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. 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.
In light of all of chaos and headlines, it is imperative to focus on what is going on right now. As difficult as it might be to avoid predictions, that is what is necessary. The market is shifting quickly and it is dangerous to make assumptions. The best way to service today’s home buyers and sellers is to guide them through our current market.
Focus on the NOW.
What affects demand?
Population growth
Every person, whether a renter or owner, is an element of demand.
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.
Affordability (based on the worst census data ever)
Employment/income
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)
Because rates are going up demand may decrease, but prices will not decline. There is still more demand than supply, prices are still increasing.
Loose/tight lending practices (can offset effects of interest rates)
Loose lending practices increase demand.
Tight lending practices decrease demand.
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.
Affordability:
Affordability is today’s biggest challenge for buyers. Interest rates are moving quickly and will hopefully settle down soon. When affordability is challenged, household formation shrinks, even if a population is growing.
When the external influence impacting interest rates retreats; demand will be released and will increase. During the height of the pandemic interest rates were artificially held down. Once they were released, rates jumped quickly.
Pricing:
The median resale home is about 1900 square feet. Through May 7 the median sales price was $470,000, up 25.3% year over year. The rate of appreciation is declining daily. Appreciation rates remain incredibly high but the speed in which homes appreciated over the past couple of years has pushed enough people out of the market that demand is no longer supporting the 28% year over year growth rates.
Interest Rates:
Over the past 10 years, each time interest rates increased by 1% it took about a year to go back down. We use this as a baseline only because in the 1980s rates increased by 5% and dropped in only 1.5 years. Rates will go down because they always fluctuate. They will come down again in the future, we just do not know when. For the most recent Freddie Mac data, click here.
Monthly Payments:
Home values are up 25% while rents are only up 13%. When rental rates decline while sales prices increase a big RED FLAG is raised.
A few weeks ago, median monthly rents were about $400 less than the median monthly mortgage payment. Now that spread is $555.
The monthly median payment for the median home is up 56% year over year to $2800. In order to afford $2800 a month; household income needs to be at $120,000 annually. The monthly median rent payment is $2250, which means household income only needs to be $96,000 annually.
Median Income:
The extent of the affordability challenge is seen in the actual household incomes. The darkest blue areas in the slide below represents households with an income of about $119,000+. The people with the highest incomes are in the least densely populated areas. Only about 32% of households make enough to buy a regular sized home. This is making people ask, is it really a good time to buy?
Long Term Appreciation:
With rent vs buy spreads that large, it is making people ask, is it really a good time to buy? A way to illustrate the power of homeownership is to show the long term benefits. Homeowners who purchased 20 years ago have averaged an 8.6% appreciation rate per year (yes, including those years).
Looking at the slide below, homeownership is a hedge against inflation, which in Greater Phoenix in April was 11% year over year, and can be a bit of a forced savings account in equity. The potential equity gain in 5 years at 6% increases $159,000 in equity.
We have gone through over 2 years of 25% value increases. Markets can weaken without prices going down. Prices are not declining right now.
The Market Cycle:
Our market has moved from euphoria to unease. Do not make decisions based on emotion. There have been continuous market bubble headlines since 2013. And Tina said, “2013 was 9 years ago y’all!” The last time we had a balanced market was 2014 and there were bubble headlines then! Look at the facts, use reason, leave out emotion.
What if prices go down? Don’t sell. People should want to hold onto their homes for 2-3 years.
Bubble vs. Correction:
They are now calling it a correction, not a bubble. Now they are trying to slow the acceleration of price. That is not a correction it is pulling the emergency break. But it is hardly slowing it down, prices are still increasing. The past 9 years have not been a bubble.
2005-2008 Bubble Vs. 2022
The biggest risk to all housing markets is vacancy.
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
Over built for 10 years, no labor or supply shortages
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
There is a common denominator between the 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).
Today only 23% of Americans are considered subprime, with scores under 660. That is a very small group. In the past it was much higher.
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. The risk is 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.
With a potential recession on the horizon (not now, the economy is very strong right now), tourism often pulls back first when money tightens. Vacancy is what creates a decline in value. What could happen in the future, vacancy to short term rentals, then regular rentals
Other big risks are places with water sources that are lacking. 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.
Rentals:
Rentals are a precursor to sales, way in advanced of resale market. Lots of info on Crane Watch from Phoenix Business Journal.
Build to rent is going in every direction. It is in all areas around Greater Phoenix. RL Brown offers detailed information on build to rent to learn more click here.
MLS is the last resort for rentals. It also means that the property is currently vacant. When the counts increase, it means more houses are vacant. Even though it is not the entire rental market it is an accurate representation of the rental market.
Available rental inventory is up across the board and getting closer to normal supply. Since September we have increased by:
Greater Phoenix is up 70%
Phoenix is up 48%
Northeast Valley is up 59%
Southeast Valley is up 71%
Pinal County is up 197% (huge rental supply)
West Valley is up 82%
Could have some seasonality coming into play. Market is no worse than it was in 2018 which was a good market. Last August we saw the early shift in rentals. Now are seeing it in sales.
Of the 1,748 properties successfully leased in April:
38% closed under the listed rent
0.9% difference between the median asking rent and median closed rent, a difference of $20.
Just 2 months prior, in February, there was a 4.5% difference equating to a difference of $99.
The areas with the largest rental gaps between asking and closed amounts are the areas with the largest new build growth.
Supply:
April new listings:
Coming Soon status = 296 Maricopa and Pinal County
10,379 Total Listed
Total New Listings -4.2% from last year
Our new listing counts were low but are increasing. We are now at a normal level of new listings coming to market. However accepted contracts are 5.8% below last year’s.
Listings under contract, we are below normal range, if we are moving into seasonality, that means that this number will continue to decrease. We will not see what we saw last year.
A few things need happen before prices drop and remember markets move slowly and a softening market does not mean prices are declining. Rental market moves way faster than the housing market does. Rental rates haven’t dropped yet. First thing needs to happen is that supply needs to rise.
Active supply is up 41% above this time last year. Six weeks ago supply started increasing and has gained speed. But it is not equal in all price points:
Overall inventory is up 117% year over year.
