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

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

To register for our August 17^th Cromford Market Update with Tina Tamboer, click here.

OMG so much change!

Despite knowing that the market was going to normalize – no market lasts forever, especially not savagely unbalanced, unsustainable markets – but the speed of this change has been surprising, to say the least.

The Greater Phoenix residential real estate market has seen 15 weeks of change but in the past 4-5 weeks that change has been amplified by a lot.

What affects demand?

• Population growth
  • Every person, whether a renter or owner, is an element of demand.
  • We still have population growth, but it is slowing, it is possible for population growth to happen without increasing demand, when there is household consolidation. That increases vacancies and roommates.

• Relocation (inbound)
  • Households relocating from outside Greater Phoenix brings one excess element of demand without adding to supply.

• Household formation
  • Population doesn’t need to grow for demand to grow if new households are forming. You can increase demand without population growth. Household formation is mostly related to affordability.
  • When 1 household splits into 2 (growing), one excess element of demand is created.
  • When 2 households merge into 1 (shrinking), one element of demand is removed.
  • The latest household formation data is from March. It is expected to fall in the next release.

• Affordability
  • Employment/income – impacts household formation and affordability
  • Appreciation/depreciation
    • Appreciating home prices decrease affordability and decrease demand.
    • Depreciating home prices increase affordability and increase demand (eventually but not immediately)
  • Interest rates (can offset effects of Appreciation/Depreciation)
    • Lower rates increase affordability and increase borrower demand
    • Higher rates decrease affordability and decrease borrower demand
    • Over the past 4-5 weeks interest rates have been very volatile, moving from 5.3% to 5.8% and back to 5.2% in only a week. It makes it very difficult for buyers to lock in. Buyers will freeze because they are waiting for some stability, so they feel more confident locking in a rate.
  • Loose/tight lending practices (can offset effects of interest rates)
    • Loose lending practices increase demand.
    • Tight lending practices decrease demand.
  • The affordability rate was awesome right when the pandemic hit. 70% affordability. Then we dropped below normal within a year.
  • Many investors are only now learning that they cannot continue to push the prices up forever. Eventually, the population will need to be able to afford these prices. Not everyone can afford the properties that were flipped.
    • 36% of homes that are currently active were bought in the past year.
    • 25% of homes that are currently active were purchased in 2022.
    • Those who bought homes in 2020 or earlier are fine.

• Consumer Sentiment – could the most important factor
  • Emotions, such as euphoria or utter despair, based on speculative opinions or unreliable forecasts can cause some home buyers to make decisions that are not in line with market indicators.
  • This is bringing out a lot of emotions. A lot of wealthy people are thinking about selling off their property. When people start to panic sell, more people will panic sell and create a self-fulfilling prophecy. If homeowners think the market is tanking, so they may sell at a discount because they think that is what is what they have to do so then it creates exactly what they are afraid of.

Intended Use:

Q2 2021 was the first time we saw owner occupied affidavits dipping below 70%. As of May, it was 62%. From 2015 through 2019, owner occupied purchases ranged from 70% to 76%. In May, 13% of buyers were second homeowners (slightly above normal), 20% were investors, and 5% iBuyers.  The majority of the elevation is investor and iBuyer purchases.

Cash Purchases:

Not a crash. The vast majority of purchases in 2005 – 2008 included loans; only 10% of purchases were cash. Lots of risky loans. Foreclosure crises come from too many bad loans. Now investors own the properties free and clear.

Cash purchases have been growing. 30% of buyers pay cash. Cash doesn’t foreclose. We are not looking at a looming foreclosure crisis. News media is very far behind. The only way to keep up with the market is to follow exactly what is happening as it happens; ignore the noise.

Interest Rates:

By rapidly raising interest rates to tame inflation, the Fed pulled the emergency brake on real estate. Is Chairman Powell channeling inner his inner Chairman Volker? He was the Fed’s chairman in the 80s who rapidly increased rates. At the end of both of the 1980s recessions, mortgage rates declined. Many people already believe we are in a recession, or we are going into a recession very soon. Interest rates always tend to drop sharply at the end of a recession. The ability to refinance is likely if the recession happens soon or now.

The majority of owners have payments that are much lower than today’s rents. People are not going to walk away from fixed mortgage payments that are lower than rents. They won’t, even if property values decline by 10%.  Predictions planning a mass foreclosure crisis are unfounded. No homeowner wants to walk away from their equity. It makes no pragmatic sense. Why walk away to pay more in rents because prices will come down from the peak?

