the AZ market

Tag: #theazmarket

  • All The Things

    Greater Phoenix Real Estate Market Update 7/31/2024

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

    These are my thoughts on a few topics.

    Commission Changes:

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

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

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

    New Construction:

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

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

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

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

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

    Supply & Demand:

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

    Case Shiller Home Prices:

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

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

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

    Final Thoughts:

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

  • Buckle Up and Wear a Helmet

    Greater Phoenix Real Estate Update 6/27/2024

    It has been a minute since my last post and I appreciate you for reading this now, after all of this time. It seems like millions of things have happened over these past few months. I celebrated my 20th year of being in title insurance sales in Greater Phoenix. That was exciting for me but the biggest news has been the commission lawsuits and the NAR settlement. This continues to be fluid and the DOJ has strong opinions. How things actually transpire remains to be seen. I have my suspicions and as an avid industry watcher, so far my predictions have come to fruition. NAR’s danger report, released in 2015 was the start of it all. It can be tough to find, and you can view or download it below.

    NAR_Danger_Report_Part_1_of_2Download

    The new listing and new contract numbers are running very close together. Inventory isn’t growing super quickly but if you compare it to where we were a year ago, it is up a lot, over 50% higher. Demand remains low. It was low last year and it is about 8% lower this year than it was. The relationship between supply and demand is no longer benefiting sellers. Arizona’s summer is here and the luxury buyers have left. Prices were flat from April to May with a median sales price of about $450,000. The expected median for June is $445,000. While it is typical for prices to moderate during the summer, it is early for them to already be declining. The persistently high mortgage rates are deterring today’s buyers. The demand is there, but they are sitting on the sidelines.

    While the overall economy remains strong, the cracks are beginning to show. The COVID money has all been spent and American’s savings rates are at the lowest in years. People feel poor and are pulling back on spending. The easiest way to see this is by going to your favorite restaurant. Restaurants are less full. We no longer have to wait for a table. Unemployment ticked up last month, despite a stronger than expected jobs report. There were more separations than there were new jobs. The thing to watch now is the workforce participation rate. That is declining now, nationally. The benefit we have here in AZ is that our unemployment rate is extremely low, it is around 2.6% which is lower than the national 4% rate. This gives us a bigger buffer should we go into recession soon. I am a bit more bearish on this front than several of my colleagues.

    The best thing we can do for today’s buyers and sellers is to tell them what is happening. Sellers MUST price their home right. This is not the time to push the market. Buyers are educated and watching everything that happens. A recent Redfin report stated that buyers view properties that have been on the market for 14 or more days as either overpriced or busted. Sellers have 14 days to put their VERY best foot forward. There are buyers in the market but they can be discerning. They have more options than they did last year and more often than not, they are flexing their negotiating muscles.

    On a side note, ARMLS released a recent update addressing the upcoming changes due to the NAR settlement. Navi Title’s own Lance Billingsley contributed to writing this and creating the path forward. NAR Settlement – ARMLS

    Roughly half of all listings on the market have taken at least ONE price reduction. This will likely increase in the coming weeks.

    If you do not regularly read ARMLS’s STAT, created and written by my friend Tom Ruff, I suggest you do, the full report can be found at https://armls.com/statistics.

    Properties priced well, sell faster and sell closer to their original asking price.

  • Change

    Change can be scary. Change is always messy. Change often hurts. The old guard hates change because they created the status quo. The status quo makes sense to them. They thrived in it and they are not bad people for wanting it to continue.

    But change creates new beginnings. New options. New ways of doing things. Cars didn’t replace horses overnight. For a while both horses and cars traveled the same roads. Over time, the faster, easier, more efficient option tipped the scales and the role of the horse changed.

    Our ability to adapt is why we survive. Our ability to create is how we thrive. In real estate, now it is time to create. The old rules are changing, by how much, we do not yet know.

    The residential real estate market is, well, not fun right now for industry participants. It is not great for buyers who waited too long on the sidelines. It is not great for the buyers who think it is a good time to continue to wait.

    I have been a title rep (I sell title insurance) for 20 years and I have yet to see a normal market. (I suppose, in 2014 we had one for a minute. But it was around then that buyers realized Greater Phoenix is an awesome place to live and the builders hadn’t meaningfully built anything in 6 years)

    As always, the law of supply and demand rules. From 2014, aside from a brief studder step in the spring of 2020, prices increased until May 2022. The Greater Phoenix median sales price bottomed out at $110,000 in February 2011 and peaked at $480,000 in May 2022. That is a 336% increase in 11 years.

    Prior to 2000, the residential average annual appreciation was around 3%. In the first 20 years of the 2000’s it jumped to 4-6% a year. The 45% we saw in 2005, the 28% we saw in 2021, even the 18% we saw in 2020 are anomalies. In 2019, we had 8% appreciation and in early 2020, when Tina Tamboer said we could see upwards of 10% appreciation in a year, I got nervous. 10% appreciation in a year is too much.