In 3 weeks, inventory for homes priced $400,000 – $500,000 increased by 35%
In 6 weeks, inventory for homes priced $500,000 – $1M increased by 99%
In 6 weeks, inventory for homes priced $1M – $1.5M increased by 38%
Investors will not likely have a large sell off. Private investors will care more than the big institutions. Depends on goals, if they want to buy and hold 20 years, won’t care that rental rates are changing. Many are not looking to sell unless rents decline by 50%. If they do a sell off, it would be bulk sales to other investors.
We are still in a frenzy market. All supply is still very low (seasonally). When there are more listings under contract than active for sale, it is a frenzy. Prices do not decline here. They only increase less quickly as inventory increases.
Price Reductions:
List prices will have to come down first. Sellers want the moon right now. Price reductions are increasing to nearly 2019 levels.
Homes priced $400,000 – $500,000 had a 71% increase in price reductions in 3 weeks. The median reduction amount is $13,000.
Homes priced $500,000 – $800,000 had a 157% increase in price reductions in 6 weeks. The median reduction amount is $16,000 for $500K – $600K and $20,000 for $600K – $800K
Homes priced $800,000 – $1.5M had a 125% increase in price reductions in 6 weeks. The median reduction amount is $25,000 for $800K – $1M and $50,000 for $1M – $1.5M
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.
Between 90 – 110 prices roughly follow the rate of inflation. (through April it is 8.3% nationally, 11% locally)
Yesterday we were at 323.1
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.
Prices are still rising right now. CMI will change. It will take 3-6 months before prices weaken. Do not look at price, have to look at the market today to know what is going to happen. Demand and supply are going in different directions. The CMI has been declining for 6 weeks, market remains in a strong sellers market that is quickly weakening. Closing numbers are not reflecting the CMI, we will see if in 4 weeks. Everything will be different in a month. Things started shifting in mid-February.
It is still a strong seller’s market but weakening quickly. In a weak seller’s market seller concessions increase and days on market increase. The CMI is boring when it is normal. We are not in a normal market. We do not know what the indicator will do. It is changing very quickly right now.
This could be the top of the market; we are seeing the writing on the wall. Waiting longer means you could be less likely to get over asking and fewer people may waive appraisals.
Things are changing quickly but there is a big difference between a bubble and a correction. During the market crash there were 59000 active listings with 4000 in escrow.
Demand is still over supply, so prices are still going up. In 2014 when it was balanced, prices were flat
The buyer and seller care about price, we will sell a home at any price. For our industry we need to have a lot of buyers and sellers, volume of transactions is important for people in the industry. When demand is below normal, we see stress on our industry.
Phoenix has below normal demand, but supply is so low prices are still increasing, but there are fewer sales with declining demand.
Urgency is on the side of the sellers. Sellers should feel a frenzy right now in getting their houses on the market. What we experienced is not normal. This will not last forever.
Flips:
We do not have desperate sellers. But the most excited sellers are flip investors. 2015 was the first seller’s market. Opendoor has never seen anything but a seller’s market. Not even a balanced market.
Flip investors are looking to unload their properties right now.
Opendoor Activity:
Opendoor made its first profit in Q1 2022.
May through November 2021 Opendoor acquired 3609 properties and sold 1861. They acquired 94% more homes than they sold.
December 2021 through March 2022 Opendoor acquired 1408 properties and sold 2149. They sold 53% more than they acquired.
Offerpad Activity:
June through December 2021 Offerpad acquired 1050 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.
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.
Sales Prices:
Sales measures don’t tell us where we ARE, they tell us where we’ve ALREADY BEEN. They reflect contracts written at least 4-6 weeks ago. Sale prices are a trailing result, not a forecasting indicator.
The median sales price is $470,000. It tells us where we were. Today’s 25% annual appreciation will slow down but not quite yet. Today’s prices reflect contracts signed in February and March. Do not expect these types of gains in the coming months.
57% of April’s closing closed above asking at a $20,000 median over asking, expect that to decrease soon.
Days on market is flat, the softening is just beginning. The price reductions are happening now and the reductions are allowing properties to sell quickly. Movement is still fast. Price reductions keeping DOM low. When inventory increases eventually DOM will go up too. Then seller concessions will increase.
Before prices decline we will see:
Price reductions (increasing)
Increased DOM (currently flat)
Increased seller concessions (not yet)
Appreciation is still very high. It is where we are now. The areas with the greatest increases in supply are still seeing small increases in prices.
Pre-Foreclosures:
Yes, they are up 306%. But that is not a foreclosure, it is a notice of trustee sale. There were only 337 properties in April and we are just coming out of a foreclosure moratorium. There were 32 foreclosures in April. They all sold to a 3rd party. No bank-owned homes coming to market. There are no indications of foreclosure increases. We do not have desperate sellers, only motivated sellers.
Final Thoughts:
April outperformed March on about everything except appreciation. Expect this to change next month.
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 market is indeed softening, locally no doubt, nationally – it is just becoming visible. The AZ market had a four-week head start. The pressure on affordability hit nationally last week when we saw purchase mortgage applications decline by 17% year over year. 2014 was the last year total housing inventory increased (this is true both locally and nationally). Currently, inventory is up 19% in a month.
*Before going further, I want to be clear, market softening does NOT mean the market is crashing nor does it mean prices are declining. We remain in a strong seller’s market that is weakening quickly. Prices are still increasing and will continue to do so for the foreseeable future. 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 between 2020’s pent-up demand and the nation’s current demographics with about 33 million Americans aged 27-34, the perfect home buying age.*
Nationally it is up 8.5% year over year in March, a 40 year high, and has cut buyers budgets of upwards of $40,000. The average consumer is spending $511 more a month than they were a year ago. There is early evidence that inflation may have peaked in March. Consumer sentiment increased by over 10% due to gas price declines since March.
The AZ Market:
Greater Phoenix’s higher than average inflation has everything to do with housing. Both purchase and rental prices are up 25%-30% year over year. With appreciation rates like that it is easy to see why investors flooded the market with capital. But keep in mind that the prop-tech startups have been investing here for several years. The most notable are Opendoor’s launch here in 2014, Offerpad’s launch here in 2015, and Treehouse Group launched in 2005 which evolved into Invitation Homes in 2012, the largest single family rental company in the country.