Interest rates don’t stay high or low forever. They always change. Nothing is forever. None of our markets are forever. The only constant is change.

Buyers primarily focus on monthly payments. The only market that matters is the market we are in right now. We can’t know what will happen but we do need to understand how we got to where we are.

15 weeks ago, mortgage interest rates surpassed 4.4%. Supply started increasing slowly. It was a very subtle turn. By April, after rates increased above 5%. Supply shot through the roof. The rate volatility has created chaos for buyers. With the lack of stability buyers have sidelined themselves.

Also, about 15 weeks ago we saw a big stock market drop. Anything that is Wall Street based is impacted. Wall Street funded institutions started pulling out of escrows. Similar to what happened at the onset of Covid. Corporations act more slowly. They stopped writing contracts. How long will Wall Street stay on the sidelines? We do not know.

Contract Ratio:

Welcome to balance. Unfortunately, it comes with a high interest rate. Buyer’s markets are loser’s markets. Seller’s markets are winner’s markets. Buyer’s markets have fewer buyers.

Seller’s markets are a dump your junk market. Everything sells in extreme seller’s markets.

Buyer’s markets are great for buyers that need more help. We will see more down payment assistance, lower down payments, first time buyer programs, FHA loans, etc. This is great for buyers who need a little help getting into a home.

The contract ratio looks at how many homes are under contract relative to how many are on the market. And it moves faster than the Cromford Market Index (CMI). It is not seasonally adjusted, and the ups and downs are more visible. On June 2 the market was still in a frenzy. By July 11 the market was warm. A warm market is a balanced market.

15 weeks ago, the contract ratio was 249, last week it was 53.2. A contract ratio of 30 – 60 is considered balanced, above 60 is hot, above 100 is a frenzy. Below 20 is a cold market. We have been living in a frenzy for 1.5 years. It is not normal to have more under contract than what is available on the market.

Are we at normal supply yet? That is a very typical question that isn’t easy to answer. Inventory counts are not that far from 2018-2019 counts. 2014 was the last balanced market we had. There were 20-25K properties on the market in 2014. A balanced market is when the number of available listings and the number of properties under contract correlate.

With a contract ratio of 53 the market is in the warm stage, balance. The contract ratio is lower than 2018 and 2019. It isn’t about the supply number it is about how many are in escrow.  We should have between 10-11K in escrow for July. But only 7700 are in escrow so we are moving towards a buyer’s are market.

Everything listed over $400K is in balance.

Days on market prior to contract is now at 17 days or 3-4 weeks. Expect it to continue to slow. For any new listings, prepare sellers for 4 weeks of active status. Expect price reductions and seller concessions. There are 143.9% more listings on the market this year than there were last year. The $400K-$1M price range has had the biggest increase in available supply.

The Market Cycle:

The market is cyclical. There are different emotions associated with the different stages of a cycle. Speed up the process and the emotions gain intensity. Capitulation is the action of surrendering or ceasing to resist an opponent or demand.

Price Reductions:

The first indicator of a balanced market is an increase in price reductions. The first wave of reductions makes a difference, but after multiple reductions the price drops don’t matter as much. Sellers have to do more to get their houses sold.

Price reductions have increased by 496% in 15 weeks. The overall median price reduction amount is $15,000.

• Listings under $200K had a $10,000 median reduction
• Listings at $200K – $400K had a $10,000 median reduction
• Listings at $400K – $800K had a $15,000 median reduction
• Listings at $800K – $1M had a $25,000 median reduction
• Listings at $1M – $2M had a $50,000 median reduction
• Listings at $2M – $3M had a $100,000 median reduction
• Listings over $3M had a $152,500 median reduction

Interest Rate Buy-Downs:

As the institutions have pulled back sellers have to focus on traditional buyers. The median sales price is slightly down from $469,000 (May) to $459,000 (July). But the payments are about the same because the interst rates are keeping the payments high. Price reductions don’t have the same impact when rates are going up.

December’s interest rates and median price worked for the median annual household income of $88,000. They do not today with higher rates and higher sales prices.

The median monthly payment for the median house is $2,745. The median rental rate for the same median house is $2,295. We have to beat rent prices to make buying desirable. In order to do that we have to pull out an old tool that hasn’t been used in 10 years.