    As 2023 winds down and we reflect on the year that was and the year that is coming. I have a lot of hope for next year, always do, but I also always remember that hope is not a strategy. It does make the grind easier. Prices are actually up this year, despite the lack of expectation of appreciation.

    Today’s buyers have proven far more resilient than we expected. Why? Here is the secret, it is simple, in 2009:

    “We started originating traditional, boring 30-year fixed-rate mortgage loans with guidelines that ensured borrowers were qualified. So the risk we face now isn’t with the mortgage loan itself, like in the past — the risk is where we are in the economic cycle and people losing their jobs.”

    — Logan mohtashami, Housingwire

    We don’t talk about those boring borrowers. We don’t talk about those boring buyers. They are the foundation, not exciting, and they have always been there. The difference is today, they are our only buyers. The interest rate changes have scared off a lot of our buyers. 3% mortgage rates are not coming back, but neither are 18% rates. There is no current looming foreclosure crisis.

    Two weeks ago, we had a 3% week over week increase in purchase mortgage applications and last week we had a 4% increase. That 3% spike took place in 3 business days. Today’s buyers are watching the market so closely that, as soon as mortgage rates adjust down, the buyers immediately write contracts.

    For those of us in the industry, there will always be home sellers and home buyers. The number of them out in the market at any given time will always depend on outside influences, but ours is a market that always continues. Residential real estate is about 18% of GDP, the Federal government does not want to destroy such a large sector.

    It is not surprising that inventory has increased. Buyers are not excited about the price increases and higher interest rates. As interest rates fall more buyers enter the market. If and when the mortgage interest rate spread above the Fed funds rates gets shrinks, interest rates will fall and that will make a giant impact on our market. Typically, that spread is about 170 basis points or 1.7% but now it is running 300 basis points which is a 3% spread.

    NAR’s chief economist, Dr. Lawrence Yun predicts a 15% increase in purchase contracts if interest rates decline below 7%. Others predict we will have an even larger increase if rates go down to 6.5%.

    As I sit here, on a Monday afternoon, days after Thanksgiving, thinking about 2023 and hoping for a good 2024, I ask: what did we do right? What did we do wrong? What can we learn from what happened? What can we do better? These are important questions to ask as we face down another new year.

    • Roughly half of the industry players in Greater Phoenix, lived through the 2008 market crash. Those of us still around have a bit of PTSD but also have the confidence to know that this too shall pass. For the half that is new since after the Great Recession; this too shall pass.
    • We learned, we pivoted, we learned more. Bottom line: if you want to sell a house, do not overprice it.
    • If you are an industry participant, like me, we have to prove our value to the consumer. Every.Single.Day. No days off.

    These are the days of good, actionable advice, these are the days of listening and practicality. What matters is the consumer and their needs. If you don’t listen to them, someone else will.

    Change isn’t coming. Change is here. Are you ready?

    “It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself in a worth cause; who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat.”

    — Theodore Roosevelt

  • Bank Runs & Lower Mortgage Rates 3/14/2023

    “Those that fail to learn from history are doomed to repeat it.” 

    Winston Churchill

    Humans are incapable of making a decision without emotion. This was found when studying people who had lost the ability to feel emotions. They are unable to make choices. Fear and panic insight action. That is how on a non-descript Thursday, one bank could lose $42B in deposits. A bank run that took down 40-year-old Silicon Valley Bank (SVB) in one day.

    Bank Run

    It was a typical bank run on an unusual bank. And it was a perfect storm of shrinking deposits and dwindling new capital. SVB catered to Silicon Valley start ups, private companies, many with billion dollar status, with huge amounts of capital flowing in and out of the bank. However, when venture capital funding dried up as the tech sector lost value, the companies burned their cash reserves. Less investment and lower deposits.

    The bank’s doors were shuttered on Friday. Signature Bank, heavy into crypto went down on Sunday. And by Monday the FDIC had guaranteed all depositors all of their deposits, meaning everything was guaranteed, not just the first $250,000 in deposits.

    The banks themselves were not saved, but their customers were. Many may criticize the decision to bail out the tech start up sector, but it wasn’t for the billionaires, it was for their employees. If a company’s deposits vanish, making payroll gets complicated. Without the ability to make payroll, there is no company.

    The FDIC’s decision to completely cover the deposits goes further than that. Remember the emotional humans? They just heard that a bank went down and panicked without understanding why. The panic could lead to more bank runs. Preventing a bank run is hands down, the top priority.