Why Greater Phoenix? Yes, the founders of those organizations have significant ties here. Yes, our local MLS is well run and covers the entire region (some areas have separate MLS’s for each city). The most simple reason is also the biggest reason why Greater Phoenix…it is because most of our houses are the same. Sure, we have custom homes, horse property, agriculture, etc. but the properties in the buy boxes of these companies are all the same. I can admit that I have pulled into the wrong driveway before and only realized it when my garage door opener didn’t work. Also, I grew up in a house built in 1892 and it wasn’t a particularly old house for the area (north shore Chicago). Here an old house was built in 1980. The math is simply easier which allows for large scale activity.
According to the Case-Shiller Index, in February, Greater Phoenix had a 32.9% year over year appreciation rate. Experts believe that the rate of appreciation has peaked and we will see it begin to slow. Declining demand and increasing inventory stifles price appreciation.
The redevelopment of Metrocenter Mall is expected to cost $1 billion!
Available rentals owned by Progress Residential, one of the biggest single family rental buyers, increased by nearly 24% in 22 days (3/21-4/12). Their median asking price declined by 2% in the first two weeks of April.
ES America purchased 650 acres of state land for $84.4M in Queen Creek. ES America is partnering with LG Energy Solution to build a lithium battery manufacturing plant. More jobs!
New Construction:
In 2018, when rates reached 5%, new home construction all but paused for 30 months. Interest rate changes impact new home sales more than existing home sales, combine that with stocks declining and continued labor and supply chain shortages could lead to buyers backing out of contracts prior to completion due to buyer affordability challenges.
Builder sentiment declined by 2 points to 77 in April, which was the fourth month in a row of declines. Keep in mind, any measure over 50 is considered a good market.
National Real Estate:
For the 5th month in a row, pending home sales declined in March from February, down 1.2%, according to NAR.
Existing home sales declined 2.7% in March month over month and the sales pace is down 4.5% from last year.
Prices are up! Fannie Mae says year over year appreciation is 20%, the highest in 47 years. Redfin says prices in March increased by 6% month over month, the highest monthly jump since 2013. NAR says prices are up 15% year over year. And Case-Shiller says 20% year over year in February.
87% of homes sold during March were on the market for less than a month.
For the second month in a row, demand for second homes declined in March. At only 13% above pre-pandemic levels, demand for second homes declined by 85% year over year.
Fannie Mae adjusted its unit sales forecast. Home sales are now expected to decline by 7.4% this year and 9.7% in 2023, a big drop from March, when Fannie Mae forecast a 4.1% decrease in home sales this year and a 2.7% decrease in 2023. They also predicted a modest recession during the second half of 2023.
This is what I mean about expected home price appreciation cooling. The rate in which homes appreciate will slow but they will continue increasing in value. All forecasted amounts are positive. Keep in mind, normal annual appreciation is 3%-10%. Normal appreciation in the late 20th century was 3% annually.
Another headline to be mindful of is the one mentioning the increase in foreclosure starts. Yes, foreclosures are increasing. Keep in mind that last year there was still a foreclosure moratorium, there were essentially zero foreclosures at this time last year so the year over year data looks dreadful. Look at the chart below, it shows an increase in foreclosures. However, the number of current filings remains substantially lower than 2017-2019 filings.
Final Thoughts:
Economist Dr. Peter Linneman is aware of the headwinds but he will not bet against the American economy. The US economy has grown 3.5% since February 2020, no one expected that. We are back at full employment, business is up, wages are up, equity is high, and costs are high. Focus is shifting from growth to profitability and sustainability; both typical in late-stage growth markets. Economics are cyclical and recessions are a natural part of the cycle, and the next recession will be very different from the previous ones. And remember it was residential real estate that pulled us out of the shortest recession in history.
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.
After reading my update from last week, a friend and client said she was confused. While the market is softening, as discussed, her listings are still selling immediately, above asking, and with multiple offers. That is just it. These things are all still happening. Houses are actually selling faster than they were last year. The supply/demand imbalance isn’t new and yet today’s market doesn’t make a lot of sense.
Over the past two years, we have spent so much time analyzing and watching the market. It seemed to change almost every day. It is still changing but not to the extent it was. I am not sure if it is that our industry is still running on urgency, waiting for the other shoe to drop, which ultimately provides no protection from the pain if and when that happens.
Was the other shoe, when mortgage rates increased? They have. The interest rates have removed some buyers from the market. It isn’t just about interest rates though. Demand remains about 350% higher than supply. And that isn’t because demand is crazy high, it is because supply is crazy low.
After interest rates increased last week by 0.5%, Amber Kovarik, Senior Loan Officer with Guild Mortgage wrote on Monday, “This is an environment, unlike anything we have ever seen. We have a gas crisis like the 70s, inflation of the 80s, a stock market correction like the late 90s, and housing affordability nose-diving like we had in the early 2000s. All of these independent events up until now have been unprecedented. Now they are all occurring at the same time. Nobody can know for certain what the FED is going to have to do to rates to stop inflation.”
Inflation is defined as too much money chasing too few goods. At a time when production was low for everything, Maricopa County, the fourth most populated county in the country, grew more than any other county. The state as a whole gained 98,330 people from July 2020-July 2021. 90% of our growth came from out of state relocation.
Greater Phoenix ranks fourth on the 2022 Milken Institute Best Performing Cities Index, up from the seventh spot last year. Phoenix is only behind Provo, Austin, and Salt Lake City. The ranking is based on wage, job, and economic growth. The job growth is why our current unemployment rate at 3.6% is lower than the national rate of 3.8%. We were fortunate to recover all of the jobs lost due to pandemic shut downs very quickly. The job growth has been a big driver in bringing people to the area. Many come from high-cost coastal regions.
The jobs have brought the people who brought the demand. Locally and nationally we were already facing a low inventory market. The new demand brought the inventory to new all time lows so prices spiked. As noted by the recent Case-Shiller Index report, January was the 32nd month in a row that Greater Phoenix led the country in year over year gains with an increase of 32.6%. The national average was a healthy 19.2% gain.