The interest rate buy-down. A seller can buy down the buyer’s interest rate. There are different options for these and be sure to discuss the details with your lender. There is a permanent buy down option or a 2-1 buy down which drops the buyer’s interest rate by 2 points for the first year of the loan and 1 point for the second year of the loan. By year 3 there is the potential of more desirable interest rates. Market the monthly payment, not the asking price. Explain what this means to buyers. Do something different than the competition. Advertise something different. Get creative.

This is an estimate only, talk with your lender for actual costs and details:

Scenario 1:

Based on the July 9 median price of $457,000 at a 5.3% interest rate the estimated PITI is $2,733, if a seller does the median price reduction of $15,000 it will save the buyer about $86 a month.

Scenario 2:

A permanent buy-down may cost around 3% of the loan amount, assuming a purchase price of $457,000 at 5.3% and a 10% down payment, a permanent buy-down of 1% could cost the seller $12,339. A 4.3% interest rate would save the buyer $248 a month.

Scenario 3:

A 2-1 buy down may cost around 2.2% of the loan. Assuming a purchase price of $457,000 at 5.3% and a 10% down payment, a 2-1 buy down could cost the seller $9,048. The 3.3% interest rate the first year would save the buyer $481 a month. A 4.3% interest rate the second year would save the buyer $248 a month.

If a seller is willing to give up the money in a price reduction, the seller may be willing to pay for the buy-down option instead.

Supply:

For sale and rental inventory is up!

• The MLS rental supply is up 111% since September 2021.
• The MLS rental supply is up 51% since January.
• One investor increased the rental inventory by 12% in only 3 days.

Always check rental supply and rates. More people are renting, and we are seeing more roommate situations. So far in July, 37% of leases closed below asking. Last year it was only 22%.

• Homes for sale on the MLS increased by 220% in 15 weeks.
• Homes for sale on the MLS increased by 144% year over year.
• Most price points have more competition.

Sellers are rushing to sell to get the peak price, but we are already past the peak. Weekly new listings are outpacing every year since 2000 except 2006 and 2007.

Investors and flip models are driving many of the newest listings. This is unusual.

• 25% of active listings were purchased since January.
• 11% of active listings were purchased in the second half of 2021.
• 36% of active listings were purchased in the past 12 months.
• 52% of all active listings are vacant. Not normal.
• 13% of active listings are new builds.
• 12% of active listings are iBuyer owned.

Owner occupied listings have an advantage. Showing a lived in house looks good. This is not your as-is market. This is the best of the best of the market. ibuyers are still buying homes right now. They are not positioned to hold properties.

Demand:

It is always important to watch new listings (supply) and new contracts (demand). When the market shifts there is always a change in either supply or demand. Buyer demand has fallen off a cliff, which ultimately was the intention of the Federal Reserve. 40% of inflation is housing.

5 weeks ago demand took a dive. Prior to that, in June, we were ok, hanging around normal-ish demand. And when the first institutional buyers not only stopped buying but cancelled existing contracts, demand tanked. Combine that with the interest rate fluctuations, most traditional buyers have been sidelined. We need to get more buyers into the market. Teach awareness of ways to make payments better.

15 weeks ago was a great market for sellers. And now there are fewer properties under contract than there were in 2014, our last balanced market. Based on the trends it is not going to get better before the end of the year.

Greater Phoenix’s weekly accepted contracts are trending lower than any week of 2021, aside from the very last week of the year. Listings under contract are down nearly 26% year over year.

The one sector that has not been crushed by fluctuating interest rates are homes listed at $3M and up. Typically, this market is not as rate sensitive, but it does tend to be impacted by stock market fluctuations. At this point, we haven’t seen the impact of the falling stock market, but we may still.

Properties falling out of escrow is increasing. It isn’t super high but is an important number to watch. Canceled listings is increasing rapidly, 2021 had very few cancellations. Despite the increase, the cancellations are not enough to significantly slow the increase of supply. Expired listings are also increasing rapidly.