    So far so good, the FDIC’s 100% guarantee calmed the panic. This is important because banks are fundamentally vulnerable. Revenue is generated by interest paid on loans so by nature, banks lend out more than they keep on hand. A bank run always has the ability to take down a bank. If the panic spreads to all of the banks, the entire financial system breaks.

    A financial crisis is different from a recession.

    If you look at the history of recessions, they are always caused by a certain sector and usually are not a total financial crisis. The stock market crash and the run on the banks in 1929 pushed the US into a complete financial meltdown and caused the Great Depression. It essentially took WWII to pull us out. (the New Deal helped but it was really the war)

    The Great Recession in 2008 created a financial crisis. It was a giant mess of fraud and greed and was started by the repeal of the Glass Steagall Act in 1999. It was enacted in 1933 and it prevented commercial banks from investing in each other. The banks bought each other’s bad loans and repackaged and resold them and everything crumbled because of the mortgage fraud with appraisers, truly a perfect storm that will never be able to happen again, at least not exactly the same. As Wall Street crumbled the Fed bailed out the banks which prevented a bank run that would have pushed the Great Recession into the second Great Depression.

    Good News!

    Let’s learn from this. Let’s help reduce the panic by giving clear information. And if you made it through my history lesson, you get to hear the good news. The banking chaos pushed bond rates up and mortgage rates down, by about half of percent, back below 7%!

    And there is pressure on the Fed to slow their rate hikes. The expected 50 basis point hike later this month maybe only 25 basis points. Some have called for no hikes this month. That is unlikely given another hot job market report and continued inflation. The lower Fed rate hike could lead to lower mortgage rates.

    This is very likely a short term thing. Once the dust settles after these bank closures, the Fed will refocus on fighting inflation and further rate hikes will come.

    Buyers should take advantage of the current rates, it is unlikely they will last more than a few weeks.

    Purchase contracts are up, especially as rates have fallen.

    Meanwhile, new listings continue to shrink and the overall available listings also continue to dwindle.

    In perfect, consistent order, the laws of supply and demand kick in. Prices are starting to increase. They are not increasing at the speeds we saw last year, which is a very good thing. Today’s buyers have their limits and they are holding to them. Today’s sellers are more flexible because they have to be.

    Final Thoughts

    Since we are all human, let’s help each other make the best, most rational choices possible. It is a good time to buy a house. And no more bank runs.

    Check it out! I was recently quoted in the Phoenix Business Journal. Angela Gonzales’ article gives a great update on MV Realty pausing business in Arizona.

    Copyright Sarah Perkins 2023

  • Housing Supply, Demand, and Psychology 2/21/2023

    It has been a minute since my last market update. Not only are we in a different market today than we were last November but I made some changes too.

    I am excited to announce that I joined Navi Title at the beginning of 2023. As the Director of Industry Research & Senior Account Executive, I get to continue my analysis of market data while working with top players in the real estate space.

    Navi Title is a two year old title company that hit the ground running. Despite the recent market shifts, we continue to grow and have big goals for 2023. Would you like to learn more? If so, click here.

    Market Update – Supply, Demand, and Psychology

    Housing demand data gets all of the attention, but to fully understand the housing market, you have to know the supply story too. It is actually the supply story that has been our saving grace, especially after the recent mortgage interest rate increases.

    Demand always fades before prices decline. In early January 2022 demand started declining and it wasn’t until June 2022 that prices started declining. If we compare the timelines of our previous market downturn (which was an absolute crash, but today’s correction is only a correction, not a crash) we can see how fast our current market cycle truly is moving.

    The speed of change spooked the 2022 housing market, not just the demand market, but the entire market. Interest rates skyrocketed, listings increased quickly, and demand dried up. And you know what else dried up? New listings.

    The graph below shows a near immediate increase in supply when mortgage rates increased. This was expected, the quick reduction in new listings was unexpected.  As the new listings remained low and demand increased at the end of December, prices stabilized, and our 5 week long buyer’s market came to an end. New contracts were up 53% in January alone. This is for Greater Phoenix:

    Then do you know what happened in early February? The Fed raised rates by 25 basis points as expected and the markets were happy. Mortgage rates dropped to a 6-month low of 5.99% on February 2. Until the unexpected January jobs report came out on February 3. Over 500,000 new jobs were created nationwide in January and only 187,000 were expected. Hot job markets = inflationary environment = more Fed rate hikes. Mortgage rates jumped. The following week, inflation data came out hotter than expected = more Fed rate hikes. Mortgage rates are back up to 6.80% and demand has declined. The data here is national:

    New listings have also declined. Prices are currently stable, and the median sales price is expected to increase by 1.22% in February to $415,000 from January’s $410,000. There are still sellers chasing the market down but all of these numbers have tightened over the past few weeks.

