the AZ market

Category: Weekly Market Update

  • Greater Phoenix Real Estate Update 8/27/2021

    Residential real estate pulled our economy out of the shortest recession in history. As last year’s market frenzy cools, the severe imbalance of supply and demand lessens and prices continue to increase, just at a slower rate. According to the 2020 US Census, housing units increased by 6.7% while population grew by 7.4%; both were declines from previous decades, but it doesn’t change the fact that demand (population) outpaced supply (housing units). Over the past 10 years, Maricopa County’s population increased by 15.8% and housing units increased by 8.3%.

    Demand outpacing supply combined with 10 million job openings and only 5.7 million jobs left to recover; residential real estate has garnered significant attention from investors. When an asset class or sector underperforms, investments are redirected into performing asset classes/sectors. Investors do their homework and invest where money will likely grow the most. Year over year rental rates are up along with property appreciation. John Burns of John Burns Real Estate Consulting said, “Investors won’t be slowing down at all. They’re only accelerating.”

    And don’t worry about the coming year over year negative reports. 2020 was an anomaly and is not a good comparison for a normalizing market.

    Rentals & the Eviction Ban:

    Yesterday the Supreme Court lifted the CDC’s eviction ban, stating that the CDC did not have the authority to create the ban in the first place, ending it six weeks earlier than the planned October 3 end date. In June, the Supreme Court ruled that the only way to further extend the eviction ban was through an act of Congress, which did not happen. Through the end of July, only $5.1 billion of the $46.5 billion in rental relief funds had been distributed.

    According to a new report from Zillow, nationwide rent prices were up 9% in July, year over year. Greater Phoenix saw the largest year over year rent increase, at 23%.

    In 33 of the 50 largest American cities, the typical rent is higher than the typical monthly mortgage payment. This is true in Greater Phoenix.

    National Real Estate:

    On Monday, NAR released its existing home sales report for July. Some interesting data points:

    • Total inventory is up 7.3% from June to 2.6 months of supply but down 12% from July 2020 when it was 3.1 months.
    • Nearly 90% of total sales in July were listed for less than a month.
    • 23% of sales were all cash, up from 16% in July 2020.
    • 30% of July sales went to first time homebuyers, down from 31% in June and from 34% in July 2020.

    “We see inventory beginning to tick up, which will lessen the intensity of multiple offers. Much of the home sales growth is still occurring in the upper-end markets, while the mid- to lower-tier areas aren’t seeing as much growth because there are still too few starter homes available.”

    – Dr. Lawrence Yun, NAR’s chief economist

    Total inventory (including both new and existing) peaked in 2008 then started declining. The declines have been consistent since 2014. While inventory has been rising since February and the market started showing signs of seasonality, which is good, we do not want to see inventory drop again, as it usually does in the fourth quarter. If demand remains the same and inventory declines then we see a faster rate of appreciation, which at its current levels, is unsustainable and has only just started to slow.

    Available Inventory

    The AZ Market:

    In January the Greater Phoenix median sales price was $340,000; now it is $405,000. That is over a 19% appreciation rate in this year alone. Most of those gains took place at the beginning of the year with 15.5% of the gain occurring from January to May. The median sales prices from May to August increased by 3.15% and from June to August the increase was 1.25%. The appreciation rate is slowing, and this is good for the overall health of the market.

    There are 62% more active listings with an asking price over $400,000 than under.

    In July, iBuyers accounted for 8.1% of all home sales in Maricopa County.

    In Q2 2021, 17 houses sold for at least $1,000,000 over the initial list price, up from 8 in Q1 2021. Fifty houses sold for at least $500,000 over the initial list price in Q2 2021, up from 15 in Q1 2021.

    85224 in Chandler is the only Arizona zip code to make it in the top 50 in Realtor.com’s 2021 Hottest Zip Codes in America list.

    Greater Phoenix, through July, has recovered 99% of jobs lost due to the pandemic and only needs 2,500 more jobs to match February 2020’s employment rate. Arizona has recovered 93.7% of jobs lost.

    According to the 2020 Census, at an 11.2% increase, Phoenix grew faster than any other major city over the past 10 years and passed Philadelphia as the nation’s fifth largest city. Buckeye took the top spot for fastest growing city in the country, among cities with at least 50,000. It grew by 80%!

    For more on the Greater Phoenix market, click here for my update from last week which is exclusively about our local market.

    New Construction:

    Lumber prices are down from the peak in May at $1,515 per 1,000 board feet to $472 per 1,000 board feet in early August. Due to the backlogs, it is unlikely that new home buyers will feel the pricing relief anytime soon.

    Month over month builder confidence declined by 5 points in August to 75, the lowest reading in 13 months. The decline is attributed to high material costs and labor shortages. Any reading over 50 is considered a good market. In April 2020 the index dropped to 30.

    “There are now almost 690,000 single-family homes under construction – the largest number since 2007. This is clearly a positive sign given the remarkably low levels of inventory on the market.”

    – Mike Fratantoni, the MBA’s chief economist

    After three months of declines, new home sales in July increased by 1% from June, beating expectations. June’s sales numbers were revised up. New home inventory is up 5.5% to a three-month average of 5.9 months. Builders tend to pull back once they hit 6.5 months.

    Commercial Real Estate:

    Much of commercial real estate has recovered from the pandemic and is now beating out February 2020 prices. The Green Street Commercial Property Price Index, which is based on REIT net asset values, beat February 2020’s ranking by 1.3%. In July, prices were up 14% year over year and up 2.4% from June.

    With prices growing over 20%; mobile home parks, self-storage, and industrial grew the fastest. In Greater Phoenix, the industrial vacancy rate is down to 4.7%. However, some asset classes are still down. The year over year prices for retail and lodging are down 7%, office is down 8%, and mall values are down by 18%. In Greater Phoenix, the office vacancy rate has increased for five consecutive months and the vacancy rate is up to 19.7%.

    Real Estate News:

    • Offerpad is the first iBuyer to turn a profit. In Q2 2021 they brought in $9.2M in profit. Based on the overly inflated offers from Opendoor and Zillow, it is likely the only iBuyer that will be profitable for some time.

    Final Thoughts:

    Danielle Hale the chief economist for Realtor.com summed it up well when she said, “Continued economic recovery is key to maintaining (real estate) sales momentum, and anything that disrupts progress, such as rising COVID cases, could knock home sales off course. We’ve already seen a pullback in builder confidence and mixed construction data as builders balance buyer interest with supply challenges, rising costs, and concerns about the future of the economy and housing affordability. Still, with listing price growth beginning to recalibrate in response to shifting supply and demand dynamics, we should see a steady pace of home sales over the next few months, especially if mortgage rates remain low.”

    Copyright 2021 Sarah Perkins

  • Greater Phoenix Real Estate Update 8/20/2021

    Today is all about the AZ market. Yesterday, Lawyers Title hosted a presentation with Tina Tamboer with the Cromford Report. 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.

    Supply & Demand:

    Supply is all of the properties; demand is all of the humans.

    The relationship between supply and demand dictates pricing in all sectors. There are influences that solely impact supply or demand, but those influences do not directly change sales prices. Mortgage interest rates influence demand and buyer behavior, but it does not impact supply.

    The wild card currently impacting pricing comes from the corporate investors and iBuyers who are paying well over market value for many properties.

    When affordability declines demand usually declines. Greater Phoenix’s affordability is down in Q2 2021, yet demand is increasing.

    Pricing:

    For nearly 2.5 months the median sales price has been right around $400,000. As you can see below, monthly payments did not increase much as prices increased because of the declining interest rates. It wasn’t until this spring that we saw a spike in monthly payments. The monthly mortgage payment for the median house is $1,859. Up nearly 23% from November 2020 when it was $1,518.

    There is even less relief for renters. To rent the same median property, renters are now spending $2,195 a month.

    Affordability:

    As many suspected, affordability declined in Q2 2021 and the US as a whole and Greater Phoenix fell below the ideal affordable range of 60-75 for the first time since late 2018. Through Q2 2021 in Greater Phoenix a household earning the median income ($79,000 annually), can afford 56.4% of what is for sale. A year ago, it was 70%.

    The low interest rates have worked in our favor for a long time. When rates increased up to 5% at the end of 2018, we dipped below the ideal affordability range and demand declined. When affordability drops below 60, we begin to see demand resistance.

    iBuyers:

    The affordability trends will impact corporate investors and iBuyers. Demand declines when things are not affordable, and it can shift quickly. In 2005 affordability went from 75 to 27. If not enough people can afford what is on the market, properties will sit for longer, and price reductions increase.

    iBuyer acquisitions are up 573%, their inventory is up 544%, and their sales are up 93% year over year. Both Opendoor and Zillow had their largest acquisition month ever in July. Offerpad is not as aggressive as the others (which could be why Offerpad was profitable for the first time ever in Q2 2021 and both Opendoor and Zillow Homes lost money).

    iBuyer offers are excessively high, sometimes bidding against their own offers. According to a recent report from Mike DelPrete, Opendoor paid 7.7% above market value on its acquisitions in Q2 2021 nationally. Tina mentioned instances of offers over $75,000 above market value. Other people’s money is very easy to spend.