Investors took notice and saw the double-digit growth and dove in. The rental market exploded and rental rates in some places increased by 30%. That sizeable increase got the attention of more corporate investors.
Not being able to keep up with all of the demand and sheer amount of capital coming into the market birthed the build for rent (BFR) market in a big way. And true to form, when Greater Phoenix housing sees success, we jump in headfirst and all in. At 20% market share, Greater Phoenix has more BFR projects than any other city in the country, by more than double!
“The bottom line: Opendoor (and Offerpad) are going to benefit tremendously from rising home price appreciation in the first half of 2022.
It’s worth noting that this key financial driver isn’t within Opendoor’s control. Wildly rising home price appreciation isn’t a business strategy, it’s the market.”
This is true for all of us. The bottom line is that this will not last forever. Nothing ever does. We must stay students of the market and pivot accordingly, so hopefully, we will never be too surprised by the market shifts.
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.
Brad Inman recently wrote, “Realtor optimism can be necessary for survival” but giddy over-confidence is a bigger problem. He went on to say, “In our industry, the euphoria is characterized by a common sentiment that a real estate market boom can go on forever. It never does.” The newness of a growth market is exciting. Residential real estate has a lot to be proud of; housing demand and low rates pulled us out of the shortest recession in history. Home appreciation made a lot of money for a lot of people and gave options to struggling borrowers. This all happened in the face of some very real headwinds.
Those headwinds are changing and getting stronger. The excitement is shifting into uncertainty. Sky-high inflation (reaching 7.9% in February with expectations that March will be significantly worse), the Federal Reserve’s short term interest hikes, stock market volatility (SPACs have all but disappeared), mortgage rate spikes, a war that only one person wants, and a pandemic that just entered year three.
National Real Estate:
Demand is stable. Do not let the headlines fool you, demand is not crazy high right now, it is stable. It seems that demand is so high because of the extremely low inventory. Remind sellers on the fence that it will not last forever. Demand may further weaken, or inventory could rise; both of which limit the strength of the seller’s market.
February’s median home-sale price increased 16% year over year, reaching an all-time high of $363,975, according to Redfin. The median asking price is up 15% year over year and up 27% since 2020.
Available single family inventory increased by 3% this week! This is the first increase in months. There are now nearly 249,000 homes on the market. Available inventory remains 21% lower than this time last year. This is good news for buyers but is too early to be a trend. Typically, it takes three weeks for a trend to emerge. This increase is due to a supply side addition versus a decline in demand.
23% more new listings hit the market this week versus last week. About 33% sold within 24 hours; the same week over week. If demand were declining, fewer homes would sell immediately.
Flip investor profit margins reached an 11 year low due to increased holding costs, additional competition from consumers, iBuyers, and institutional investors.
Second home demand declined quickly to its lowest level since May 2020. While second home demand remains 35% above pre-pandemic levels; in January that demand was 87% above pre-pandemic levels.
A record, 1 in 12 homes is valued at or over $1 million or roughly 6 million homes.
“Owning a home continues to be a proven method for building long-term wealth. Home values generally grow over time, so homeowners begin the wealth-building process as soon as they make a down payment and move to pay down their mortgage.”
-Dr. Lawrence Yun, NAR’s chief economist
Rentals:
Nationally, in 2021 rents increased by 11%, triple the typical increase in a normal year. In Greater Phoenix rents increased by 30% in 2021, among the highest increases in the country. These increases have caused more than 12 states to re-open rent control policy talks. Wages are not growing quickly enough to keep up with prices. In the past rent control talks have slowed new build projects so this time new builds may be exempt from the rules. Many cities currently have rent control policies in place with annual increases capped anywhere from 3% (St. Paul, MN) to 10% (CA).
In Greater Phoenix rents are up nearly 80% over the past five years while wages are up on 22% over the same time period.
The AZ Market:
In Greater Phoenix, the median sales price in February reached $450,000 – an all time high. That is a 28.5% year over year increase and there are no signs of slowing. The median sales price for properties in escrow, likely to close in the next 45 days is $470,000!
In February, 64% of the buyers purchased with the intent to live in the property, this is a decline from 2015-2019 when this number was closer to 73%. A huge group of those absentee owned properties are owned by institutional buyers who purchased more than 9,000 homes since the beginning of last year to use as rentals.
STAT writer, Tom Ruff with the Information Market quotes Michael Orr with the Cromford Report, who explained that single family rentals on the market have increased by 99% year over year. And rents are down to $1.80 per square foot versus $1.93 a year ago. In May 2021, prices reached $2.01 per square foot.
“These conditions suggest that the era of quickly rising rents in Greater Phoenix may be coming to an end. A large amount of new rental supply is coming on board this year, judging by the number of multi-family permits issued in the last 2 years. Rent looks likely to stay fairly flat, which will change the buy versus rent equation as home prices and mortgage rates continue to increase. In the longer term, this could seriously dampen demand for homes to buy.”
-Michael Orr, Cromford Report
Diamond Age, a home construction startup, recently moved its headquarters from CA to AZ, and plans on building 20 homes this year using a combination of 3D printing technology and traditional building processes.
Federal Reserve:
Earlier this month, the Fed ended its bond and mortgage backed securities purchases. And has shifted its focus on combating inflation. At this week’s meeting, they raised the short term interest rate by 25 basis points to 0.25% – 0.50%. The Fed expects to increase rates six more times this year and three more times next year. With the seven planned rate hikes, the Fed expects to be back at a 2% rate of inflation after 2024.
Lending:
Interest rates are up nearly 1% in eight weeks. While yes, rates are still at historic lows and yes, in 1980 rates increased 3.5% in eight weeks, today’s buyers are not connected to 1980’s buyers (my parents bought their first house in 1980 at 18% interest). However, we can easily connect with the 2018 rate increases that totaled over 1%. Inventory increased some, home price appreciation slowed but stayed positive, and homes took a little longer to sell.
“The bottom line is that rates were never going to hold at the record lows we have seen, and we need to just accept the fact that they will continue trending higher as we move through the year but are not yet at a level that suggests impending doom for the housing arena.”