    Despite the slowdown in demand, we remain in a weak seller’s market, just a low velocity one. It is not bad for the market but this is tough on the real estate industry. We live off of transactions, not sales price. Real estate tech strategist, Mike DelPrete told me:

    “I don’t know how to say this politely, but Phoenix is such a f’d up market! It goes so extreme on both sides. Being in real estate in that market is a contact sport.”

    Mike DelPrete

    I am proud of his statement. Winning here in Greater Phoenix is like extra winning, especially in a tight market. I couldn’t agree more with Greg Hague (and I am sure he includes the whole industry 😊):

    “I believe in Realtors who want to win, need to win, will sacrifice to win, will help each other win, and won’t quit until they win.”

    Greg Hague

    While we hope for interest rates to decline, we have to remember, hope is not a strategy.

    Copyright 2023 Sarah Perkins

  • Greater Phoenix Housing Update 11/9/2022

    Economist Dr. Peter Linneman said that the roaring (20)20’s would see continued asset appreciation, job growth, GDP growth, and other good things from a healthy economy until – the one thing that ends all healthy growth emerges – and emerge it did. He was talking about greed.

    RIP Demand:

    During the summer of 2021 before the ridiculous iBuyer nonsense started, the Greater Phoenix housing market was starting to normalize. The spring frenzy cooled as the last of pent-up demand was exhausted. Initial evidence of seasonality appeared but not for long.

    Money was cheap so Opendoor, Zillow, and several other institutional investors were all flush with cash (AKA other people’s money) and were ready to spend. The investor frenzy commenced, and no one spent more than Opendoor and Zillow. Properties sold in minutes, far above asking. The median sales prices grew 1% to 2% a month.

    Institutional buyers purchased from each other. Many properties never even hit the market. The intensity of the frenzy killed Zillow’s iBuyer business by Q4 2021. Zillow realized that Q3 2021 losses shouldn’t have been $422M during the most intense seller’s market in 16 years.

    This Wall Street funded frenzy broke the emerging seasonality and pushed prices up and sidelined regular buyers. Inflation grew further and the Federal Reserve realized it wasn’t transitory. Demand peaked in early January 2022 as the increasing prices took their toll.

    Mortgage rates rose and demand dropped below normal levels in early May. Prices peaked in late May. The relationship between supply and demand that had treated sellers so well for so long turned its back on the sellers. The demand finally had some supply to choose from, but the demand was now priced out.

    The corporate investors and iBuyers outbid their competition, regular buyers, and now those same corporate investors and iBuyers are losing money on those investments. They forgot that in order to make a profit, their target consumer needs to be able to afford the product.

    Disruptors Disrupted:

    Eventually, investors expect profits or at least market sustainability. As the cost of capital increases and mortgage rates hang out around 7%, demand continues to fade further. The result, market caps decline and losses mount. Mike DelPrete shared this information on Opendoor’s Q3 results and Zillow’s final quarter of iBuying results. He also mentioned Opendoor shuttered its mortgage company, Opendoor Finance.

    Inflation & Rates:

    While the Federal Reserve is tasked with reducing inflation, it is limited to altering the Fed Funds rate. After artificially holding rates low for over two years, the Fed has increased rates 5 times this year which has pushed mortgage rates to around 7%. Unfortunately, despite the rate hikes, the inflation remains high.

    One big cause of inflation, that isn’t lowered by increased rates, is the country’s significantly increased money supply. There is simply a lot more money flowing through the economy. According to Shadow Stats, September’s money supply was 121.6% above the pre-pandemic high. The way to reduce inflation caused by increased money supply is to remove capital from the economy.

    Housing economists worry that the Fed has already over-corrected and is leading us to recession because the inflation data is a lagging indicator (tells us where we were). The Fed is expected to increase the Fed funds rate by 0.5% to 0.75% before the end of the year.

    The Fed does not use the CPI to gauge inflation. Instead, it uses the Personal Consumption Expenditures (PCE). Both the CPI and PCE weigh housing (rents) heavily, the CPI at 42% and the PCE at 23%

    • PCE is currently up 6.2% year over year and has already started to stabilize.
    • PCE is a survey of businesses and adjusts over time.
    • CPI is currently up 8.2% year over year.
    • CPI is a survey of consumers and doesn’t change.

    Notices & Foreclosures:

    A foreclosure crisis remains unlikely. The total number of residential notices of trustee sale declined by 2% from September to October. Notices of trustee sale and foreclosures remain below 2018 and 2019 levels.

    Demand Isn’t Completely Dead:

    In order to have a healthy real estate market, two things are required: 1) jobs and 2) inbound migration. Jobs and migration create new housing demand. While today’s demand has been sidelined by volatile mortgage rates and affordability challenges, it is important to note that the demand does exist. We saw a glimpse of it in early August went rates dropped down to 5% and we had a spike in new contracts for a few weeks. When rates went back up above 6% (and continued to rise) that demand cooled, waiting again. And we have jobs and people are still moving here.