    A year ago, owner-occupants drove the housing market. People were buying houses to live in. Today much of the demand is led by iBuyers and investors, both large and small. Since June 23% of Opendoor’s sales, 19% of Zillow’s sales, and 11% of Offerpad’s sales have gone to corporate investors.

    Overinflating values and creating false demand is extremely unhealthy for a market. This is not what the market is supposed to do. The iBuyers will either have to wait for the market to catch up or sell for a loss. The 3.1% monthly appreciation rate from the spring has slowed and is expected to slow further, likely down to 0.5% or 1% a month by the end of the year.

    Forbearance:

    Forbearance numbers are only available on a national level and continue to improve. As of Monday, there are about 1.6 million borrowers in a forbearance plan, a huge decline from the over 8 million in a plan last May.

    The majority of borrowers exiting forbearance are staying in their home, with no flood of foreclosures coming. Estimates could go as high as about 20% of borrowers will need to sell at the end of their forbearance plan. 20% of 1.6 million is 320,000. If we divide that by the 50 states, then each state (if divided evenly) would see about 6,400 foreclosures.

    For a deeper dive into forbearance, foreclosures, and delinquencies check out my latest Forbearance Update here.

    Supply: 

    Shelter is a basic human need. Over the past 10 years our population grew by 20% and total inventory grew by 11%. We have more demand than we have houses.

    Single family permits are up 39.7%. And builders are struggling to keep up with the demand due to supply chain shortages and labor shortages. It is now taking 10-14 months to build a house.

    Supply stopped dropping in February. It is up 61% since February and up 44.3% since May. There was an initial shift in February and then a bigger shift in May as prices continued rising.

    Supply Increases by Price:

    • $300K – $400K up 62.4% since February and up 47.6% since May
    • $400K – $500K up 187% since February and up 99.7% since May
    • $500K – $600K up 171% since March and up 76.9% since May
    • $600K – $800K up 149% since February and up 64.5% since May
    • $800K – $1M up 100% since February and up 38.5% since June
    • $1M – $1.5M up 50.9% since February
    • $2M – $3M down 5.3% since March
    • $3M+ is up 2.1% since March

    Price Reductions:

    With the increase in supply, we are seeing an increase in price reductions. We often hear about sellers upset that they had to drop their price when their friend received multiple offers over asking only a few months ago. It was a different market in March and today’s sellers cannot expect the same.

    May 9 was the turning point and appreciation began moderating. In a normal market, you can expect to see about 400-500 reductions per week. In 2018 we hit 600. Now we are hitting about 200, still low but increasing. Not unusual, just unusual for the past year. Sellers can no longer push the market.

    A price drop of $5,000 used to be the norm. Two weeks ago it was $15,000 per reduction, a week ago it was $14,000, and now it is down to $10,000.

    In April the median days on market was 6. We are now up to 8 days.

    Demand:

    We have been hanging around normal demand for the past few months. Then last week demand increased. Where did that come from? Investors? iBuyers? The increased demand will keep us in a seller’s market longer. Increased supply decreases the strength of the seller’s market and increased demand increases the strength of a seller’s market.

    ibuyers have no effect on supply since they buy and sell. They impact demand. Show an extra transaction that can inflate demand metrics because they never have an occupant in the property.

    2019 had slightly above normal demand. Today there are 6.2% more listings under contract than in 2019 but 12.9% lower than in at this time last year.

    Typically demand decreases in Q3 and Q4. We should see inventory gains and fewer buyers. Many listings will likely be over-priced, and buyers will not pay over asking when they have a lot of options.

    We are still having a record year for luxury, amazingly high demand remains, usually this late in the year, luxury slows down as owners pull their unsold properties off the market by about June.

    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 5.4%), below 100 is a buyer’s market, above 100 is a seller’s market, prices drop below 90, prices rise at 110. 2014 was a balanced market.
    • On 3/20/2020 we were at 241
    • On 5/15/2020 we were at 145.2
    • Yesterday we were at 349.7
    • We peaked on 3/14/2021 at 514.9
    • Prior to this run, the previous peak was 312.9 in the spring of 2005.
    • CMI is the predictor, it moves first and then appreciation follows. Cannot predict the CMI. It tells us where we are.

    When the CMI weakens we see other weakening follow, like sales prices, appreciation, over asking, etc. We are now averaging a decline of 29.3 points over 30 days. Previously it was dropping 50 points over 30 days. It is slowing due to the increased demand.

    While the CMI will probably not move in a straight line, we are moving towards a weaker seller’s market. Tina expects we may level out around 200-240. It will feel like a buyer’s market but it won’t be. Likely will get to the 2019 numbers.

    As the seller’s market weakens, people will get very nervous about a market crash and declining property values. Remember demand needs to be lower than supply for prices to drop. With supply 69% below normal and demand nearly 9% above normal, it will take a long time for demand to be lower than supply. Before the 2008 crash there were 57,000 active listings. Today there are fewer than 7,100 active listings.

    Using 4 week averages and tons of past data, we can draw a trendline from the CMI, illustrating when we might reach a balanced market. No reason to believe that this will stay in a basic trendline. It will adjust and probably stay in the 200-240 range. It is only what we know today. Since each city is so different, it is best to check each one weekly. To show the variation between cities, these are the timelines in which they could reach balance:

    • Phoenix 7.3 months
    • Chandler 3.6 months
    • Glendale 3.8 months
    • Mesa 5.8 months
    • Gilbert 5.6 months

    Appreciation:

    CMI moves first and then appreciation follows, usually about 3-6 months later. In a seller’s market, the rate of appreciation is higher than the rate of inflation. The luxury market is pushing appreciation rates up even higher.

    Appreciation rates are slowing. It has gone from a year over year increase of 39.3% in May to 28.4% in August.

    For over a year we had a monthly appreciation rate of 3.1% but in the past few months, it has slowed considerably. Today it is at a 1.4% increase and will likely continue to slow throughout the rest of the year.

    Contract Ratio

    The contract ratio compares how many listings are on the market to how many are in escrow. Has it cooled off? Yes. Cold? No. In April it reached 332.5 and today it is 161.2. We are in a hot seller’s market but not an extreme seller’s market. In 2019 was 76. 75-80 is normal for August.

    Before the pandemic, the market was in a frenzy. We didn’t have enough supply and still don’t. In March we had 10 levels of insanity illustrating the seller’s market. Today we have 5. It is cooling but is not cold. We have been in a weakening seller’s market since March. It is only now getting noticed.

    54% of listings are selling for over asking. Two months ago the median amount over asking was $25,000 it has since dropped to $15,000. Now sales are averaging about 1% over asking versus the 1.8% it reached in the spring. Expect this to come down throughout the rest of the year.

    Final Thoughts:

    Overall, the market is still very busy. We are on the cusp of weaker seller’s market. We are seeing fewer purchases from regular owners and more from investors and ibuyers. It is still a good time to buy. BUT we need to watch the affordability levels. It is not about whether the buyer can afford it now but about how many future buyers can afford to buy it from today’s buyer?

  • Greater Phoenix Real Estate Update 8/13/2021

    It’s earnings season so the headlines are dominated by big business quarterly revenue numbers. Wall Street and residential real estate have a bumpy history.

    In late 2008 when the Greater Phoenix real estate market’s heart stopped beating and everything went eerily quiet, I didn’t understand what happened. Like many, I wondered, how could everything stop seemingly overnight? I asked, “where did all of the money go?” And I was told, “it never existed in the first place.” I learned that money did not just evaporate on Wall Street and that housing could take down Wall Street, or was it the other way around?

    In 2011 the market bottomed with a median sales price of $107,000 in greater Phoenix. Since 2014 we have been in a seller’s market and the recovery was slow. For a time, real estate felt local again. But was it?

    Venture Capital Funding:

    In 2015, young company, Opendoor, entered its first market, Phoenix. The company pioneered the iBuying concept and was backed by Softbank’s Vision Fund, one of the biggest funds in the world, allowing Opendoor to remain after continued losses. Seven years later the company still has not turned a profit but has billions more to keep trying, especially since going public last year. Big venture capital money continues its quest to disrupt real estate. Opendoor’s situation is not unique, the industry is ripe with unprofitable giants backed by big money. The chart below illustrates the magnitude of venture capital money in real estate, not limited to Opendoor.