-Matthew Gardner, Windermere’s Chief Economist
Loan servicers support a permanent forbearance option. It has been a very successful program and the program as it exists today is winding down over the next few months. Of the roughly 8 million borrowers that entered into forbearance, only about 3% or 275,000 remain behind on their payments.
While yes, cash out refinances did hit a new record in 2021 with a volume of $1.2 trillion, the loan to value ratio declined, meaning the amount owed compared to the house’s value decreased. 60% of 2021’s refinances included cash out and values increased. Despite continued equity gains, due to an increase in rates, cash out refis declined by over 10% in February.
Real Estate News:
Judge rules that Oregon’s real estate love letter ban violates free speech and struck down the proposal.
The state of Washington has proposed a bill to make real estate love letters illegal stating that they may violate fair housing laws.
Power buyer, Knock.com, has abandoned its plans to go public via SPAC, was nearly acquired in December, recently laid off half of its employees, and is now attempting to hit profitability by the end of the year.
Matterport added virtual staging company, Sketchfab, to its platform which also allows agents to take screen shots and use virtually staged Matterport images as photos too.
Six former Realtor.com employees are suing Move, operator of Realtor.com, for discrimination, abusive work environment, and being forced to lie to Realtors among other complaints.
President Biden signed an executive order urging the Federal Reserve and Treasury Department to study and identify cryptocurrency’s impact on financial stability and national security and establish whether or not the federal government should create its own, regulated, cryptocurrency.
Final Thoughts:
And yet we move forward in spite of it all. Human resiliency never ceases to amaze me. Let’s hope that resiliency can help all of those who are suffering through the humanitarian crisis in eastern Europe.
I regularly quote several of my subscribers. Thank you for your input and contribution to our industry and your support of the AZ 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.
People are resilient. There is chaos in the world and uncertainty is looming in every corner. This is as true today as it was two years ago. Quite frankly, it has always been true. In January 2020 when Tina Tamboer stood in front of a packed room and told us that we could see a 10% appreciation rate in the coming year, I thought to myself, “Oh no, we can’t handle that, that is way too much, it will be terrible for our market!” 2020 ended with an appreciation rate of 18%. Not only did our market handle it, it did so during a pandemic, civil unrest, and a presidential election. Residential real estate quickly became the solution to the shortest recession in history. Then we handled the 2021 market and now we will figure out how to handle the 2022 market.
War & Economics:
In order to slow inflation, which is currently 7.5% year over year, the Federal Reserve is planning to raise rates from 0% to 0.25% during its meeting on March 15-16. Economic sanctions often lead to even greater inflation which could lead to additional rate hikes or larger hikes. Some analysts predict that rates could be increased as much as 0.5% during the upcoming meeting.
Georgia Kromrei of Housingwire explains, “Economists have said that the conflict in Ukraine could bring a short-term reduction in mortgage rates, as investors flock to safe haven assets like mortgage-backed securities and bonds. But longer term inflation brought on by the conflict will cause mortgage rates to rise.”
The Fed is also concerned with home price appreciation which is another to say home price inflation. Fed Chairman Powell expects that by raising the rates, home buyer demand will weaken, slowing the rate of growth. This will not cause prices to decline.
“We won’t get back to pre-pandemic levels. We’re not trying to get prices back down, we’re trying to limit future prices.”
-Fed Chairman Powell
Supply & Demand:
Nationwide, available single family inventory declined by 1.4% last week. There are now fewer than 245,000 homes on the market. That is 25% lower than 2021’s bottom on April 30. And over 66% below January of 2020.
In 2018 inventory increased as interest rates increased. Rates declined in 2019 and inventory decreased. The expected inventory increase due to increased rates has not yet emerged in the national data. Declines in demand will emerge locally before it does on a national level.
According to NAR, pending home sales declined by 5.7% month over month in January, continuing a three-month decline in transactions. Of the four major U.S. regions, only the West had an increase in month over month pending sales. All four regions saw a year over year decline. The declines are likely due to lack of homes available for purchase.
In Greater Phoenix, demand has been declining slowly since early January when demand was 23% above normal. Yesterday’s demand was about 15% above normal. Because inventory is 75% below normal (about 4,000 available single family homes in Greater Phoenix), the decline in demand is nearly unnoticeable. Listings may now only receive 10 offers instead of 20. Despite the decline in demand those remaining buyers still want to buy that property which usually only goes to the highest bidder.
“The last time the Valley saw a ‘normal’ supply of inventory was in January 2019 when there was a four-month supply. The last time there was a five-month supply was January 2016. From March 2019 to January 2022, we have not hit three months (worth) of inventory. That’s crazy.”
-Thomas Brophy, Colliers Phoenix housing research director
One reason given for the tremendous lack of available supply is homeownership tenure. According to Redfin, the typical homeowner is staying their home for 13.2 years, up from 10.1 years in 2012. At 18 years, Los Angeles has the longest median tenure in the country.
Appreciation Rates:
In Greater Phoenix, February’s median sales price was $450,000. That is $100,000 more than the median sales price in February 2021 of $350,000! And is nearly a 29% increase year over and year. Wow!
The Case-Shiller Index released its 2021 report last week showing that US homes appreciated 18.8% last year which is the biggest increase in the 34 year history of the index. 2020’s appreciation rate was 10.4%. Phoenix topped the charts with a 32.5% appreciation rate in 2021. Behind Phoenix, Tampa’s appreciation rate was 29.4% and Miami’s was 27.3%.
While the Case-Shiller Index is not often used in residential real estate pricing because of its lag time, the data is used by Wall Street, the federal government, and many other businesses. The index calculates price changes monthly by looking at the three month moving averages of single family home sales.
New Construction:
Labor and supply chain challenges continue to pressure new home builders. The timelines are difficult to estimate, each week there is something else slowing things down. The latest hold up: garage doors.
“It used to take us 20 weeks to build a house and now it takes us 20 weeks to get a set of garage doors.”