    The Greater Phoenix Economic Council (GPEC) has been busy this year bringing more businesses and jobs to Greater Phoenix. During fiscal year 2022 (10/1/21 – 9/30/22):

    • 55 new businesses came to Greater Phoenix
    • 10,859 new jobs
    • $635M+ in payroll was generated
    • Average high-wage salary: $76,000

    Future prospects include:

    • 214 domestic businesses
    • 58 international businesses
    • A potential of 4,748 high wage jobs

    Final Thoughts:

    The Greater Phoenix median sales price peaked in May at $480,000. Through October the median is down to $436,000; a 9% decline in only five months. Prices will continue to decline through the end of the year. The high prices and high mortgage rates have sidelined most of today’s buyers.

    Yes, it is true that this is the second largest price decline since the end of WWII. And that sounds scary, but it is ok. It will ultimately help our market normalize. The 2021 housing market was unsustainable and unhealthy.

    We are going through growing pains, or shrinking pains, we need to go through in order to get back to a healthier, calmer market. It is only a matter of time.

  • How to Protect Real Property

    Founder and owner of the Keystone Law Firm, attorney Francisco Sirvent, discusses the best practices for property and asset protection in a volatile housing and economic environment. For more information visit keystonelawfirm.com or call 480-209-6942.

    Topics Include:

    • Should a real estate investor use one LLC or multiple per number of properties?
    • Is there a contingency plan if the primaries have incapacity issues
    • Are their techniques available to aid in legal avoidance of the Federal Estate Tax?
    • Inflation and Interest Rates Rising! How can protect my assets now?

  • Greater Phoenix Housing Update 9/27/2022

    Today is all about the AZ market. Recently, Clear Title hosted a Market Update with the Cromford Report’s Tina Tamboer. She always shares pertinent and timely information. Below I have combined a lot of her information from her presentation, along with additional information from my research.

    To learn more about a Cromford Report membership, click here.

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

    Mortgage Interest Rates:

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

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

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

    Accepted Contracts:

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

    Emotional Cycle:

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

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

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

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

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

    Affordability:

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

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

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

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

    Investors:

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

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

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

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

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

    Contract Ratio:

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

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

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

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

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

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

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

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

    Cromford Market Index (CMI): 

    The best tool for predicting future price appreciation trends available is on the main page of the Cromford Report: https://cromfordreport.com/ (without a subscription)

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

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

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

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

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

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

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

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

    Supply:

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

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

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

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

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

    Seller Concessions:

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

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

    Days on Market:

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

    Price Reductions:

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

    Sale Price/List Price Ratio:

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

    Price Appreciation:

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

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

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

    Employment Report:

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

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

    Final Thoughts:

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

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

    The Greater Phoenix economy is doing great.

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

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

  • Greater Phoenix Housing Update 8/26/2022

    Today is all about the AZ market. Recently, Clear Title hosted a Market Update with the Cromford Report’s Tina Tamboer. She always shares pertinent and timely information. Below I have combined a lot of her information from her presentation, along with additional information from my research.

    Before diving in, our first episode of Beyond the Transaction Podcast is available now. Our first guest was the illustrious Tina Tamboer! To listen and subscribe, click here.

    To learn more about a Cromford Report membership, click here. To register for our September 14th Cromford Market Update with Tina Tamboer, click here.

    July was rough, but…

    Nothing lasts forever and things are getting better. There is good news we have seen a week of improvements. Remember, it takes 3 weeks to make a trend so fingers crossed this is not an anomaly. Contracts are up. Cancellations are down. New listings are not coming to market as quickly. Demand is declining at a slower rate. The increase in activity is likely due to the few rate drops we have seen lately and shows us that the demand is there waiting for the right price.

    The stock market overall actually had a great July despite builders not feeling as optimistic as they were only a few months ago.

    Affordability:

    Affordability remains a major issue. Sellers can only sell to people who can afford to purchase the property. The same goes for landlords who can only rent to people who can afford the monthly payments. If sellers sell for less than anticipated or landlords rent for less than anticipated, they are not losing money they are experiencing a less than expected return, not a loss. The challenge to affordability has slowed the market to a crawl and it has caused fear that the situation is similar to drops we have seen in the past. The majority of the liability is held by Wall Street and private venture capital firms and not individuals.

    The US Census data we have to use for income is terrible (self-admitted). Bad data leaves a lot of wiggle room for variation. The data used in the affordability index is only released annually so take this with a grain of salt. In the past, Greater Phoenix was always more affordable than the country as a whole. We used to be the cheapest big city in the country. Not anymore. In Q2 2022 our affordability index dropped from 43.9 to 22.3. The normal range is 60-75. The national level for Q2 2022 was 42.8.

