordingly.
Median amount reduced
$400K – $500K: $10,000
$500K – $600K: $10,000
$600K – $800K: $12,000
$800K – $1M: $25,000
$1M – $1.5M: $50,000
Over $1.5M listings
Price reductions are up 172% in 10 weeks.
Median amount reduced
$1.5M – $2M: $77,500
$2M – $3M: $136,000
Over $3M: $187,500
Days on Market:
Behind price reductions, the second indicator of a market shift is an increase in average days on market prior to contract. For most of the year, listings were on the market for 7 days prior to accepting a contract. In May, that number hit 9 days and by the end of May it was up to 11 days. May’s increases were quick and with more inventory coming to market, this number will continue to increase. Sellers will need to adjust their expectations from an offer coming in one week to two weeks.
Contract Ratio:
Housing is no longer in a frenzy. A frenzied market is when there are more properties under contract than there are on the market. The contract ratio for a frenzy market is over 100. A month ago listings up to $2M were still in a frenzy. Each week another price range dips below frenzy level. With a contract ratio of 98.3, we are still in a very hot seller’s market. A year ago the contract ratio was 224.8. A normal contract ratio is around 85.
The decline in contract ratio is more about increased inventory than it is about decreased demand. Inventory has grown faster than demand has declined. The recent drastic declines in the contract ratio represent the chaos before the calm.
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 8.6%), 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 227.6
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.
There is no number that defines normal. It is about the relationship between supply and demand. When the numbers for supply and demand are the same, the market is in balance.
In 2005, the CMI dropped for 4 months before prices flattened. In the next 3 months, we will likely see a slowing in appreciation rates. Cash investors are still very strong buyers in our market. Less competition so they are offering less.
Supply is 60% below normal. Demand recently fell below normal and is now 7.5% below normal. Supply is increasing faster than demand is decreasing. When demand falls below 100, the number of transactions declines. The closer demand is to 100 or higher keeps transaction counts high. It is better for the industry and overall economy for supply to come up to meet demand versus demand dropping to meet supply.
The CMI declined at record rates over the past 8 weeks. CMI data goes back to 2000 and the last month had the fastest CMI drop on record. With this many outside influences impacting the market, it is impossible to know what will happen next. The CMI can change on a dime. There is no indication that prices will decline anytime soon but this does show weekly declines in the seller’s advantage. Now is not the time to over price a listing. We don’t have desperate sellers. They can wait and not panic sell. Worst case they keep their home and an awesome interest rate for a little longer than planned.
Sales Measures:
Sales measures tell us what happened in the past, not what is happening in the future. The media is using closed sales, past activity, to explain the market. Things are shifting so quickly right now it is impossible to predict the future past 3-4 months from now. The sales measures for the month of May are still very good. But that is not the future, it explains what the market did 30-60 days ago.
May ended with a median sales price of $480,000 and year over year annual appreciation rate of 22%. The sales price to list price ratio was 101.7% (expect this to drop in the next 4 weeks) and 54.6% of homes closed over list price. The third indicator of a shifting market is increased seller concessions (when a seller pays some of the buyer’s closing costs). Currently, seller concessions are low at 4.1% but are just starting to increase.
Flips:
Flips dropped off in April, likely due to the increased interest rates and declining demand.
Opendoor Activity:
Opendoor made its first profit in Q1 2022.
May through November 2021 Opendoor acquired 3,609 properties and sold 1,861. They acquired 94% more homes than they sold.
December 2021 through March 2022 Opendoor acquired 1,408 properties and sold 2,149. They sold 53% more than they acquired.
April 2022 Opendoor acquired 510 properties and sold 494. They acquired 3% more than they sold.
Offerpad Activity:
June through December 2021 Offerpad acquired 1,050 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.
April 2022 Offerpad acquired 94 properties and sold 93. They acquired 1 more than they sold.
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 than do the iBuyers.
Rentals:
Available rentals in the MLS is up 26% since the beginning of the year. This indicates that there are more vacant homes. Vacant homes are bad for a housing market.