-Adrian Foley, Brookfield Properties President & CEO
These delays have made new home inventory difficult to track. In years past, the number of permits pulled and the number of new home sales was essentially the same. In 2021, there were 31,069 permits pulled (up 7.26% from 2020) and only 24,039 new home sales (down 1.33% from 2020). While these counts exclude single family rental permits, RL Brown Reports is tracking 144 build-to-rent communities in Maricopa, Pinal, and Pima Counties. Thank you, Jim Daniel – President of RL Brown Reports for sharing these numbers with me.
Both locally and nationally, new home demand is consistent and sales are increasing but not at breakneck speeds. The reason demand feels so strong is because available supply is nearly non-existent.
Real Estate News:
Blackstone, the nation’s largest commercial real estate holder, continues its investment in rentals with its recent $5.8 billion acquisition of Preferred Apartment Communities with about 12,000 rentals units in the southeast United States. Real estate accounted for almost half of Blackstone’s $5.66 billion earnings in 2021.
The Property Listing Service (formerly the Pocket Listing Service) has rebranded to the National Listing Service. The company’s federal antitrust lawsuit against NAR and the Clear Cooperation Policy remains ongoing.
After Airbnb surpassed its goal set in August of providing 20,000 Afghan refugees with free, temporary housing; the company has set a new goal to help another 20,000 refugees.
Last week Fifth Wall, a venture capital firm, withdrew its request for a SPAC with the SEC. Fifth Wall had planned to raise $150 million to take a real estate tech company public. The withdrawal is likely due to the stock market volatility, particularly surrounding proptech stocks.
The Host Co. is a digital market place that allows short term rental owners to sell items like furniture, artwork, crafts, and even food. Guests are able to pre-order items or purchase on-site.
Final Thoughts:
Today’s uncertainty is different from that of 2020 and 2021. After all that we have been through, I am more optimistic about our ability to adapt. I know we can because we have done it before. And as Logan Mohtashami of Housingwire always says, “Be the detective, not the troll, listen to serious people who don’t need money from clicks.”
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.
At 7.5%, inflation is at its highest rate in 40 years, the sanctions against Russia will lead to more inflation, combined with rising interest rates, rising (home) prices, low inventory, and solid demand; today’s home buyers face a lot of hurdles. We remind the buyers that real estate ownership is the number one wealth creator. With 28% year over year home appreciation in Greater Phoenix, a bullish Wall Street (with some recent corrections), and risky crypto/NFTs capital is flowing and is getting more expensive and more unpredictable. Yet, the average American homeowner with a mortgage has $185,000 in equity. Equity provides options.
Appreciation Rates:
As always, supply and demand dictate price. In Greater Phoenix, in 2007 when there were over 58,000 active listings (including UCB) demand declined to 43% below normal, and prices declined. Earlier this month there were about 8,300 active listings (including UCB) and at the same time demand was 21% above normal, and prices are increasing – a lot. The supply deficit is significant.
Tom Ruff with the Information Market recently wrote about the local median sales prices. He said, “ARMLS reported the median sales price for homes sold in January as $430,000. Our daily monitoring of pending sales contracts tells us that the median sales price for closed listings will hit $460,000 around April 1. In March 2017, the reported median sales price was $230,000. If our projection is correct, home prices will have doubled in the last five years.”
While we are seeing early signs of demand cooling and a slowing rate of appreciation, we have a long, long way to go to get to a balanced market. According to FHFA, nationwide from Q1 to Q2 2021 home prices increased by 5.1%, from Q2 to Q3 2021 home prices increased by 4.2%, and from Q3 to Q4 2021 home prices only increased by 3.3% (remember when that was an entire year’s worth of appreciation?) Nationally, 2021 saw a 17.5% appreciation rate.
Real estate is not just an investment, although the investment element has been almost exclusively our focus, it is also shelter, a basic human need. Because of that need, demand will never vanish completely, nor will supply. And here is the kicker, due to the incredible investment opportunity residential real estate has created, especially over the past few years, we no longer know how much of the supply is actually available for shelter. Short term rentals are not part of supply because no one calls them home.
The total number of short term rentals is unknown. The New Times recently mentioned that there are 5300 in Scottsdale alone, which is over 6% of Scottsdale properties. Sedona and Paradise Valley have the largest percentage of short term rentals, pushing 20%. If 5% of Maricopa County’s roughly 2 million housing units are short term rentals, that would be 100,000 units. The Arizona Department of Housing recently estimated that the state is short 250,000-270,000 housing units based on today’s demand.
These numbers are based on assumptions. If and when demand declines, these properties will be sold and put back into available supply. The lack of data makes the actual shortage unknown. What we do know is currently demand significantly outpaces available supply.
Additional Supply?
Despite the fear-mongering headlines, foreclosures will not drive an increase in supply. Nationally, foreclosures are running 76% below normal and locally there were only 256 foreclosures last year. Yes, 2022 will have more but probably not a whole lot more.
New home inventory will also not solve our inventory problems. New home sales declined 4.5% in January from December and declined 19% year over year. The labor and supply chain issues are preventing new home sales to make a dent in today’s demand. While new home permits are up, completions are flat.
Institutional Investors:
Last year in Greater Phoenix 28.4% of homes went to investors. Smaller investors are struggling to keep up with the larger investors, thus driving up prices, not only for local buyers, but smaller investors as well.
In 2021, iBuyers sold 20% of their inventory to corporate buy and hold investors, up from 5% in 2020. Mike DelPrete recently wrote, “Selling to investors may be a sound business decision, but there are real world implications that directly affect thousands of American families.”
This year Zillow has sold about 200 houses in Greater Phoenix in three sets of bulk sales to Progress Residential. All three sales had an exemption code so an affidavit of property value was not recorded. Zillow’s acquisition price remains the most recent sales prices on all of these properties.
With mortgage rates at 4 percent, a homebuyer who could qualify to buy a $475,180 home in November can now only afford a $423,262 home. Source: First American data and analytics.
Zillow lost $528 million in 2021 a 226% year over year increase from a loss of $162 million in 2020. Zillow’s plan for the future is to better leverage premier agents, sell more of its mortgage and title services, which will then create the super app of the future.
Nationwide, single family rents increased 3x more in 2021 than they did in 2020.
According to NAR, existing home sales were up 6.5% in January month over month while existing home inventory was down 16.5% in January, year over year.