    Intended Use:

    Primary residence transactions provide market stability, which is why real estate is less stable than it used to be. Redfin’s CEO, Glenn Kelman explained why changes are speeding up in real estate, “I just think as Wall Street owns more of Main Street, the housing market will look more like the stock market, which is extremely volatile.” He went on to explain that investors are more likely to make drastic price drops to move inventory, which complicates selling for regular homeowners competing with institutions – which represent one-third of the available national market.

    Q2 2021 was the first time we saw a huge decline in primary residence home ownership in Greater Phoenix. Many were pushed out of the market by cash investors who accelerated price appreciation.

    • From 2015-2019 owner occupied purchases averaged 70%-76% of the market.
    • In 2020, owner occupied purchases averaged 80%-83% of the market.
    • In Q4 2021 that number dropped to 64%.
    • Q2 2022, through June, the number declined to 62%.
    • Q2 2022, through June, saw 36% of sales going to investor buyers.
    • Second home buyers peaked in Q4 2021 at 13.5% and declined to 12.2% in Q2 2022.

    Second homes are scaling back at a normal seasonal rate. In Q2 2021 iBuyers and institutional buyers went on a purchasing rampage leaving the consumers behind. The only way to make money from consumer spending is to stay within the general confines of affordability. Essentially saying, if no one can afford to buy the product, no one will buy the product. The group that is in the best position, owner occupied buyers. Anyone who purchased 12+ months ago remains in good shape in their ability to resell. Remember, prior to the pandemic, the rule of thumb for purchasing a property is that it takes two years to recoup the investment.

    Investor Flips:

    A property is considered a flip if it is acquired and sold within a 6 month period. It is tougher to turn a profit on a flip property in a balanced market. The savvy local investors know how to operate in shifting markets. Flip sales peaked in March and by June dropped by over 39%.

    The iBuyer model has only ever operated in seller’s markets. Launched in late 2014, Opendoor, the first iBuyer, has only ever operated in seller’s markets and is struggling to manage today’s market. Opendoor currently has 10% – 12% of today’s active listings while it only has about 3% of the current sales. Opendoor seems to be slashing prices in order to get more under contract. Offerpad is not aggressively slashing prices and therefore continues to have far more active listings than pending listings. iBuyers are still acquiring property, offers are now coming in about $100,000 under what seller expectations.

    The FTC’s $62M fine against Opendoor is about 2018 and 2019 advertising. Not for today’s current acquisition and sale environment.

    Contract Ratio:

    The overall market is in balance now. There are some lingering hot markets but those are cooling quickly as well. There are only 3 areas with cold markets, one in Gilbert, one in Avondale, and one in south Scottsdale. These are changing quickly.

    The good news is that the contract ratio is no longer dramatically plunging, it has slowed into more of a glide down. The increase in contract activity offset the inventory coming to market. Hopefully, this is the beginning of a trend! We need more data to be sure.

    The dramatic rate of change is slowing. The contract ratio is a bit colder than it was in 2014, the last time we had a balanced market. There is a difference between normal and balanced markets. Normal is based on long term averages. For example, normal supply (long-term average) is about 20,000 to 25,000 available properties. Normal under contract is about 9,000. Balance is when supply and demand meet. The under-contract count matters the most. The $1M+ is still a warm market. The contract ratio for the luxury market is around 38 when it normally is around 10-15. This is likely due to the extremely low inventory count in this segment. There are currently over 700 $1M+ properties in escrow.

    Emotions & the Market Cycle:

    The market is moving through the regular market cycle. Sellers are going through the stages of grief and are currently in denial. The sellers need to understand this market is different. They have to fix up their properties. They missed the peak of prices, and that is ok. Once sellers arrive at acceptance then they will be able to sell their home. The severity of each part of the cycle depends on the market. If we see a continued increase in contracts then despair may be short-lived.

    Days on Market:

    There are 3 stages in a market shift. The first is price reductions which have increased, further details are below. The second is an increase in days on market. That has definitely increased. On May 1 the median days on market prior to contract was 7. It is now up to 25. People are upset about it. When you see an increase like that it is unnerving but historically speaking it is great. In 2007 the median days on market prior to contract reached 130 days. And that was before prices crashed! The third stage is an increase in seller concessions, which we are seeing. More details on that are below also.

    Price Reductions:

    Weekly price reductions have increased 746% over the past 5 months. About 23% to 26% of active supply is dropping prices weekly. The median reduction is $13,000. This does not mean prices are crashing. These are list prices coming down significantly which are down 18% since the market began shifting 5 months ago.

    Sales prices are down about 4% since May. List prices are coming down which is bringing the prices down to where the buyers are. It is not crashing the market. Sales prices are not as far down as list prices.