Cromford Market Index (CMI): 

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

• 100 is balanced and prices rise at the rate of inflation (currently 9.1% nationally, 12.3% in Greater Phoenix), below 100 is a buyer’s market, above 100 is a seller’s market, prices drop below 90, prices rise at 110. 
• Between 90 – 110 prices roughly follow the rate of inflation.
• Yesterday we were at 139.1
• All time high: 3/14/2021 at 514.9 
• 2022 High: 2/7/2022 at 474.6
• One month ago, 6/20/2022 it was 210.2
• CMI is the predictor, it moves first and then appreciation follows. Cannot predict the CMI. It tells us where we are. 

There is no number that defines normal. It is about the relationship between supply and demand. When the numbers for supply and demand are the same, the market is in balance.

Property value is declining while rate of appreciation is still positive. Values are declining but the seller (as long as they owned 1 year or more) won’t lose money. To lose money on a house a homeowner has to sell for less than they paid. Losing money if they are selling with in a 6 month period. Historically it took about 2 years of ownership before purchasing costs are recovered.

It is mostly buy and hold investors losing money. They are only getting slightly less than expected but a large scale. Regular owners are in really good shape. Watch what was actually invested in the property.

Supply is rising faster than demand is dropping. Month over month prices were flat from May to June and will decline from June to July. We are getting close to year over year declines but supply has to be bigger than demand for year over year prices to drop.

In 2007 it was builders and homeowners who couldn’t afford their payments who listed their homes and spiked inventory. Today’s homeowners are credit worthy, have great interest rates, and can afford their payments. They are not flooding the market with listings. Investors are listing property. Many investors paid cash, which does not foreclose.

Prices:

Sales prices represent what the market was like 4-6 weeks ago. In July there has been a sharp median sales price decline. The year over year appreciation rate in June was 19% up. So far the year over year appreciation rate is only 13% up. This is a bigger decline than normal. It usually drops off the second half of the year. Expect each month to have a smaller and smaller year over year appreciation rate.

Sale Price to List Price Ratio:

As of July 10, nearly 37% of listings closed over asking for a median of $10,000 above. Both the amount and percentage are dropping and will likely be down to 2%-3% of sales close for over asking in August.

June ended with a sale price to list price ratio of 100.0%. It is coming down now. Do not expect full price offers in July. Currently, the rate is 99.3% A decent seller’s market often sees a 98%-99% ratio. A balanced market has a ratio around 97%.

Seller Concessions:

25-28% of closings with concessions is normal. We are up to about 5.5% now. This is the third stage of a shift. First days on market increase, second price reductions increase. Third, seller concessions increase. Expect this number to continue to grow.

Distress? Nope!

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

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

Mortgage credit availability will not increase anytime soon. Most lenders believe that people will be refinancing in the next 3 years. It is tough for investors to want to increase credit because they make all of their money in the first 3 years and the lenders know people will refinance as soon as rates decline.

Not seeing a lot of pre-foreclosures or foreclosures, we are still running below 2019 numbers. A notice of trustee sale is a pre-foreclosure. A homeowner is given 90 days notice. The current median days on market before a contract is 17 days.

Final Thoughts:  

Buying is fun again. All month over month metrics are down. This can be scary for the industry yet it is necessary for the market. The severity of the previous year’s imbalance is unsustainable.

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

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

A lot is happening in housing and there is no reason to panic. The market of the past two years is unsustainable. In order to get to the calm of a more balanced market, we have to go through the chaos of change.

In order to really see what is going on in Greater Phoenix real estate, we have to take a granular look at exactly what is happening right now.

Interest Rates:

Interest rates are never low or high forever. Sometimes they come down as fast as they go up. In 2018, it took 10 months to go up and 6 months to come down.

The speed of movement hasn’t been like this since the 1980s. The speed is comparable to the 80s but the actual rates are very different.

Look at the changes during a recession. What do interest rates do during recessions? At the end of all of the past recessions, interest rates dropped. If we are going into a recession, then we will likely see rate drops towards the end. Aside from 2008, most recessions last only about a year.

In time rates will likely come down. Remember people buy payments. They are watching payments. Potential buyers should buy now, start building equity, and refinance later when rates drop. Homeownership is the greatest creator of wealth in the US, this is true regardless of interest rates.  

Active Supply:

This is the chaos. Active inventory is up 86.2% year over year and up 108% in 10 weeks. Listings are rising and demand is down, causing inventory to grow even faster.

New listings are up 11.2% year over year. We are just coming in over 2021 but not higher than 2005. Before the crash of 2008, we had a ton of new listings. This does not mean the market will crash. We are at an inflection point though. Are the numbers turning seasonal or will there be an acceleration of new listings? It is important to watch these numbers.