From mid-January to mid-February, 41% of homes sold for over asking. During the same time in 2021 it was 33% and in 2020 it was 19%.
Final Thoughts:
Jordan Levine, the chief economist for the California Association of Realtors summed up our current environment well when he said, “The broader economy is showing signs of continued improvement and the housing market remains an economic bright spot, yet inflation and rising interest rates are beginning to squeeze some buyers out of 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 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.
To learn more about a Cromford Report membership, click here.
The AZ Market:
In order to be successful in real estate you need to know what is actually going on, clear information is the best. Ignore the noise and fear mongering headlines, it is just click bait. The sky is not falling but the market is indeed changing, it is always changing. This is what I wrote about in my update from last week, which can be found here.
Wages and Demographics:
The Census Bureau openly admits that the 2020 US Census data is incomplete and of low quality. The Census released experimental estimates for the 1-year data. Between the low quality, lack of data, and experimental estimates; establishing benchmarks, like affordability levels, is difficult. Garbage in, garbage out.
The US Census stated, “Unfortunately, even with modifications focusing on known sources of bias, the Census Bureau determined that the estimates did not meet our statistical quality standards. These inconsistencies led to the Census Bureau’s decision not to release the standard set of 1-year data products.”
Without the 1-year data, we cannot estimate population growth or accurate wage information. And without that data, we cannot accurately estimate affordability.
HUD publishes wage data once a year, from the Census data. The next update will be released in March. To measure affordability in Greater Phoenix we are still using $79,000 as the median household annual income. This number was established by using the 2018 wage data and applying inflation over time (yikes!).
Based on that amount, affordability is suffering significantly. The ideal affordability range is 60-75, meaning that of the families earning the median income were able to afford 60-75% of the homes sold that quarter.
Tina doesn’t believe it is this bad, it is unlikely that our affordability level is only at 44.5 like it is on the report. With demand still 18% above normal, Phoenix’s affordability rate is probably closer to the national number at 54.2.
Rather than using the affordability index as a predictor; we have to closely watch all demand indicators. As soon as the population cannot afford an item, demand drops.
Buyer Mix:
All residential property owners are categorized in one of three buckets. 1. Owner occupied, 2. Second home, and 3. Landlord.
From 2015 to 2019 owner occupied buyers purchased 70-76% of the properties. In 2020 it was 80-83%. In Q2 2021 a new trend emerged, owner occupied purchases began declining and by the end of the December that rate dropped to 64%.
What changed? It wasn’t the iBuyers, they pulled back on purchases in Q4 2021. It was the massive increase in landlord purchases that pushed that percentage down. We have to watch this number very closely. If owner occupied purchases go down further, then we clearly have a big affordability problem. This matters to everyone. Can the landlord find a renter? Can the ibuyer find a buyer? Ignoring this info today will cost the investors.
While the intensity of the market feels like the intensity of the bubble. The fundamentals are very different. A market correction will not hurt the consumers like it did in 2008-2011; it will hurt the investors who are asking too much in rent or sales price. Miscalculations destroyed Zillow Offers.
Mortgage Payments:
The February 2022 median sales price for a 1,500 to 2,000 square foot home is $435,000. That is a 27.9% year over year increase. Combine the increasing interest rates with the appreciation, payments are now 38% higher than February 2021. With an estimated monthly payment of $2,232 a family needs an income of $95,700 a year to make it affordable. That is up from $91,000 last month, last month’s update notes are here.
That monthly payment is based on an interest rate of 3.69% which was the rate last week. Yesterday’s, Freddie Mac survey showed a 30 year fixed rate mortgage is now 3.92%. Rates dropped from 2018 through January of 2021 when rates bottomed at 2.65%. In December 2021 rates were 3.12%
In 2018 they increased by 1%. Mortgage payments jumped, demand declined, inventory grew, and in 2019 rates dropped and houses became more affordable. Based on the market movement in 2018 when rates increased, we have a general idea of what to expect today. 38% year over year monthly payment increases is unsustainable.
A fixed rate mortgage is one of the best hedges against inflation.
Rentals:
Single family rental rates have been flat for the past 5 months. It is very typical to see rents hold steady in the fourth quarter of the year. Any prospective landlords must make sure there is room for rents to grow when investing. The median monthly rent is up to $2,195; up 17.1% year over year and up 34.3% since Q1 2020. Some luxury rentals have declined, February is not outperforming January.
For apartment, rents are an entirely different beast and they have been increasing significantly as well. For details on apartment rents, evictions, and distressed properties, check out these new charts from the Maricopa County Association of Goverments.
Now that the median mortgage payment is higher than the median rent, some potential buyers may be on the fence. The advantage of homeownership remains. Real estate ownership is still the greatest wealth creator.
Where can landlords get the biggest bang for their buck?
West side
Southeast valley
85254 – the magic zip code
Median size of rentals is 1,600 square feet. Rentals follow the same law of diminishing returns. Properties over 1,700 square feet have lower price per square foot rentals. Larger homes do not have huge price per square foot prices.
There is not going to be a decline in rentals until the vacancy rates decline. At 5.6% vacancy rates very low. They haven’t been this low since the early 1980s. An issue during the 2004-2006 bubble was the high vacancy rates; indicating false demand. Today’s low vacancy rates indicate true demand.
What affects demand?
Population growth
Relocation (inbound)
Household formation (growing)
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
Population:
National population growth is very low, and it is very location dependent. Where is the population moving? (the Census will have an update in March) How much can we draw into Greater Phoenix? Some people talk about over building for the future due to lack of growth. Today’s market is telling us that we do not have enough houses for the people that are here now.
What will happen to AZ in the future? Job growth. Many people are moving here for jobs. Retirees used to drive the population growth, but now with so many new jobs more and more working age people are moving here. We depend heavily on domestic migration for our population growth.
From 2020-2021 only six states had a population growth greater than the entire country’s. Those states are Arizona, Utah, Idaho, Montana, Texas, and South Carolina. 16 states saw population declines.
Unsurprisingly, the areas with the greatest inbound flow are from southern California, Chicago, and Seattle. Check out the interactive map at https://flowsmapper.geo.census.gov/map.html
What affects supply?