    Mortgage rates declined and even dropped down below 5% which stirred buyer interest. When rates go down monthly costs go down. Combined with declining prices, payments fell 5.7% since June.

    Payments: 

    Our market is still not affordable. The median monthly payment for the median home selling at $450,000, with 10% down is $2,674. For that to be within the affordable range, household income needs to be at $115,000 a year. Based on the estimated Greater Phoenix median household income of $88,800, in order for payments to be affordable, they have to be $2,072 a month. The median monthly rental payment is $2,250 which is affordable for a household income of $96,000 a year.

    Interest Rate Buy Down:

    A great way to bring down the monthly costs for a buyer is to do an interest rate buy-down. A seller can buy down the buyer’s interest rate. There are different options for these and be sure to discuss the details with your lender as there are a lot of conditions. There is a permanent buy-down option or a 2-1 buy-down which drops the buyer’s interest rate by 2 points for the first year of the loan and 1 point for the second year of the loan. By year 3 there is the potential for more desirable interest rates. Market the monthly payment, not the asking price. Be sure to note that some of these concessions could actually be cheaper than a price reduction.

    These are estimates only, talk with your lender for actual costs and details:

    Seller Concessions:

    In August 9.6% of all closings included a seller concession, up from 7.1% in July. The long-term average is 25%. Expect this number to increase. Offers are not as clean as they were but this is also allowing sellers to make fewer price reductions.

    Weekly accepted contracts are up week over week but remain down 24.1% year over year. The percentage of seller concessions is increasing weekly. This is an unseasonal increase in weekly accepted contracts. It is likely due to interest rates and increased seller concessions. This tells us that the demand is there, but it is right below the surface, and likely will emerge when rates drop down below 5%. That is not a trend yet, but it is exciting.

    Supply & Demand:

    Active listings are not increasing as quickly.  In July there were 1000 new active listings added a week and in August it dropped to 500 new active listings being added in a week. The decline in new listings help stabilize the market and will help the existing sellers. Not on the 2005 track anymore. During 2006-2007 there were about 3500 new active listings added a week. We are nowhere close to that. We could be reaching a normal realm though.

    Demand has stopped dropping and the luxury market is showing signs of normal seasonality. WOOHOO!

    Cromford Market Index (CMI): 

    The best tool for predicting future price appreciation trends and is available on the main page of the Cromford Report: https://cromfordreport.com/ (without a subscription)

    • 100 is balanced and prices rise at the rate of inflation (currently 9.1% nationally, 12.3% in Greater Phoenix), below 100 is a buyer’s market, above 100 is a seller’s market, prices drop below 90, prices rise at 110. 
    • Between 90 – 110 prices roughly follow the rate of inflation.
    • Yesterday we were at 107.4
    • All-time high: 3/14/2021 at 514.9 
    • 2022 High: 2/7/2022 at 474.6
    • One month ago, 7/25/2022 it was 131.6
    • CMI is the predictor, it moves first and then appreciation follows. Cannot predict the CMI. It tells us where we are.  

    Our market is officially in balance. When we are in balance homes appreciate at the rate of inflation. The math does not support a crash or lots of price declines. We could see a short buyers market. We won’t see a price crash but a price correction could be 10-15%. Right now, we are looking at a 4% decline so far since June.

    In 2007 we had 57,000 active listings with only 4,000 under contract. That was a crash. Today we have about 19,000 active listings and 8,800 under contract, not a crash but yes to a correction.

    The CMI’s decline is slowing and the curve is turning into a balanced market. Demand is declining more slowly and supply is being added more slowly, together this is creating some stabilization.

    Broken down by city, the top seller markets are Fountain Hills, Paradise Valley, Scottsdale, Cave Creek, and Goodyear. The cities in balanced markets are Avondale, Phoenix, Mesa, Glendale, Peoria, and Chandler. The cities in a buyer’s market are Surprise, Tempe, Gilbert, Maricopa, Queen Creek, and Buckeye. New home communities add supply which brings them into a buyer’s market faster than the areas without new construction.

    Prices:

    The sale price to list price ratio is now 97.9% (from the last list price, not original) Sellers are getting about 98% of asking. A normal, balanced market is about 97%. In May it was 101.7%.

    The median sales price in May was $480,000. August to date is $450,000 which is a 6.25% decline. Year over year prices are still up 11%. It is still higher than the rate of inflation. We are looking at about a 2% decline a month, not a crash.

    Today the average price per square foot is ($293.79) up from July ($289.86) but down from May ($306.01). Sellers are getting more for each square foot. Year over year average price per square foot is up 17.3%. Averages change when there are fewer luxury sales. Overall we have seen a 4% drop since the peak in May, which is a 1.3% drop a month. If we stay on this trajectory, we could see another 4% decline by the end of the year. We could see a total decline of 8% this year. That is a correction, not a crash.