Accepted Contracts:

There is always a drop in accepted contracts over Memorial Day weekend. Newly accepted contracts were down 11.3% year over year. There will be another drop off for the 4th of July weekend. Expect the decline to continue. The accepted contracts are matching the pace of 2019. This is another metric to track.

Pending listings have declined in each of the past four months. 10 weeks ago, listings under contract started coming in lower than in 2021. Now that count is 15.9% below last year’s count. About a year ago the market started normalizing when Zillow and Opendoor both went on a purchasing rampage, creating the frenzy of the second half of 2021. That will not happen again this year.

29% of buyers in April paid cash. Investors are not buying everything.

Supply & Demand Changes:

Overall, active supply is up 92.4% year over year and at the same time listings under contract is down 15.9% year over year. Buyers are seeing inventory rise after two years of rejection. Now is the time to prepare your sellers for what is happening right now. Today’s market is very different from the market of only a few months ago.

$300,000 – $400,000 listings

• Active supply up 23% year over year
• Active supply up 84% in 10 weeks
• Listings under contract down 45% year over year
• Listings under contract down 36% in 16 weeks

$400,000 – $1.5M listings

• Active supply up 174% year over year
• Active supply up 105% in 7 weeks
• Listings under contract up 29% year over year
• Demand is still quite high but there are way more listings coming on the market, many sellers do not want to miss the top of the market. If it were following seasonal patterns, demand will flatten.

$1.5 – $3M listings

• Active supply is still low compared to previous years
• Active supply up 38% year over year
• Active supply up 112% in 10 weeks
• Listings under contract up 6% year over year but on a steep decline, will fall below 2021’s numbers in the coming weeks. If following normal seasonality, this will decline through the end of the year.

Over $3M listings

• Active supply up 20% year over year
• Active supply up 34% in 12 weeks
• Listings under contract up 19% year over year

Flip investors, private landlords, and first time home buyers tend to buy below the median. The current median is $480,000. There are not very many listings available below $480,000. This has impacted first time buyers and investors on a budget, there is both a lot of competition and profits are lower for flippers in the lower price ranges.

If this market slows down enough, down payment assistance programs will likely increase. There is aid available but only when demand is low enough will sellers accept offers from buyers utilizing the programs. This is not seasonal.

Price Reductions:

Price reductions are often the first indicator of a market shift. When buyers believe they can afford the asking price is when they will come into the market.

$300,000 – $400,000 listings

• Price reductions are up 208% in 10 weeks
• Median amount reduced: $10,000

$400,000 – $1.5M listings

• Price reductions are up 302% in 10 weeks. In the same 10 week period listings under contract are down and inventory is up. Sellers need to adjust accordingly.
• Median amount reduced
  • $400K – $500K: $10,000
  • $500K – $600K: $10,000
  • $600K – $800K: $12,000
  • $800K – $1M: $25,000
  • $1M – $1.5M: $50,000

 Over $1.5M listings

• Price reductions are up 172% in 10 weeks.
• Median amount reduced
  • $1.5M – $2M: $77,500
  • $2M – $3M: $136,000
  • Over $3M: $187,500

Days on Market:

Behind price reductions, the second indicator of a market shift is an increase in average days on market prior to contract. For most of the year, listings were on the market for 7 days prior to accepting a contract. In May, that number hit 9 days and by the end of May it was up to 11 days. May’s increases were quick and with more inventory coming to market, this number will continue to increase. Sellers will need to adjust their expectations from an offer coming in one week to two weeks.

Contract Ratio: 

Housing is no longer in a frenzy. A frenzied market is when there are more properties under contract than there are on the market. The contract ratio for a frenzy market is over 100. A month ago listings up to $2M were still in a frenzy. Each week another price range dips below frenzy level. With a contract ratio of 98.3, we are still in a very hot seller’s market. A year ago the contract ratio was 224.8. A normal contract ratio is around 85.

The decline in contract ratio is more about increased inventory than it is about decreased demand. Inventory has grown faster than demand has declined. The recent drastic declines in the contract ratio represent the chaos before the calm.