    Credit: Mike DelPrete’s 2021 Emerging Models Report

    Valuations:

    Establishing valuations is complicated and the businesses with the highest valuation does not mean that they are the most profitable. Click here for more info on establishing valuations. Earnings alone only tell most of the story. As accurate pricing is established by both supply and demand, profitability is established by dollars brought in and dollars spent. The only way to be profitable is for a company to spend less than it makes.

    For example, eXp’s year over year Q2 2021 $1 billion in revenue led to an earnings increase of a whopping 183%. That combined with an 87% increase in agent count illustrates future growth potential and explains why eXp’s valuation has skyrocketed. eXp’s profit was $37 million or 3.7%.

    Meanwhile, RE/MAX’s revenue grew by 48%, bringing in $76.05 million for a profit of $5.2 million or 6.8%. RE/MAX has consistently been profitable for years, yet its valuation has remained stable.

    Credit: Mike DelPrete’s The Impact of Compass’ Declining Stock Price on Agents

    Earnings:

    Q2 2021 year over year earnings look extremely impressive given that the post lockdown real estate recovery started in May 2020.

    The AZ Market:

    Join us next Thursday 8/19 as Tina Tamboer with the Cromford Report does a 1 hour deep dive into the greater Phoenix housing market. For details and registration click here.

    Q2 2021 was one of the biggest multifamily construction quarters on record, there were 623,500 units under construction in the 150 largest apartment markets nationwide. In greater Phoenix there were 28,600 multifamily units under construction, increasing our multifamily base by 7.6%.

    These numbers are high but warranted. Nationwide apartment rents are up 8.3% year over year and occupancy is at a record high at 96.9%. Greater Phoenix continues to top the charts in year over year rents growth at 21.6%.

    Policy:

    The CDC extended the eviction ban through October 3 with slightly different criteria, covering about 90% of renters. In May, the Supreme Court ruled that the only way to extend eviction protections is with Congress’ approval. President Biden officially made that request to Congress while it is in recess, the only way for it pass is through a unanimous call-in vote. Furthermore, when the Supreme Court made its ruling it stated that it agreed with the plaintiffs in that the Supreme Court did not believe that the CDC had the authority to extend the ban in the first place. Of the $46 billion allocated for emergency rental relief, only $3 billion has been disbursed.

    On July 31, the foreclosure moratorium expired. The CFPB implemented specific rules in which lenders must abide by when foreclosing which will further delay most foreclosures. Abandoned properties will be foreclosed on first. There will be some foreclosures but not a flood. For greater detail on this and forbearance, please check out my AZ Forbearance Update from Wednesday, here. One major factor at play is the historic levels of equity most homeowners have.

    New iBuyer:

    Rocket Homes, a subsidiary of Rocket Companies which owns Rocket Mortgage, the country’s largest lender, is hiring employee real estate agents and is planning a “soon to be released iBuyer program” that will be managed through a third-party partner company.

    Rocket Homes, a licensed brokerage, which is already licensed in all 50 states (has been licensed in AZ since 2018) said that beginning in the fourth quarter of 2021, employee agents working from downtown Detroit will provide services to sellers at a discounted commission rate of 1.5% (the co-broke offered is unclear). The remote employee agents will advise on listing price, handle photos, enter listings in the local MLS, negotiate offers, and handle paperwork. Sellers who would prefer to work with an agent in their market will be referred to the Rocket Homes Verified Partner Agent Network. Sellers who don’t want to work with an agent at all can use Rocket’s ForSaleByOwner.com platform for free.

    Real Estate News:

    • A new Connecticut law is now regulating what Realtor teams may call themselves. They can use “team” but not “group” or “LLC” and also requires a $565 initial registration with an annual fee of $375. This is an awfully complicated way to increase state revenue. Will it catch on?
    • Citigroup, JP Morgan Chase, and other banks are offering a new high risk, high reward bond product and investors want in. While they are a very small part of the market, banks are selling riskier products that packages mortgages, car loans, and corporate debt. Investors are responsible for the losses when borrowers default on the loans packaged in the bonds.

    Final Thoughts:

    Long before residential real estate pulled us out of the shortest recession in history, Wall Street and Silicon Valley were plotting ways to infiltrate housing. While big money and new technology provide powerful incentives, it is very difficult to replace a well-informed, well-connected, local real estate professional.

    Copyright 2021 Sarah Perkins

  • Greater Phoenix Real Estate Update 7/30/2021

    In the past, the Phoenix housing market tended to run about 8-12 months ahead of the rest of the country. Over the past 18 months, our market has pretty much been on pace with the rest of the country until very recently. I would say that our market is running about a month ahead of the rest of the country so be mindful of national headlines, it is old news in Phoenix.

    Economy:

    The economy is in growth mode and many economists expect huge employment growth in September when the additional $300 a week in pandemic unemployment benefits expire. There are two scenarios in which economists forecast a growth reversal and push us into recession. The first is if the increased COVID cases shuts down the economy again. The second is the Federal Reserve tapering its $120 billion in monthly bond and mortgage-backed security purchases too quickly because if they do, interest rates will spike. The Fed met this week and are keeping rates as is. They are also not planning on beginning to taper their purchases until late in 2022. Given that the Federal government is the nation’s largest borrower, the Fed is not in any hurry to raise rates.

    Hopefully, the consumer inflation truly is transitory and settles down by the end of the year. It is the asset inflation that is impacting the economy. We have seen exponential asset inflation over the past 10 years. Economists, Wall Street, and Washington DC call it inflation. We call it appreciation. Houses in Greater Phoenix have appreciated 274% since 2011 when our median sales price bottomed out at $107,000. Today the median sales price is $400,000 which gives us a year-over-year appreciation rate of 27%.

    The AZ Market:

    On Wednesday I pulled the top 5 zip codes for year over year appreciation and was surprised that despite our nearly non-existent sub $300,000 inventory, it was not the lower-priced zip codes with the greatest appreciation rates. Only one zip code has a median sales price even close to the overall median. Luxury took the top spot.

    The top 5 zip codes for year over year appreciation:

    1.) 85253 at 49.8% with a median sales price of $2,397,500 (Paradise Valley)

    2.) 85260 at 43.8% with a median sales price of $575,000 (Scottsdale)

    3.) 85297 at 41.9% with a median sales price of $518,750 (Gilbert)

    4.) 85022 at 41% with a median sales price of $375,000 (Phoenix)

    5.) 85262 at 40.3% with a median sales price of $1,175,000 (Scottsdale)

    This huge appreciation is not like the 2005 bubble. Today’s appreciation is based on low levels of supply. In 2005 it was the high levels of demand, and of course a bunch of other stuff. We did have pent up demand due to the lockdowns in Q2 2020 which caused the frenzied purchasing in Q3 and Q4 2020. Demand peaked in late November 2020 at 35.4% above balance and declined continuously until July 20 when it bottomed at 5.1% above balance. Demand today is 5.9% above balance. That is an 22% decline in demand since November. But it didn’t feel that way because inventory has been so extremely low. The market intensity peaked in March and inventory is up 42% since then.

    “What a frantically interesting and engaging industry.”

    Mike DelPrete, Real Estate Tech Strategist

    Monthly sales have decreased by about 12% in the past two months. This is seasonally normal and also to be expected due to the increased supply and decreased demand. The slowing intensity feels weird, but our market is actually moving in a healthier direction. If you have clients expecting a market crash or price decline, they will be disappointed. This moderation will only slow the appreciation.

    An easy way to show anyone expecting a crash why we won’t see one is by using the Cromford Market Index, which is an awesome leading indicator. The index is available to anyone, without a subscription, at www.CromfordReport.com. Anything over 100 is a seller’s market. More importantly, the demand index would have to move below the supply index.

    http://cromfordreport.com

    Today’s buyers are better educated than ever before and they are doing their homework and are not writing such high offers. From the low point in mid-February to now weekly price reductions are up 182%. The majority of the reductions are in the $400K to $800K price range as this is the range with the highest increase in new inventory.

    In Q2 2021, investor purchases were up 15% from Q1 2021, Phoenix topped the charts with an increase of 25% in Q2 2021 from Q1 2021. Phoenix was also the most popular destination for Redfin users when looking outside of their own city.

    National Real Estate:

    • Purchase mortgage applications declined by 2% last week and that was after a 6% decline the week before. Purchase mortgage applications have declined, on an annual basis, for the past three months, reaching their lowest level since May 2020. High prices and continued competition are blamed for the declines.
    • On Saturday the foreclosure moratorium will expire. The CFPB implemented specific rules in which lenders must abide by when foreclosing which will further delay most foreclosures. Abandoned properties will be foreclosed on first. There will be some foreclosures but not a flood. Experts predict maybe 300,000 foreclosures which would be about 6,000 per state if divided up evenly. For details on the CFPB’s foreclosure rules, forbearance, and delinquencies, check out my update from Wednesday, here.