    2005-2008 Bubble Vs. 2022

    The biggest risk to all housing markets is vacant homes.

    2005: HIGH VACANCY & HIGH FORECLOSURE RISK:

    • False demand leads to vacant properties and vacant properties lose value.
    • Bad financing: 100% (or more) loans, interest-only loans, no equity
    • Lots of speculation: no intention of occupying the property
    • Overbuilt for 10 years, no labor or supply shortages, built quickly

    2022: HIGH EQUITY, LOW FORECLOSURE RISK, LOW VACANCY RISK

    • Good loans with significant down payments
    • Cash does not foreclose
    • Stable buyers
    • Intent to occupy
    • New home development struggles to keep up with demand
    • Wall Street’s returns may be lower than expected, rentals/short term: moderate risk of vacancy due to potential pull back on rentals
    • Lack of water creates a high risk of vacancy

    The common denominator between the 2005 and 2022 markets = Wall Street. People always take more risk when spending other people’s money. A flood of capital in any sector often creates chaos. In 2005 investors put all of their money in lending and mortgage-backed securities (MBS). The Dodd-Frank Act prevents that from happening again. The risk for today’s investors is a lower than expected return, not a flood of foreclosures.

    We do have to watch water, the outskirts are impacted the most. People will not be as interested in buying or renting if there is a water shortage. Expansion will be restricted in areas with stressed water resources. It will likely push more density in areas with a solid water supply. Water supply could impact future housing demand in shortage areas.

    Distress?

    Today’s desperate sellers are ibuyers. A balanced market is tough on iBuyers. Both Opendoor and Offerpad purchased far more houses than they are selling. And their model requires continuous purchasing. Both companies are seeing huge inventory increases and few sales.

    Investors pushed the market further than it could bare so they are pulling back and that is why the market is crumbling now. Most price declines are leading to lower than expected prices but owners are not losing money.

    In July there were 238 notices of trustee sale (pre-foreclosure) recorded. In July 2019 there were 465. In 1996 there were 515. In 1996 there were more than double today’s amount and back then Gilbert was a farm. Kierland and the 101 didn’t exist. The population of Greater Phoenix was significantly lower. Foreclosures are not currently posing a big threat to the market.

    Final Thoughts:

    Welcome to a balanced market. We are currently in stage 3 of the market shift, an increase in seller concessions. We will likely stay here for a while. It is important to set clear expectations with your home buyers and sellers. While the days of the runaway seller’s market are long gone, today’s sellers are not desperate (aside from iBuyers) and will not sell if they do not have to. We are working our way through the chaos and a stable market may actually be in sight.

  • Been There Done That: Reflections on a Market Shift

    Disclaimer: Today’s market and the 2008 – 2011 market are not the same. While it may feel similar, the fundamentals are entirely different. This is about my own experience.

    In 2005 I was 25 years old and thought I would never be able to buy a house. Four years later I bought my first house and promptly watched my new investment plummet in value. But we could afford the payments and needed a place to live so we stayed. Housing is shelter and is a basic human need regardless of price.

    Today there are many 25 – 35 year olds hoping to buy their first home. Last year I would have encouraged them to buckle down, save as much as possible, and still throw their hat in the ring. It may be exhausting and defeating but at the end of the day, they just might be able to push, shove, and elbow their way into home ownership.

    There are more options today. There will be even more options tomorrow. This is challenging sellers and the industry. A home listed at a competitive price last week may no longer be competitive next week. The market is cooling faster than ever before.

    I started in title in 2004 and was unaware that the market began slowing in April of 2005 (the Cromford Market Index was not yet available to the public). I had a vague idea things were changing when prices flatted in late 2006. Twelve months later available inventory reached 57,000 – the standing record – and buyers were few and far between. There were only 4,000 properties under contract when inventory hit those record highs. Before builders closed up shop or walked away from projects they offered 4%+ commissions, flat-screen TVs, and even new cars to Realtors who brought buyers. 2008 started with some optimism that was quickly extinguished.

    By November, my employer filed for bankruptcy. Only a few weeks later, while on my honeymoon, I learned the company was bought out. Then on December 27, 2008 half of the company was laid off. I survived the cut, my branch closed, and I went to work at corporate. By mid-2009 the magnitude of the housing crash, which continued for another two years, changed how the collective looked at residential real estate.

    Since then over one million people have moved to AZ. New challenges and industry leaders have emerged. 50% of licensees today sold real estate prior to 2014. As we face a new shift, one that we saw coming, there is some PTSD, some relief, and a lot of fear; I want to remind the real estate industry that we are resourceful and resilient. We have been beaten up before and lived to tell the tale.