Cromford Market Index (CMI): 

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

• 100 is balanced and prices rise at the rate of inflation (currently 8.6%), below 100 is a buyer’s market, above 100 is a seller’s market, prices drop below 90, prices rise at 110. 
• Between 90 – 110 prices roughly follow the rate of inflation.
• Yesterday we were at 227.6
• All time high: 3/14/2021 at 514.9 
• 2022 High: 2/7/2022 at 474.6
• CMI is the predictor, it moves first and then appreciation follows. Cannot predict the CMI. It tells us where we are. 

There is no number that defines normal. It is about the relationship between supply and demand. When the numbers for supply and demand are the same, the market is in balance.

In 2005, the CMI dropped for 4 months before prices flattened. In the next 3 months, we will likely see a  slowing in appreciation rates. Cash investors are still very strong buyers in our market. Less competition so they are offering less.

Supply is 60% below normal. Demand recently fell below normal and is now 7.5% below normal. Supply is increasing faster than demand is decreasing. When demand falls below 100, the number of transactions declines. The closer demand is to 100 or higher keeps transaction counts high. It is better for the industry and overall economy for supply to come up to meet demand versus demand dropping to meet supply.

The CMI declined at record rates over the past 8 weeks. CMI data goes back to 2000 and the last month had the fastest CMI drop on record. With this many outside influences impacting the market, it is impossible to know what will happen next. The CMI can change on a dime. There is no indication that prices will decline anytime soon but this does show weekly declines in the seller’s advantage. Now is not the time to over price a listing. We don’t have desperate sellers. They can wait and not panic sell. Worst case they keep their home and an awesome interest rate for a little longer than planned.

Sales Measures:

Sales measures tell us what happened in the past, not what is happening in the future. The media is using closed sales, past activity, to explain the market. Things are shifting so quickly right now it is impossible to predict the future past 3-4 months from now. The sales measures for the month of May are still very good. But that is not the future, it explains what the market did 30-60 days ago.

May ended with a median sales price of $480,000 and year over year annual appreciation rate of 22%. The sales price to list price ratio was 101.7% (expect this to drop in the next 4 weeks) and 54.6% of homes closed over list price. The third indicator of a shifting market is increased seller concessions (when a seller pays some of the buyer’s closing costs). Currently, seller concessions are low at 4.1% but are just starting to increase.

Flips:

Flips dropped off in April, likely due to the increased interest rates and declining demand.

Opendoor Activity:

• Opendoor made its first profit in Q1 2022.
• May through November 2021 Opendoor acquired 3,609 properties and sold 1,861. They acquired 94% more homes than they sold.
• December 2021 through March 2022 Opendoor acquired 1,408 properties and sold 2,149. They sold 53% more than they acquired.
• April 2022 Opendoor acquired 510 properties and sold 494. They acquired 3% more than they sold.

Offerpad Activity:

• June through December 2021 Offerpad acquired 1,050 properties and sold 742. They acquired 29% more than they sold.
• January through March 2022 Offerpad acquired 201 properties and sold 546. They sold 172% more than they acquired.
• April 2022 Offerpad acquired 94 properties and sold 93. They acquired 1 more than they sold.

The iBuyers struggled to turn a profit during the largest resale year in history. The rest of the flip investors did very well. Regular, private flip investors hold properties for shorter timeframes than do the iBuyers.

Rentals:

Available rentals in the MLS is up 26% since the beginning of the year. This indicates that there are more vacant homes. Vacant homes are bad for a housing market.

4.9% of May’s closed rentals closed over list price. 53.5% closed at list price. And 41.6% closed under list price. There are no bidding wars for rentals.

Crash Versus Correction:

A crash is a big drop. A correction is a slight fix. Correction is getting back to where we would be anyway. We are experiencing a disruption. We do not know how long it will last. After the disruption, we will experience a correction. Do not expect foreclosures.

2005-2008 Bubble Vs. 2022

The biggest risk to all housing markets is vacant homes.

2005: HIGH VACANCY & HIGH FORECLOSURE RISK:

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

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

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

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

There is risk with short-term rentals and second homes. If the investors cannot rent the property, they will sell. If short-term rental owners can’t rent to vacationers, they will go to long-term rentals.

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

Final Thoughts:

We are early in the shift. Start bracing sellers for market prices, increased days on market, and potential concessions. Do not expect to see more of the 2% month over month appreciation rates, expect to see an appreciation rate of less than 1% month over month.

The market is attempting to normalize and is doing so quickly. We have to move through the chaos to get to the calm.

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.