    “Pending sales have seesawed since January, indicating a turning point for the market. Buyers are still interested and want to own a home, but record-high home prices are causing some to retreat. The moderate slowdown in sales is largely due to the huge spike in home prices.”

    Dr. Lawrence Yun, NAR Chief Economist

    iBuyers:

    In order to compete in this fast-paced market, during the first half of 2021, the country’s biggest iBuyers (Opendoor, Offerpad, Redfin, Zillow) expanded their buy box by upwards of 40% and increased their offers to an average of 104.1% of market value. In 2020 the same iBuyers offered an average of 97.6% of market value.

    Simultaneously, iBuyers also dropped their fees to an average of 5.1% at the end of Q2 2021 from an average of 7.2% in 2020. Between the increase in offers and decrease in fees, consumer’s costs are down by 35% this year.

    And iBuyer purchase activity is way up. In the past three months, Opendoor has acquired more properties than it did in all of 2020.

    Final Thoughts:

    Throughout the rest of the year, expect a further weakening of the seller’s market. The declining affordability and buyer fatigue combined with increased inventory are leading us towards a more normal, balanced market. When housing is more balanced, it is not quite as exciting, but it is much healthier and allows for long-term growth. We finally are getting to the calm after the housing storm.

    Copyright 2021 Sarah Perkins

  • Greater Phoenix Real Estate Update 7/2/2021

    The market is softening = slowing = normalizing = moving closer to balance which are all good things even though it feels weird. After the wild ride of 2020 and the nearly non-existent inventory levels of Q1 2021, the real estate market is working out its kinks. I have mentioned it before and will say it again, it is impressive what a person can get used to. We got used to 10 or 15 buyers for each listing. We even (kinda) got used to only 4,000 active listings (when we should have 25,000). Now we have to prepare today’s buyers and sellers (and ourselves) for another new normal, a much healthier one.

    National Real Estate:

    Existing home sales declined again for the fourth consecutive month in May but the rate of decline is slowing. Sales are down by nearly 1% since April and 14% since February to a seasonally adjusted rate of 5.8 million units. In 2020 there were 5.64 million existing home sales. Low inventory, falling affordability, and buyer fatigue are blamed for the declines. Sales are nearing pre-pandemic levels as the market continues to normalize and the pent-up demand from last year is exhausted.

    Speaking of falling affordability, the median existing-home price for all housing types in May was $350,300, up 23.6% from May 2020 ($283,500). This is an NAR record high and marks 111 straight months of year-over-year gains since March 2012.

    Pending home sales increased by 8% in May, month over month, after declines in April. The increase is attributed to the low interest rates and increasing inventory. Nationally, active inventory is up by nearly 16% since February.

    New Construction:

    New construction sales declined by 5.9% in May month over month, to an annualized rate of 769,000 units. This is the second month in a row of declines, April also had a 5.9% decline in new home sales. Rising sales prices combined with lumber, labor, and material shortages are blamed for the decline.

    Meanwhile, housing starts increased by 3.6% during the same time period putting new construction inventory levels at 5.1 months. When inventory levels are 4.3 months or less builders are happily building, when inventory levels are 4.4 to 6.4 months builders need evidence of sales growth to continue building, and at 6.5 months or more builders slow or even stop production. Builders only build houses they know they can sell.

    The new construction sales chart below shows the initial declines in sales followed by a giant increase and the recent declines from that peak level.

    The AZ Market:

    Here in Greater Phoenix, when it comes to real estate, everything is magnified. In 2008, when the market crashed, as a country values declined by 25%. Phoenix saw 45% declines. Today, as the entire country sees 23.6% year over year appreciation, Phoenix’s appreciation rate reached 33%, year over year. It should come as no surprise that as the market normalizes, Phoenix is normalizing faster. Inventory is up nationally 16% since February, in Phoenix, it is up by nearly 28% since February.

    May’s Case-Shiller Home Price Index was released on Tuesday. For the 11th month straight, the US has seen price gains. In May it was 15.4%, year over year, the highest reading in over 30 years. Greater Phoenix has topped this chart for the past 23 months and in April came in with a 22.3% year over year price gain. Case-Shiller is what the federal government, national builders, and Wall Street use to gauge price appreciation.

    Cities like San Francisco and New York had huge rental declines. Not only do Phoenix and Tucson top the charts for rental appreciation but four valley cities are in the top 10 fastest growing rents since March 2020.

    ShowingTime’s latest data shows that home showings saw an unusual dip in May, which could indicate further market stabilization. Nationally, showings usually peak in April and remain high through June. In AZ showings slow in the summer more than other parts of the country. We are currently running 32.4% below this time in 2019 and 24.4% below this time in 2020. (Phoenix declines were larger than the national declines)

    Evictions, Foreclosures, and Forbearance:

    Last week the CDC extended the eviction moratorium through the end of July and stated, “this is intended to be the final extension of the moratorium.” On Tuesday the Supreme Court denied the requests to lift the nationwide eviction moratorium filed by the Alabama and Georgia Realtor associations last November. Justice Brett Kavanaugh agrees that the CDC overstepped its authority by issuing the ban but denied the request. The Supreme Court will frown on any further extensions without congressional approval.

    Last week the foreclosure moratorium was also granted a final extended for another month, now set to expire on July 31. On Wednesday the CFPB announced its final ruling on how mortgage servicers are to handle foreclosure proceedings. Only those borrowers who do not qualify for assistance, fail to meet the assistance agreement, who are unable to be reached, or the home has been abandoned are able to be foreclosed on once the moratorium is lifted. Servicers must contact delinquent borrowers prior to foreclosing to offer loss mitigation plans. The rule goes into effect on August 31 which likely means that servicers will not be able to initiate foreclosure proceedings until the end of the year. For more information on the CFPB’s ruling and forbearance info, check out my AZ Forbearance Update from Wednesday, here.

    Lending:

    Rising sales prices likely caused the 5% week over week decline of purchase mortgage applications last week. They are also down by 17% year over year.

    Ginnie Mae announced a new 40 year mortgage term option created for struggling borrowers in order to lower their monthly payments and keep them in their home. The product will be available in October and will be sold on the secondary market.

    New Laws:

    • Within hours of the June 23 Supreme Court ruling, stating that the FHFA’s structure is unconstitutional, giving new power to the president to fire the head of the FHFA, the White House announced plans to replace Mark Calabria, the head of FHFA. Calabria then resigned and by the end of the day, Sandra Thompson was appointed as acting director of the FHFA. Her appointment will likely lead to more policy change and diminishes the likelihood of Fannie Mae and Freddie Mac’s exit from conservatorship. The irony behind this activity is that this lawsuit was brought by investors hoping to end the conservatorship so profits would flow to the investors rather than the government. Thompson’s appointment all but guarantees that Fannie and Freddie will remain in conservatorship for years to come.

    Real Estate News:

    • Not only are consumers using cryptocurrency to buy houses, now people are talking about utilizing non-fungible tokens (like crypto, stored on blockchain ledgers) for homeownership. This NFT-ing of real estate would allow the ownership of a home to be held in one digital wallet which opens up new options for fractional ownership.
    • A credit card provider says it’s partnering with landlords, like Blackstone and Lennar, to help provide “every young person a path to homeownership” by allowing them pay their monthly rent with a credit card, and apply the points they earn to making a down payment on a home. (I am not sure this is best idea)
    • Offerpad is now a mortgage broker. Offerpad Home Loans is licensed in AZ, CO, and AL and plans further, rapid expansion. Will they offer seller carrybacks? If so, the impact to traditional lending could be significant by nearly eliminating appraisals and other typical loan application steps required by traditional lenders.
    • Yesterday the Department of Justice withdrew the proposed settlement and the lawsuit it filed last November against NAR. The settlement for the antitrust lawsuit required NAR to repeal or change several rules regarding buyer agent commissions. The DOJ plans to refile the suit at a later date.

    Final Thoughts:

    Elliott Pollack wrote on Monday, “The impacts of supply and demand imbalances continue to be on full display in each weekly release of economic data. Consumer spending on goods has been hampered, not by lack of demand, but rather bottlenecks in production and the supply chain. Demand has stayed incredibly strong due to pent-up savings, and is driving up prices, with housing at the forefront. Fortunately, with continued vaccinations, more and more of the economy has reopened and spending will shift from goods towards services. This will help drive the country toward full economic recovery and will bolster those industries hit hardest such as food services, tourism, and hospitality.”

    Copyright 2021 Sarah Perkins

  • Greater Phoenix Real Estate Update 6/25/2021

    Today is all about the AZ market. On Tuesday, Lawyers Title hosted a presentation with Tina Tamboer with the Cromford Report. 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.

    Why Do We Have a Housing Shortage?

    From 2000 to 2009 we over-built for the population. From 2010-2020 we under-built for the population. In 2004-2006, speculation building on credit caused huge problems. When the lending dried up, we had huge price declines. This is not a gap that can be closed easily.