4.9% of May’s closed rentals closed over list price. 53.5% closed at list price. And 41.6% closed under list price. There are no bidding wars for rentals.
Crash Versus Correction:
A crash is a big drop. A correction is a slight fix. Correction is getting back to where we would be anyway. We are experiencing a disruption. We do not know how long it will last. After the disruption, we will experience a correction. Do not expect foreclosures.
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 is 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.
There is risk 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.
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.
Final Thoughts:
We are early in the shift. Start bracing sellers for market prices, increased days on market, and potential concessions. Do not expect to see more of the 2% month over month appreciation rates, expect to see an appreciation rate of less than 1% month over month.
The market is attempting to normalize and is doing so quickly. We have to move through the chaos to get to the calm.
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
The US housing market is shifting and it is shifting quickly. The speed in which the changes are happening is making both real estate consumers and practitioners uncomfortable. The velocity of rate increases, the velocity of inflation (despite the very recent modest decline), the velocity of price appreciation, and now the simultaneous velocity of growing inventory and declining buyer demand. Using facts and not emotion is the best way to address the discomfort.
*Market softening does NOT mean the market is crashing nor does it mean prices are declining. Prices are still increasing, just at a slower rate. In this case, market softening means that buyer demand is declining.
Negative year over year reports illustrate what we know: 2021 was a record-breaking year for (re)sales units and volume. 2021’s records happened because of a perfect storm of both 2020’s pent-up demand and the nation’s current generational demographic of about 33 million Americans aged 27-34, the perfect home buying age.*
The AZ Market:
Greater Phoenix available inventory increased by 50% during the past 30 days and is up 79% since the end of February.
Greater Phoenix remains in the top spot for the country’s inflation rate, as of April, we made it up to an 11% year over year increase. It is mostly due to housing costs. According to Redfin; “Homes are becoming less affordable more quickly in Sun Belt metros than in coastal areas. Homebuyers in Phoenix, for instance, need to earn 46% more than they did a year ago to afford the area’s typical monthly mortgage payment, compared with 26% more in San Francisco.”
For a detailed local market update, check out my post from last week here.
National Real Estate:
NAR’s chief economist, Dr. Lawrence Yun, has been quoted as saying, “The market is quite unusual as sales are coming down, but listed homes are still selling swiftly, and home prices are much higher than a year ago.”
Dr. Lawrence Yun expects sales to continue to slow and we will go back to pre-pandemic sales activity. In 2021 there were 6.1M existing home sales, the second most sales behind 2006. A 10% decline in sales would put us at about 5.5 million sales which pre-pandemic was considered a healthy market.
Total available single family homes increased by 8.2% to 344,000 homes last week. That’s an increase of 26,000 more homes than last week, and 6% more than this time last year.
This is the first we have had year over year inventory gains since 2019. Available purchase inventory has been falling each year for a decade. During that time, Americans have turned about 8 million homes into rentals, capitalizing on the low mortgage rates.
National Demand:
NAR’s pending home index declined by 3.9% month over month in April to the slowest pace in 10 years. It was the sixth consecutive monthly decline.
This week nearly 27,000 went under contract immediately. But so many new listings hit the market, the immediate sales percentage declined down to 24%. Last week it was 25%. A year ago it was 26%.
Price reductions continue to increase. 21.7% of listings are reducing their price before selling. That is up from last year’s 15.8%.
Fannie Mae expects total number of home sales to decline by 11% this year from last, a 3.7% decline from Fannie’s April forecast.
The median price of a resale home sold in April was $391,200, the highest on record and an increase of 14.8% from a year ago. Remember, sales prices tell us what the market was doing 30-60 days ago, not today.
Existing-home sales declined for the third month in a row. In April sales decreased by 2.4% from March and 5.9% year over year as declining affordability continues to challenge today’s buyers.
Midwest increased by 3.1% (month over month)
Northeast increased by 1.5% (month over month)
The South declined by 4.6% (month over month)
The West declined by 5.8% (month over month)
New Home Sales:
Leading indicator because this market shifts faster than the resale market.