New homes
FSBOs
Appreciation/Depreciation (Equity)
Foreclosures/Household Formation (shrinking)
Relocation (Outbound)
Divorce/Illness/Death/Job Losses/Tragedy
Consumer sentiment
Builders are not going to crash the market, after a decade of insufficient building the undersupply is significant. Until you see vacancies or longer days on market, builders will keep building. Are the builders overbuilding? Permit counts are where they were in the 90s, down 15.7% year over year. New home sales declined 0.5% in 2021 from 2020. We are not currently overbuilding for the demand.
Even if builders wanted to build like they did in 2005; it won’t happen. There are still far too many challenges with tight labor and supply chain issues. Typical build time is up to 12-14 months. Permits are primarily being pulled for the west valley and Pinal County.
Arizona has indefinitely tabled a recent controversial bill that would have allowed the state to override city zoning and rules.
Household formation is growing, which makes supply drop. When household formation slows, supply increases.
Investor Flips through December 2021:
The more balanced the market, the fewer flip transactions. Briefly, in 2014, we had a balanced market and was the year with the fewest flips. Today’s market is seeing nearly as many flips as we had in 2012, when investors were selling all of the properties they picked up for $1 in 2011 (the bottom of the market after the crash). iBuyers do not affect supply.
Zillow lost $880M on its failed iBuyer business. How did they do this in a market with 28% appreciation in 2021? By paying more for properties and it sold them for. Zillow’s median acquisition price was $466,765 and its median sales price was $430,000.
Opendoor is in the hot seat with a median acquisition amount of $429,500 and a median sales price of $435,000. ibuying is risky and yet Opendoor just launched in the Bay area.
Offerpad is the most conservative of the three and is not doing as poorly as the others. Offerpad’s median acquisition price of $395,000 is 8.8% higher than its median sales price of $429,900.
Traditional flips are doing great. The long term average return is 30-40% and right now the average return is about 25%. This is significantly better than the iBuyer returns.
Short term rentals might be adding some supply, maybe. Cities are enforcing ordinances on short term rentals. PV and Scottsdale are enforcing the most.
Short term rentals are mostly in the Northeast valley, primarily in Scottsdale, Paradise Valley, and north Phoenix. One reason rents are so high is because short term rentals reduce supply in these areas which makes houses in these areas cost even more. Long term rentals is a place for someone to live so it helps slow price appreciation.
Short term rental data is tough to track. Despite some available data, analysts believe that the numbers in the chart below are very low. Rather than 210 short term rentals in Paradise Valley, experts believe the number is closer to 380, which is closer to 6% of supply in PV.
Realtors:
ARMLS Agent population has grown 19% in the past 5 years. With declining inventory and increasing competition, many agents are expected to leave the business. Keep track of those agents getting out and work with them for referrals, etc.
New listings:
YTD down 3.1% year over year. In 2021 we had a lot of new listings hitting the market.
We are at the lowest count for new listings since 2001. Contract activity is higher than 2021.
Newly accepted contracts are sky rocketing.
There are 3.5% more listings in the MLS than we had this time last year.
Listings under contract are down 2.1 from last year but still very high and are expected to keep rising.
Closings are still coming in very high. Second highest closing rate since 2000 (behind 2021).
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 7%), below 100 is a buyer’s market, above 100 is a seller’s market, prices drop below 90, prices rise at 110.
On 3/20/2020 we were at 241
On 5/15/2020 we were at 145.2
Yesterday we were at 471.9
We peaked on 3/14/2021 at 514.9
CMI is the predictor, it moves first and then appreciation follows. Cannot predict the CMI. It tells us where we are.
The predictor says the annual appreciation rates are going to increase. This is not good for buyers. Prices are not declining.
Supply stopped dropping so quickly. At 4.1 points in 30 days, demand is now dropping faster than supply which is down 2.4 points in 30 days. We are starting to see a slight softening in the market.
Prices are not going down. Prices are going up quickly. Currently at a 2% month over month rate. First half of 2021 we saw a 3-5% rate of appreciation. In the second half of the year, we had 1.1% monthly appreciation.
Cities with the most new home completions have the weakest CMI. Cities with fewest new homes have the highest CMI.
Median Sales Prices:
The median sales price is up 50% in 2 years!
Prices are increasing slightly faster than they were at the end of 2021 but not as quickly as they were in the first half of 2021. Currently prices are increasing at a 1.8% month over month, up from 1.6% just last month. We may see this go up but unlikely to go up to the 4-5% we saw last year. Definitely be faster than 1.1% from last year. Average and median prices are increasing at about the same percentage together.
2022 will not be like 2021, buyers are exhausted and pulling back slightly.
What is normal anymore?
It could be another year before we see demand drop to near normal. Demand dropped in 2018 due to rates. No softening in price anytime soon. The rate of growth is slowing. Supply has to go above demand for prices to drop. It is not worth waiting for prices to go up 20% for a slight possibility of a small drop maybe in the future. The interest rates hikes have slightly decreased demand, slightly.
Past 21 Years:
Buyer’s market – 3.6 years
Balanced market – 4.6 years (2001-2003, 2014)
Seller’s market – 13 years
What we are used to is not a balanced market. We are used to a weak seller’s market, like 2015-2019. There were seller concessions and some wiggle room for negotiations.
Contract Ratio:
We are mirroring last year.
Phoenix has slight weakening in demand.
Pinal County has a lot of demand.
The demand is many areas is not unusual demand. Pinal and northeast valley cities have high high high demand and crazy low inventory. None of our areas have much supply, way below on where we should be. The highest contract ratio you should see is 105. All cities are currently over 200.
Closed Sales:
We currently have a 22% annual appreciation rate (normal is 4-10%).
46% of homes sold over asking in February.
Median over asking $11,000 (up from 10,000 last month)
List to sale price ratio is rising. Great to be a buyer in Q4. Normal is 97-98%.
Median days on market is currently 7 and will likely drop to 5.
Median sales price is $445,000 up 27.1% from February 2021.
Summary:
Prices are expected to rise through June, possibly even at a faster rate than last year. Even in a booming market, buying still wins. It’s a hedge against inflation and provides greater opportunity as the value increases.
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.