    True demand is based on population. With 290 people moving here a day, we have the population to support more building.

    As housing units increase and reduce the gap between building and population growth the strong seller’s market will weaken and could even go flat. Check out the population growth versus housing unit growth. In 2008 we built 0.6 units for every added person. In 2012 it was 0.11 new units per person. In 2020 (through July) it was 0.30. 0.4 per person is ideal.

    In 2000 there were 2.44 people per household, it then declined through 2009 and bottomed out at 2.32.  Through July 2020 it reached 2.53 people per household. Arizona is #13 for having the most people per household in the country. How many houses are only for tourists? We do not know for sure. There is not a lot of available data on short term rentals. There are many properties that are short term rentals that are not registered as short term rentals.

    The areas with the most new developments are also the areas with the most population growth. Queen Creek tops the charts at 16.2% population growth. Pinal County’s population growth outpaced Maricopa County’s.

    The Greater Phoenix Economic Council (GPEC) expects a 14% population increase by 2029. 11.2% of that growth in Phoenix, 13.8% on the east side, and 26.4% on the west side. This population growth is projected in conjunction with all of the job growth. GPEC has really focused on bringing in a lot of new jobs. In 2010 we were all real estate and tourism. Today our job market is much more diverse.

    New Development: 

    • For interactive maps on land use and locations of new development, visit http://geo.azmag.gov/maps/landuse/
    • Single family permits are up 40% year to date. 25% fewer than in 2005 at this time.
    • Builder associations are reporting real material shortages. 90% of builders are saying that something is behind and slowing them down. 95% are saying it is a slow down in appliances.
    • Lumber prices are dropping but are not expected to reach pre-pandemic prices.
    • Home renovations are starting to slow because people are going back to work.

    Cromford Market Index (CMI):

    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, below 100 is a buyer’s market, above 100 is a seller’s market, prices drop below 90, prices rise at 110. 2014 was a balanced market.
    • On 3/20/2020 we were at 241
    • On 5/15/2020 we were at 145.2
    • Yesterday we were at 422.6
    • We peaked on 3/14/2021 at 514.9
    • Prior to this run, the previous peak was 312.9 in the spring of 2005.
    • CMI is the predictor, it moves first and then appreciation follows. Cannot predict the CMI.

    How long can we expect to be in this market? Some people think we are on the cusp of a market crash. While it is not a crash, the market is softening. Inventory is increasing more quickly than demand is declining. Demand has declined by 0.7 points in the past 30 days, while inventory has increased by 1.6 points. More options for buyers. It is not about the demand right now, it is about supply.

    More listings are coming to market and staying active. The CMI is dropping because inventory is increasing. As inventory increases sellers are getting fewer offers and people are noticing.

    How long will be in a seller’s market? Do not predict the CMI. It is not predictable. It is the predictor.

    If we are dropping 27 points a month it will take a year to go to balance. By the end of December, we could be at 265, still a very strong seller’s market. This is a trendline, things can change quickly and each city has its own distinct market trendline.

    As the seller’s market weakens, people will get very nervous about a market crash and declining property values and think may wait to buy. Remember demand needs to be lower than supply. With supply 75% below normal and demand nearly 7% above normal, it will take a long time for demand to be lower than supply. Before the 2008 crash, there were 57,000 active listings. Today there are fewer than 6,000 active listings. We do not have lots of listings. The housing market isn’t like bitcoin. We are not overbuilding without the population growth. Prices are not going to drop.

    Using 4 week averages and tons of past data, we can draw a trendline from the CMI, illustrating when we might reach a balanced market. No reason to believe that this will stay in a basic trendline. It will adjust. It is only what we know today. Since each city is so different, it is best to check each one weekly. To show the variation between cities, these are the timelines in which they could reach balance:

    • Phoenix 14.3 months
    • Chandler 13 months
    • Scottsdale 8 months
    • Mesa 5.5 months
    • Gilbert 4.8 months

    Always look at demand. Today’s high CMI is mostly based on low supply. When demand drops below normal, there are fewer transactions, but prices still go up, just more slowly. Mortgage lenders loosened credit slightly in May. Demand increases when it is easier to get a loan. Low rates are still desirable.

    For Sellers:

    This means that as we come out of a strong seller’s market and into a weaker one they may have to pay seller concessions. In a strong seller’s market, only about 3% of sellers pay concessions. In a weak one, 25% of sellers pay concessions. They also have to make more repairs and the property will likely spend more time on the market. The market is still super hot and it is a great time to sell.

    For Buyers:

    It is still a great time to buy. Interest rates are low. Home prices will only continue increasing. Buyers last year who opted to wait are now paying 30% more for the same house. In Q1 2021 62.8% of homes sold were affordable. In 2005 26.6% of homes were affordable. Wages have increased 26% in the last 5 years. Rents are up 23%. To buy the median house with 10% down the monthly payment is $1843 a month. To rent the same house, renters are spending $1975 a month. It is cheaper to buy.

    Inflation:

    Hit 5%. People are talking about housing prices dropping due to inflation. Low inflation is not necessarily good. Low inflation happens when people are not spending their money. Inflation increases because people are spending a lot of money. We had a stimulus that drove more spending. The spikes in spending doesn’t always last. We were told to stay home and then they gave us money so we spent it on stuff like boats, guns, cars, clothes, appliances, etc. We were not making any new stuff to replace what we bought so we ran out and prices went up. Supply and demand.

    Inflation is the relationship of appreciation. The rate of inflation is the appreciation in a balanced market. The buyer’s market appreciates a lower rate than the rate of inflation. Seller’s markets appreciate at a rate higher than the rate of inflation.

    Forbearance:

    Forbearance could speed up the rate at which we move to balance. There are about 2 million mortgages in forbearance. What will happen in July? Struggling borrowers have until June 30 to enter into a forbearance plan and will have the ability to stay for 12 months. Forbearance exits will be spread out across the next 12 months. Most homeowners are staying in their homes after exiting their plan. About 15% of borrowers are leaving forbearance without a loss mitigation plan in place. Divided up by state, we could have about 6,300 borrowers that need to sell.

    Supply:

    Supply is up 28% since February but is still 40% below this time last year. If we got 6,300 new listings we would match where we were in 2018.

    Certain price ranges have bigger increases than others:

    • $300K-$400K is up 31.4% since February.
    • $400K-$800K is up 79.5% since February.
    • $800K-$1M is up 67.6% since February.
    • Over $1M is up 10.1% since February.

    More and more homeowners are comfortable with selling their home now. We are seeing the high side of seasonality and going into the summer slowdown, which is normal. We are following the 2019 trends, which is a good thing. A more balanced market is a healthier market.

    Price Reductions:

    Price reductions have increased by 70% from 2/14/21. We are seeing a lot of price reductions but not a lot compared to other years. This is a trend.

    Demand:

    Listings under contract are down 16.9% from this time in 2020 and down only 5% from this time in 2019. Again, here price point matters:

    • $300K-$400K listings under contract are down 3.6% below 2020.
    • $400K-$800K listings under contract are up 24.3% above 2020.
    • $800K-$1M listings under contract are up 42.2% above 2020.
    • $1M+ listings under contract are up 56.4% above 2020.

    So far in June, 61.5% of listings sold over asking, reflecting contracts written 30-45 days ago, the market was different 30-45 days ago. June closings are closing 2% higher than their list prices. 97% is the normal range for closing. June is 102%. The median amount over asking is $20,000.

    The median days on market is still only 6 days, the same as February. This number will start to go up due to the increased inventory.

    2021 is now the new benchmark with the biggest sales count ever from January through May. There have been 1.1% more sales than in 2005.

    Luxury had the biggest year ever in 2020 and so far in 2021 it is continuing. The first 5 months of 2021 saw an increase of 147% in closings for properties over $1M.

    Final Thoughts:

    The seller’s market is weakening but we do not have desperate sellers so we are not in a buyer’s market. Inventory is rising and demand remains solid. May had an appreciation rate of 39% and June, so far, is at 38% appreciation. The appreciation rates will slow as more inventory comes to market and slowing appreciation is a good thing. There is lots of job growth with more to come.

  • Greater Phoenix Real Estate Update 6/18/2021

    The real estate market continues to shift and change, slowly moving towards normalization. Prices continue to increase, demand is slightly subsiding, and inventory is growing (and has a LONG way to go). The intensity is cooling (from 500 degrees to 350 – its still HOT), and fatigued buyers are writing fewer offers before one is accepted. The headlines attempting to explain the still very hot, yet cooling market seem to be causing more confusion than clarification.

    National Real Estate:

    A recent report from CoreLogic states that homeowners gained $1.9 trillion in equity in Q1 2021, which is a year over year increase of 19.6%. Going deeper that breaks down to an increase of $33,400 in equity per homeowner and is the highest gain in over 10 years. Arizona’s year over year average equity increase is $51,000!