Builder confidence declined by 8 points in May to 69, dropping to its lowest levels since June 2020.
April new home sales dropped for the fourth month in a row by 7% month over month and 27% year over year, matching the lowest level of sales since April 2020, at the very onset of the pandemic.
Available new home inventory has skyrocketed from 4.7 months in April 2021 to 9.0 months in April 2022! Economist Logan Mohtashami with Housingwire uses this rule of thumb for anticipating builder behavior basing it on the three-month average of supply. He writes:
“When supply is 4.3 months and below, this is an excellent market for the builders. They will happily build.
When supply is 4.4 to 6.4 months, this is just an OK market for the builders. They will build as long as new home sales are growing.
When supply is 6.5 months and above, the builders will pull back on construction.
The monthly supply has spiked, the 3-month average is at 7.4 months, and the headline number is at 9.0 months!”
Real Estate News:
Realtor.com is the first to add wildfire risk data to properties listed on the portal.
Opendoor is expanding in AZ and just committed to over 100,000 square feet in Tempe. The location will employ 500 people and will be Opendoor’s largest office.
Microsoft created a real estate venture called Bing Rentals and is currently creating a team of engineers to build it, very little is known about this venture.
Google Trends saw a huge increase in searches for the term ‘housing bubble’ in March, and it hasn’t fully returned to normal levels. Clearly this remains a concern for many. This is not good for consumer sentiment.
Final Thoughts:
The negative year over year reports can easily cause fear when it shouldn’t. Consumer sentiment can have a greater impact on a market than actual data. Zillow Economist, Jeff Tucker, recently raised concern that talk of a bubble could create fear which could actually negatively impact the market.
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
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.
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
“A great sense of enthusiasm could be found in the housing market in February, but something else started to creep in – a mild sense of panic.” -Ali Wolf, Zonda’s chief economist
That mild panic may be caused by volatile interest rates, low inventory, 7.9% and growing rate of inflation, housing affordability challenges, labor shortages, supply chain disruptions (growing problem as more and more of China goes into lockdown), giant annual home appreciation rates, war, pandemic, etc.
The newness of the market frenzy has worn off. Buyers are exhausted and sellers hesitate to list, unsure where they will go. While we know that this market will not last forever, no market ever does, we do not need to wait for the other shoe to drop. Real estate moves slowly and as long as we watch it closely and carefully, we should have a general idea of what to expect.
National Real Estate:
Available single family homes nationwide saw a tiny decline last week of 0.4%, leaving total inventory at about 248,000. This means the previous week’s increase of 3% held steady. In the past mid-March was the time of year with the largest inventory increases. Two years ago, available inventory was three times higher.
Sales velocity remains strong with 31% of last week’s new listings going under contract within 24 hours of going active.
At 81,000; there were 10% fewer new listings to hit the market last week versus the previous week (just shy of 90,000), last week had the second most new listings come to market this year.
Over the past 10 years, about 8 million single family homes have moved from resale inventory to rental inventory. That is 9.5% of all single family properties in the country! Due to low mortgage rates the most common way properties transitioned is when would-be sellers opt to keep their previous home as a rental rather than sell it when they move to their next home. As rates go up and money is more expensive the frequency of this declines. In 2018 when rates increased fewer homes moved from resale to rental inventory. Listing inventory increased and the appreciation rate slowed (but did not go negative). This could cause inventory to rise later in the year.
After 120 consecutive months of annual price increases, national home appreciation is running at 15% since February 2021, despite the fact that monthly payments are up 28% year over year.
“Monthly payments have risen by 28 percent from one year ago – which, interestingly, is not a part of the consumer price index – and the market remains swift with multiple offers still being recorded on most properties.”
-Dr. Lawrence Yun, NAR’s chief economist
The AZ Market:
According to Redfin, in Q3 2021 30% of the homes sold in Greater Phoenix were purchased by investors and rents increased by 30%.
According to AZ Family, using data from the Maricopa County Assessor’s Office, the 700 largest investors own more than 71,000 residential properties in Maricopa County. Invitation Homes is the county’s biggest investor, owning 8,744 homes.