    Demand is slowing and the market is cooling. Pending sales are down (4.4% in April from March). Mortgage applications are down 7% from the average levels from January and February 2020. Redfin’s demand index is down 12% from the peak in late March. These shifts are not a bubble bursting but gradual changes towards a more normal market. Given the extreme imbalance during the winter and spring, it will take well over a year before we have a balanced market.

    Active single family inventory climbed another 3.8% this week to 342,000. That’s now up 11% from the bottom on April 30, but still 51% lower than this time last year when inventory started falling 1-2% a week.

    The Altos market action index is another tool to gauge demand. Any reading above 30 is a seller’s market. The notable change is that the weekly reading (dotted line) dipped below the 90-day rolling average for the first time all year. This shows that the market is not getting hotter from here but is still very hot.

    The AZ Market:

    -For a deep dive into the Greater Phoenix market, join us on June 22 for a Cromford Market Update with Tina Tamboer. For details and registration, click here.

    -Greater Phoenix’s median monthly appreciation rate has declined by maybe 1%, down to 31% year over year. (yes, you read that correctly) Healthy appreciation is 3-6%. Today’s huge appreciation rates are due to low inventory levels and not super high demand. Demand remains solid but is only about 7% above normal.

    -Inventory levels in Greater Phoenix have increased by 10% since the end of May, matching listings counts from the end of January.

    -Habitat for Humanity is building its first 3D printed house in Tempe. The goal is to expedite the building process while reducing labor and construction costs. About 70% of the building will be printed and the remaining 30% will be built through traditional construction. The selected family will move into the 1,600 square foot, 3 bedroom, 2 bathroom home this fall.

    -In Q1 2021 the Maricopa County Assessor’s Office received twice as many construction permit requests as in 2019 and 2020. A total of 19,232 residential and commercial permits were requested. This increase was expected.

    “[We’ve] been seeing this trend now for a number of years, so I think we’re all scaling toward that. It wasn’t like one day the door got opened and a flood of water just rushed in, this has been just kind of a growing trend that we’ve been monitoring over the last several years.”

    – Eddie Cook, Maricopa County Assessor

    -NAR has identified both Phoenix and Tucson as top 10 commercial real estate markets in 2021.

    –Phoenix took the top spot in Origin Investments’ machine learning database that identifies cities with “promising fundamentals for success.”

    New Construction:

    Lumber prices have declined by 40% since early May. Timberland industry executives, from several different companies, have been selling off company stock at unusually high rates indicating that Wall Street expects lumber prices to continue to decline.

    “This level of selling is simply unusual and to have this type of alignment among peers like this is unusual. It shows a consensus within the group about how they are thinking about their stock prices.”

    -Ben Silverman, director of research at stocks analytics firm InsiderScore

    The speedy price appreciation of not only lumber but appliances and other materials needed for new construction slightly reduced June’s builder confidence rating to 81 in June, from 83 in May, the lowest level since August 2020. Ratings over 50 reflect strong market conditions.

    Nationwide, single family housing starts increased by 4.2% from April to May while completions were down by 2.6% and permits declined over the same time period.

    Housing Shortage:

    According to a recent NAR report, construction declines over the past 30 years has created a 5.5 million unit housing shortage nationwide. NAR is calling for a “major national commitment” for more building of all housing types, especially for more affordable housing units. To close the gap, builders will have to build 2 million homes a year for the next 10 years. When you combine the underbuilding count with housing demolition (intentional or disaster) the shortfall grows to 6.8 million units.

    NAR is asking the government for help. It will take federal policy to increase the rate of construction to the levels needed. Builders build homes to make money and after the 2008 crash, builders are even more careful with the bottom line. When interest rates rise, new construction takes a bigger hit than resale. In 2018 when mortgage rates moved up to 5%, new construction inventory grew to 6.5 months and builders stopped building. When rates declined in early 2019 inventory declined and builders started building again. When rates increase or demand declines, what will keep the builders building?

    “Unless the government steps in to build when new home sales demand gets soft, we will not add homes to the builders’ demand algorithm. Builders have learned to tightly control inventory by retreating from construction when demand becomes slack. Building more homes is bad business during weaker times.”

    -Logan Mohtashami, HousingWire’s Lead Economist

    Rentals:

    The average size of apartment units under construction is 50 square feet larger than the average apartment unit built over the past five years. The new units allow space for a home office.

    In May, the median rent for multifamily properties increased by 2.5% year over year, matching the growth rate of March 2020. At 9.6%, Phoenix had the second-highest multifamily rent growth behind the Inland Empire, CA. San Jose, San Francisco, and NYC still have negative growth but are improving.

    In April, single-family rents grew by 5.3% nationwide, more than double the April 2020 growth (2.4%). Phoenix’s growth led the country, again, at 12.2% year over year. Chicago and Boston both saw negative growth.

    Remember when rental prices increase as quickly as sales prices the market is operating on healthy fundamentals. When rents decrease while sales prices increase it is a bubble market. Prices decline due to vacancies, which neither the purchase nor rental market have much of.

    Real Estate News:

    Final Thoughts:

    Remember real estate changes slowly. Yes, it has never moved so quickly but it doesn’t change overnight, despite what it seems. By understanding the implications of the slight shifts, we can all better council our clients. And while Sean Black, CEO of Knock, believes that within 5 – 10 years buying a house will be like booking a short term rental on Airbnb, a lot has to happen first.

    Copyright 2021 Sarah Perkins

  • Greater Phoenix Real Estate Update 6/11/2021

    At Weight Watchers, the first five pounds lost is celebrated, regardless of the end goal. The celebration is to acknowledge the initial progress towards a healthy lifestyle. While today’s residential real estate market remains unhealthy (remember when 10% appreciation was a lot?), initial progress has been made. Prices are leveling off, supply is increasing, and immediate sales are declining. This is good for buyers, especially first-time homebuyers, who are the key to the real estate market. Without them, the machine stops.

    National Real Estate:

    Pending Sales:

    Pending home sales declined by 4.4% in April from March but were up 51.7% year over year (keep in mind April of 2020 was not a big month for contract signings). Low supply and fast-rising prices are blamed for the decline.

    “Contract signings are approaching pre-pandemic levels after the big surge due to the lack of sufficient supply of affordable homes. The upper-end market is still moving sharply as inventory is more plentiful there.”

    -Dr. Lawrence Yun, NAR’s chief economist

    Another potential correlation is the decline in personal savings rates, which dropped from 27.7% in March to 14.9% in April. People are spending more on services and entertainment as the economy reopens. Last year’s closures allowed people to accrue a down payment much more quickly than in the past.

    While pending sales do not tell the whole story, they are a leading indicator and help us gauge where the market is going.

    Pricing:

    51% of homes sold above asking price in May. Last May it was only 26%. As more inventory comes on the market, these numbers will fall and appreciation will slow, which is good for the overall health of the market.

    In a balanced market, about 30% of listings take a price cut before they sell. In hot markets, it is about 25%. Today, we are at 17.1%. This number is ticking up each week from a low of about 8%. The insanity of the pandemic market is calming down and starting to normalize showing we are not in a bubble market.

    According to a recent report from Black Knight, the annual rate of home price growth hit 14.8%. The top five markets with the biggest growth are (1) Austin at 24.9%, (2) Phoenix at 24.4%, (3) Riverside at 22.3%, (4) Seattle at 20.8%, and (5) Sacramento at 20.8%. These levels of appreciation are not sustainable and are nearing the tipping point where affordability issues will slow the appreciation.

    Inventory:

    Active single-family listings increased again by about 2,500 to nearly 330,000. Inventory is up 7% from the April 30 bottom but remains 53% lower than this time last year. There still are more buyers than sellers.

    Three weeks ago, just over 29,500 listings sold in less than 24 hours. This week it was just over 23,000. Homes are staying active slightly longer than before.

    The AZ Market:

    For a deep dive into the Greater Phoenix market, join us on June 22 for a Cromford Market Update with Tina Tamboer. For details and registration, click here.

    58% of homes sold above asking price in May in Greater Phoenix, so far in June that number is 62%. In the past 30 days pending sales have declined by 5%, inventory is up 6%, and price reductions are up 23%. On Monday, Elliott Pollack & Company wrote a great explanation about what this means.

    He wrote: “For about 22 consecutive months, Maricopa County has led the nation in housing price appreciation. In the last year, prices are up somewhere around 20% according to several sources. The Information Market suggests that prices for May 2021 are up 43% since May 2019. And in May of this year, the median sale price of a resale home surpassed the median price of a new home, something that is rarely seen. Prices are rising due to (1) limited for-sale inventory and (2) demand as Greater Phoenix continues to see in-migration.