Zip codes with the highest concentrations of investor-owned homes include:
Mesa – 85209 with 3,251 investor properties
El Mirage – 85335 with 2,155 properties
Scottsdale – 85260 with 1,596 properties
Mesa – 85202 with 1,438 properties
Buckeye – 85326 with 1,223 properties
Phoenix – 85015 with 1,194 properties
Click here to see an interactive zip code map that shows how many properties are owned by an entity/person with 20 or more properties in the county.
In 2021, residential real estate in Sedona appreciated by 35% and the inventory is currently running 85% below normal. Sedona’s median asking price for new listings is $1,295,000!
75% of this Tempe Habitat for Humanity house was made with a 3D printer, a first for Arizona. Printed using laticrete or “fancy concrete” the building is highly efficient in minimizing future energy costs as well as creating less waste during the build.
New Construction (national):
“Buyers are out in force and builders are ready to sell them houses, but unpredictable interest rates and a lack of materials are making it almost impossible to gauge the market.” Ali Wolf, Zonda’s chief economist recently wrote. Demand is slowly declining and yet there are still bidding wars and homes are selling above asking. 97% of builders raised their prices from January to February.
Single family starts reached their highest levels since 2006.
Housing permits declined by 1.9% from January to February.
In February, for the second month in a row, new home sales declined. They are down 2% month over month, and down 6% year over year. At the same time, new home inventory is up 3.3% month over month and up 40% year over year.
The new home market has a greater impact on the overall economy than does the resale market, more money flows to more sectors. Rising interest rates impact the new home market more also; builders must budget their projects accordingly. Completions are slow and there are a lot of homes under construction, which allows for more opportunities for a buyer to cancel.
Real Estate News:
According to Redfin, national rents increased by 15% year over year in February. At the same time mortgage payments increased by 28% (NAR) to 31% (Redfin). As rental prices do not keep up with purchase prices, would-be buyers may opt to rent. Another factor that could lead to inventory increases.
Redfin’s portal will now include homes and apartments available for rent. Last year Redfin acquired RentPath which operates Rent.com, ApartmentGuide.com, and Rentals.com.
IWG PLC, a flexible office company which operates brands like Regus and Spaces, is teaming up with Instant Group, an online listing portal for office space, to create the largest online marketplace for flexible office space rentals. Offices can be booked by the hour, day, week, etc.
Final Thoughts:
These are a series of recent tweets from Redfin CEO, Glenn Kelman, he captures the nature of our market nicely.
“It feels crazy for demand to be so strong in the midst of war, market volatility, and inflation. We expected rates to increase over 2022 from 3.3% to 3.8%. That happened just in January. Then, mostly yesterday in a few hours, we got a hike of nearly the same size, to 4.4%.”
“Even still, we’re supply-constrained. Last quarter, 18.4% of homes sold to investors, a record; the 10-year average prior to the pandemic was 12.6%. Another record: 71% of homes in February sold in bidding wars. Pre-pandemic, when inventory was still low, the average was 55%.”
“Year to date, the number of new listings is down, but only 6%. The average number of homes for sale is down much more: 24%. The amount of food being served is nearly the same, but it’s being eaten much faster.”
“Even when the market cools down, it may not slow down: good homes’ll sell in a weekend. The rest’ll be discounted after two. Pundits gauge our impact on commissions, which in 30 years fell from 6.1% to 4.9%. Brokers are a bit cheaper, but a lot faster: a lifestyle gig is now 24/7.”
“Another misconception: that rising rates affect home-buyers more than owners, limiting demand not supply. But the monthly payment for a median-priced U.S. home with a 2.65% mortgage is $1,264. That home will rent for $1,900. Many would-be sellers would rather have ~$600 a month.”
“That difference is why investors & individual homeowners would rather rent than sell. The Fed’s actions saved the economy in 2020 but will limit housing inventory for 30 years to come. The bidding wars created by this inventory crunch have been the worst I’ve seen in 17 years.”
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