    So are we in a bubble? A bubble is typically driven by a surge in asset prices that is fueled by irrational behavior and disconnected from fundamentals. By that measure, what is happening in housing today is the opposite of a bubble and should help drive the economy. While the impact of the Great Recession and the collapse of the housing market is still a fresh memory, the damage to the economy was from the subprime mortgage fiasco. There is little evidence today that lending standards are anywhere near those of 2004 through 2007.  

    Some observers believe that it will be quite a while before supply overwhelms demand. The demographics of the population provide a huge tailwind for housing. The key is Millennials and those behind them. They make up the bulk of first-time homebuyers and their numbers will keep growing over the next decade.  

    The hot housing market will eventually cool as supply catches up to demand. But in no way does this runup in the market suggest that a bubble has formed similar to what we saw 15 years ago. The age of high-risk derivatives is gone as financial regulations have prevented a repeat performance. Rather this market is built on a solid foundation of a homeowner’s ability to pay a mortgage. We just need more housing.”

    Inflation:

    According to economist, Elliot Eisenberg there are two types of inflation currently impacting the US economy. Base-effect inflation measures declining prices which we had a year ago so the year-over-year numbers are large. This inflation should settle down by the end of 2021. Bottleneck inflation is based on current shortages both in supply chain and labor and shows up as month-over-month inflation. This is the inflation to watch today.

    Employment:

    After two months of missing the expected job numbers, the data suggests that the supercharged economic recovery may be a little bumpier than initially anticipated.

    “This is also a great time to remember that it is much easier to shut down an economy than it is to open one back up and we are still experiencing the pain and effects from government actions over a year ago.”

    -Elliott Pollack

    Only 559,000 jobs were added in May, 671,000 were expected, bringing the unemployment rate down to 5.8%, a year ago it was 14.8%. There are currently 8 million job openings and 9.3 million people unemployed in all categories.

    The lackluster job reports reduce pressure on the Federal Reserve to taper its $40 billion monthly mortgage-backed securities buying program. When to begin the tapering will likely be discussed at the upcoming Federal Open Market Committee meeting on June 15-16. Experts believe it will be late this year or early next year and when the tapering begins mortgage interest rates will rise.

    “The decrease in initial claims for unemployment insurance in recent weeks, the continued robust demand for workers as shown by the high level of job openings, and other data showing increasing economic activity, point to more hiring over the summer. MBA is sticking with our forecast of a 4.5% unemployment rate by the end of the year.”

    – Mike Fratantoni, senior vice president and chief economist for the MBA

    Real Estate News:

    • Offerpad may be the first major iBuyer to become profitable. In Q1 2021 Opendoor’s net loss was $270 million or nearly $13,000 per home, Zillow Offers’ net loss was $58 million or about $30,000 per home, while Offerpad’s net loss was only $233,000 or $229 per home.
    • Earlier this week the DOJ announced that it had tracked down 63.7 of the 75 Bitcoins Colonial Pipeline paid ransomware hackers, illustrating that cryptocurrency is trackable. Could this lead to an increase in legitimate, large-scale transactions – like buying real estate – using cryptocurrency? Potentially.

    Final Thoughts:

    Sam Khater, Freddie Mac’s chief economist said, “The economy is recovering remarkably fast and as pandemic restrictions continue to lift, economic growth will remain strong over the coming months. Despite the stronger economy, the housing market is experiencing a slowdown in purchase application activity due to modestly higher mortgage rates. However, it has yet to translate into a weaker home price trajectory because the shortage of inventory continues to cause pricing to remain elevated.”

    Copywrite 2021 Sarah Perkins

  • Greater Phoenix Real Estate Update 5/28/2021

    “Buy land, they’re not making it anymore.” ~Mark Twain

    April saw its best sales rate in 15 years and at the same time sales declined again for the third straight month. Homes are selling faster than ever before, and prices are higher than ever before; yet the signs are all there, the market is slowing – very slowly – and just starting to normalize.

    “One of the main reasons that inventory can keep falling as it has and sales overall continue to grow is precisely because of this faster market velocity. And unlike previous periods when demand for homes was high and time on market short, notably the pre-2008 housing boom, the market this time around is driven by sound fundamentals unlikely to fade anytime soon.”

    ~ Treh Manhertz, Zillow

    National Real Estate:

    Pending sales for the seven-day period ending May 16 were down 10% from four weeks prior, compared to an 8% increase during the same period in 2019. (NAR)

    In the past week, single family inventory increased by 10,000 listings or 3%. This is the biggest increase in new inventory since June of 2019. That is a three-week trend of increasing inventory and it takes three weeks to see a trend. Nationwide, during normal market cycles, inventory tends to peak around August. Expect more slow increases in inventory in the coming weeks. It will likely take years to get to normal levels.

    Last week just over 29,500 listings sold in less than 24 hours. This week it was just shy of 27,000. Homes are staying active only hours longer than in previous weeks.

    88% of homes are selling in 30 days.

    Price reductions tend to be very cyclical. Usually, by mid-May we see more people cutting their prices before they go too deep into the summer. We are just barely starting to see the seasonality now with 16.3% of listings taking a price reduction. The average is around 28%. Markets remain very hot, yet we are slowly starting to move closer to normal. Now is not the time to push the market or overprice a listing.

    New Construction:

    New home sales fluctuate more than resales month to month. It is not unusual to go positive growth, negative growth, positive growth. A more stable approach to new construction is by measuring monthly supply levels, averaged over three months. At 6.5 months builders stop building. Below 4.4 months business is good and builders are building. At 4.4 to 6.5 months, the market is fine. April’s report shows a 3-month average supply of 4.23 months.

    Housing permits, starts, and builder’s confidence levels remain strong. Affordability challenges for both buyers and builders are the root of the falling numbers. Buyers and builders are both benefitting from the low-interest rates which will not last forever.

    In order to manage labor and supply chain shortages as well as the skyrocketing costs of materials, many builders are adjusting how they work with buyers. Some builders are building spec houses to sell outright, some are waiting to go under contract once they are closer to the build start date, and some builders are going under contract without a finalized price.

    “In the short-term, inventory shortages will persist. U.S. Census Bureau data from earlier this week showed residential housing starts have started to slow due to challenges in the cost and availability of building materials.”

    ~Joel Kan, MBA’s Vice President of Economic & Industry Forecasting

    The AZ Market:

    Greater Phoenix took second place in two recent price index reports. One for losing affordability and the other for the annual appreciation rate, which is pushing 32%!

    On Monday, local housing economist Elliott Pollack wrote, “Permits in Greater Phoenix were above 3,000 for the second month in a row, bringing the year-to-date total to almost 12,000 permits. The median sales price for both resales and new homes increased to $365,000 and $370,878 respectively, narrowing the gap between resale and new home prices to just $5,878.”  

    MLS Aligned is a new showing scheduling service that is co-founded and owned by five MLS’s, including ARMLS. Due to a 12-year-old ARMLS policy that doesn’t allow vendors to also be broker members, ARMLS will not extend the contract with ShowingTime after its expiration on 1/1/2022. Zillow is both a member of ARMLS and the owner of ShowingTime. The other co-owners are Metro MLS in WI, MLSListings in Silicon Valley, RMLS in OR, and UtahRealEstate.com.

    Earlier this year Scottsdale formed a municipal committee that consists of residents, Realtors, hospitality officials, and two city council members to research and track the city’s short-term rentals. Over the past three weeks, two city employees found 1,000 short-term rental locations that are currently are in violation of contract or tax licensing requirements. Will this committee set a precedent for other cities?

    Greater Phoenix retail vacancy rates decline as 99.6% of the lost retail jobs have been recovered. Leasing activity is up 18% year over year and up 85% since the whole decline in Q2 2020.

    Greater Phoenix has recovered 73.6% of jobs lost while the US has only recovered 63.3% of jobs lost.

    Earlier this week the Case-Shiller Index released its March numbers. Nationally, March saw a 13.2% year-over-year appreciation rate. Greater Phoenix had the highest appreciation rate of 20% year over year. Economists, Wall Street, and the federal government use Case Shiller’s data on appreciation rates. The index is considered a “repeat sales index” which means that it looks at the difference in sales price from when a property is purchased and when it is sold. It is a very accurate way to monitor home prices. The downside is that it is a very slow report, these are only March’s numbers.

    Commercial Real Estate:

    Apartment complex vacancy rates are expected to hit 4.55% this year, 4.38% in 2022, and 4.18% in 2023. All of those are lower than the 20-year average and significantly lower than the 7.2% apartment vacancy rate reached in 2009.

    Corelogic recently announced that single family rents increased nationwide by 4.3% in March. The cities with the largest-double digit rental increases were Phoenix and Tucson. Renting costs more than buying!

    Lending:

    Purchase mortgage applications increased for the second time in May after a weak April with multiple declines.

    In 2020, 15% of buyers purchased homes with cash. Through mid-May 2021 that number has grown to 25%.

    A new bill has been proposed to create a new loan program similar to a VA loan that allows first responders, law enforcement, and teachers to borrow up to 100% of the acquisition price.

    Real Estate News:

    • Chlorine prices have increased by 36% year over year. New pool demand is up 20% year over year after 2020’s large increase over 2019. Expect chlorine prices to continue to climb.
    • In addition to the Georgia and Alabama Association of Realtor’s lawsuits against the CDC’s eviction moratoriums; the Florida Association of Realtors filed a lawsuit against the CDC stating that the CDC does not have the authority to be the “nation’s landlord-in-chief.” NAR supports all three lawsuits and stated, “

    “Nearly half of America’s rental housing is provided by mom-and-pop property owners who own four units or less. These providers will be hesitant to pour their sweat and savings into housing if a government entity without oversight can seize their only ability to generate income. Many have struggled for more than a year to pay their bills and maintain their properties as legally required. This future uncertainty will suppress the availability of affordable rental housing in America.”

    Final Thoughts:

    Yesterday, Elliot Eisenberg wrote, and it sums up our market beautifully, “April existing-home sales fell 2.7% M-o-M, to 5.85 million/year, the best April sales rate since 2006. That said, it was the third straight monthly decline. While low rates and remote working still boost demand, a lack of homes, especially at lower price points, vertiginous Y-o-Y price appreciation of 13% to 19% depending on how you measure, and no new meaningful growth in home construction activity are quietly taking their toll.”

    Copyright 2021 Sarah Perkins

  • Greater Phoenix Real Estate Update 5/21/2021

    Residential real estate continues moving at breakneck speeds. In April, nearly 75% of offers written by Redfin agents were for listings with multiple offers, nationwide. In greater Phoenix, it was 80.5%. Last week Tina Tamboer with the Cromford Report told us that 57.1% of homes that closed in greater Phoenix in April, closed over asking. These exciting times of economic growth and massive home-price appreciation are being dampened by fear, not just of a bubble – which we are not in – but also by the threat of inflation. One of the ways the government is able to slow inflation is by increasing rates (not mortgage), which then usually puts pressure on mortgage rates which would increase affordability challenges thus weakening homebuyer demand.

    Inflation:

    Consumer price inflation increased by 0.8% from March to April, the largest increase since June 2009. It increased by 4.2% year over year, the highest since September of 2008. Core inflation is up 3% year over year. Experts blame supply chain challenges and last spring’s weak readings and believe this inflation is short-term and will settle down in the coming months. Housing has taken on the largest rate of inflation at 18% (nationally) year over year. Consumers call it appreciation and economists call it inflation.

    In late April the Federal Reserve stated again that it intends to keep short-term interest rates at nearly 0% until we reach full employment (roughly 5%) and inflation is slightly above 2% “for some time.” It will also continue buying $80 billion in Treasury securities and $40 billion in mortgage backed securities monthly until those benchmarks are reached.

    Employment:

    American workers are more productive than they were pre-pandemic. Federal Reserve Governor Christopher Waller said, “It fits with what we have been hearing from businesses about labor supply shortages. GDP is back to its pre-pandemic level, but we have recovered only 14 million of the 22 million jobs lost last spring.”

    With nearly 8 million job openings nationwide and many employers struggling to find workers, 22 GOP led states, including Arizona, opted to end the additional $300 in weekly pandemic unemployment benefits early. In Arizona, those benefits will expire on July 10 rather than in early September. There are just over 6.6 million people receiving Pandemic Unemployment Assistance nationwide.

    Despite the dismal April jobs report, the weekly jobs report released yesterday shows that 444,000 people filed for initial unemployment benefits, down 7% from the previous week and hitting an all-time low since March 14, 2020, when it was 256,000. In Arizona, we had a 27% decline in initial unemployment claims. Continued unemployment claims, known as insured unemployment, increased by 0.1% week over week to 3,751,000. In Arizona, that number declined by 4% to 52,836.

    While the unemployment numbers remain high, experts predict Arizona will add 116,900 jobs by the end of 2021, which would put us ahead of our pre-pandemic numbers, according to the Economic Club of Phoenix, a unit of the WP Carey School of Business at ASU. In April of 2020, Arizona lost 331,000 jobs.

    Source: US Department of Labor

    National Real Estate:

    Single-family housing starts in April declined 13.4% from March, putting us at an annual rate of 1.09 million single-family starts. Builders blame supply chain and labor shortages for the decline.

    As people are out and about more, the personal savings rates will decline. Dr. Lawrence Yun, Chief Economist for NAR, expects “revenge spending” on more services and entertainment in the coming months which will slow some of the frenzy we have been experiencing. He also expects that bidding wars will not be common by 2022.

    Single-family inventory increased again this week by 1% to 313,577. Experts predict inventory to gradually increase by about 1% a week over the next few weeks. There are no signs of distressed listings coming to market. This gives our exhausted buyers more flexibility and room for negotiation. As you can see below, we have only had 3 weeks of inventory increases in the past year.

    71% of new listings went under contract in less than a week, a slight decrease from last week’s 73%. Expect strong demand through June.

    Home sales prices were flat this week at $395,000 and new listing asking price dropped from $365,000 to $360,000. For the past month, new listing asking prices have stayed flat so prices are no longer skyrocketing, on a national level. Normally the asking prices top out in May, last year it did in July. The new listings prices lead the market by about a month. Then closed listings followed by a month and then the headlines follow by another month.

    The AZ Market:

    From July 2019 through July 2020, Phoenix ranked #1 in net migration. We had 89,000 people move here or 244 per day. In 2020 alone Phoenix grew by 106,008 people, ahead of the 10-year average of 85,562 people a year.

    According to the Information Market, in Maricopa County, new home sales are up year to date by 8.6% and resales are up 22.3%. In April, the median sales price for new homes was up 24.6% year over year. For resales, it is up 32!!

    For more in depth information specific to greater Phoenix, see my update from last week, here.

    Lending:

    It is no surprise that mortgage demand declined in April from March but remain significantly above last year’s totals. Demand has been slowly declining since March. The continued low inventory combined with affordability pressures is still to blame. Experts predict there will be a modest rise in rates this year, which will likely further impact demand as well.

    1031 Exchanges & Proposed Policy:

    President Biden’s proposed American Families Plan does not completely eliminate 1031 exchanges but it does cap the amount allowed in the exchange. The plan allows for up to $500,000 in capital gains deferral.

    A study from the University of Florida shows that the average size of a 1031 exchange transaction from 2010 to 2020 was $500,000; which is far smaller than institutional commercial real estate transactions. Walker & Dunlop’s average transaction amount is $49 million and they do not use 1031 exchanges.

    Real Estate News:

    • Fannie Mae recently revised down the expected existing home sales counts due to rising mortgage rates and potential inflation. The article states, “Homes will sell at an annual pace of 5.88 million during April, May and June. That’s down from the previous forecast for second quarter sales to come in at 6.16 million, annualized.”
    • National mortgage delinquency rate improved in April as 400,000 borrowers became current on their loans. The delinquency rate declined to 4.66%, a 7.08% decline from March’s rate.
    • On Wednesday, Zillow launched an in-app calling feature which allows potential buyers to call an agent directly without ever leaving the app. The Realtor has 30 seconds to answer before the call is then routed to another Premier Agent.
    • Two of the country’s largest single-family rental REITs upped their rates on vacant home in April by a lot. American Homes 4 Rent increased 11% and Invitation Homes increased by 10%.
    • Popular CRM, Liondesk announced last week that it is being acquired by Lone Wolf Technologies. As the system integrates with Lone Wolf, users may see some changes.

    Cryptocurrency:

    Yesterday, the IRS announced that “businesses that receive crypto assets with fair market value of more than $10,000” must be reported. This is part of President Biden’s proposed American Families Plan. The announcement comes on the heels of Bitcoin’s peak earlier this week at nearly $65,000 and then an immediate decline to just below $40,000 after a similar announcement that China is planning its own cryptocurrency regulations.

    Final Thoughts:

    While yes, the inflation numbers are more intimidating than we would like, these are short-term numbers and are expected to fall and normalize over time to a more balanced level.

    Demand is declining some but remains stable. Inventory is rising but is coming from such a small number it needs to rise for some time before it becomes a concern.

    For those who remain afraid of a bubble, I quote one of my favorite housing economists, Logan Mohtashami of HousingWire, “Home prices, on the other hand, are rising too fast. When you have the best housing demographics ever recorded in U.S. history in the years 2020-2024 and the lowest mortgage rates ever recorded in history, then the notion that housing demand will collapse is, in a word, ridiculous. Along with stable demand, the financial balance sheets of our current homeowners are solid. But hey, in America, trash sells, no matter how unbelievable.”

    Copyright 2021 Sarah Perkins