It happened. The residential real estate market was going so fast that the only way to slow it down was to pull the emergency brake. And boy, was that emergency brake pulled. It threw the market into chaos but this chaos won’t last long. It may feel as though we are spinning out of control. It is all in an effort to find normal.
Normal is not exciting. It is rather boring. And change is scary. But normal isn’t exhausting. Normal is healthy and sustainable. But we aren’t there yet.
We are in the chaos. Inventory is up, price reductions are up, and consumer sentiment is down.
National Real Estate:
Supply of unsold single family homes in the US increased by 5.6% last week, up to 396,000. We probably have 12 more weeks of climbing inventory before we see a peak. Inventory is up 16% year over year and is up 22.3% in the past four weeks.
Price reductions continue to increase. Two weeks ago, we saw the largest weekly increase in price reductions and last week’s increase was even bigger. Now 25.5% of homes on the market are taking price cuts. That is a 1.4% increase, week over week, which is significant. We will probably be at a normal level of price reductions (30%) in July. Based on this trajectory, we could see above normal price reductions by the fall.
At 23%, immediate sales continue to decline, despite falling more slowly than expected. Expect this to keep dropping and to see more inventory, longer market time, and fewer bidding wars as we go deeper into the year.
Fannie Mae’s June forecast now predicts a 13.5% decline in total sales this year due to increased mortgage interest rates and another decline of 11.2% next year due to the Fed’s rate hikes which Fannie Mae believes will push us into a recession in 2023.
According to Redfin, luxury home (top 5% priciest homes in a market) sales declined by 18% year over year through the end of April. Non-luxury home sales declined by 5.4% over the same timeframe.
Consumer Sentiment:
The latest news of unexpected higher inflation which caused Wall Street to freak out and fall into a bear market and drove the Fed to increase rates by 0.75% instead of the expected 0.50% scared a lot of people. All of that happened in 4 days. And add that to the uncertainty with the war in Ukraine, gas prices, and still rising mortgage rates; people are nervous. This is why consumer sentiment is so important. If enough people freak out, it can stop the market, even when things aren’t as bad as they believe.
The most important thing right now is to not overprice listings. The perception with all of these price reductions is that prices are going down. That isn’t the case at all. The current year over year appreciation rates are about 15% nationally and 20% locally. As you know, sellers want the moon right now and many still believe they can have it. But as more and more listings drop their prices, buyers will pull back more waiting to see how much lower they will go which will further soften the market.
June’s preliminary Consumer Sentiment level dropped 14% from May to 50.2 reaching its lowest recorded value. Increased gas prices are the biggest cause. Gas prices are up 65 cents nationally since May. All consumers are feeling pitched. Fluctuations in interest rates impacts that housing sector more than any other sector.
Rates, Inflation, and the Fed:
Housing makes up about 40% of costs in the CPI so the huge appreciation rates of the past 2 years is considered the primary cause of inflation. When inflation increased in May, the Federal Reserve increased rates by 0.75 of a point, the largest increase since 1994. More rate hikes are likely ahead, as the Fed tries to cool off the U.S. economy without causing a recession.
Dr. Lawrence Yun, NAR’s Chief Economist, said, “The Federal Reserve set a big increase in interest rates and means several more rounds of rate hikes are on the way in upcoming months. So far, the short-term fed funds rate that the Fed directly controls has risen by 175 basis points. But the 30-year fixed rate mortgage has risen even more, by nearly 300 basis points. On the same $300,000 mortgage, the monthly payment has risen from $1265 in December to $1800 today. That’s painful and, consequently, will shrink the buyer pool.”
The AZ Market:
While the Greater Phoenix housing market follows the same trends of the national housing market, it does so first (currently running 4-6 weeks ahead versus the usual 6-9 months ahead). The cooling trend emerged 10-12 weeks ago locally, while nationally the trend became more apparent in April. Not only does the Greater Phoenix market run ahead of the national market, it has bigger swings. Our highs are higher and lows are lower. For example, over the past three months, the national single family inventory has increased by 64% and during the same time period, Greater Phoenix’s single family inventory increased by 148%.
Total active listing inventory is up 47% in the past month.
The median number of days prior to contract is now 11, up 4 days from last month.
Price reductions are up 471% since the beginning of the year.
The current median sales price is $475,000.
Sales prices are likely peaking now and pending sales prices peaked the second week of May. This means monthly price appreciation will likely go flat in the coming weeks (if not days).
Join us for our next Cromford Market Update with Tina Tamboer on July 13. For details and registration, click here.
Short term rental bookings increased by 2.6% year over year and yet occupancy rates declined by 8.6% in May. This is due to a 24.7% (57,000 properties) increase in Airbnb and VRBO listings.
Final Thoughts:
The imbalance in the market was caused by very low supply, not unusually high demand. This is the fundamental difference between the 2005 market and the 2021 market. In a market with already falling demand, drastically rising mortgage interest rates has pushed our current demand off a cliff.
The data line to watch is active inventory. If inventory continues to climb at its current rate, we will be in a buyer’s market soon. However, at roughly 13,000 active listings, if inventory slows or flattens we will stay in a weak seller’s market.
We are once again, in uncharted territory. Hopefully, the chaos clears soon.
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
The US housing market is shifting and it is shifting quickly. The speed in which the changes are happening is making both real estate consumers and practitioners uncomfortable. The velocity of rate increases, the velocity of inflation (despite the very recent modest decline), the velocity of price appreciation, and now the simultaneous velocity of growing inventory and declining buyer demand. Using facts and not emotion is the best way to address the discomfort.
*Market softening does NOT mean the market is crashing nor does it mean prices are declining. Prices are still increasing, just at a slower rate. In this case, market softening means that buyer demand is declining.
Negative year over year reports illustrate what we know: 2021 was a record-breaking year for (re)sales units and volume. 2021’s records happened because of a perfect storm of both 2020’s pent-up demand and the nation’s current generational demographic of about 33 million Americans aged 27-34, the perfect home buying age.*
The AZ Market:
Greater Phoenix available inventory increased by 50% during the past 30 days and is up 79% since the end of February.
Greater Phoenix remains in the top spot for the country’s inflation rate, as of April, we made it up to an 11% year over year increase. It is mostly due to housing costs. According to Redfin; “Homes are becoming less affordable more quickly in Sun Belt metros than in coastal areas. Homebuyers in Phoenix, for instance, need to earn 46% more than they did a year ago to afford the area’s typical monthly mortgage payment, compared with 26% more in San Francisco.”
For a detailed local market update, check out my post from last week here.
National Real Estate:
NAR’s chief economist, Dr. Lawrence Yun, has been quoted as saying, “The market is quite unusual as sales are coming down, but listed homes are still selling swiftly, and home prices are much higher than a year ago.”
Dr. Lawrence Yun expects sales to continue to slow and we will go back to pre-pandemic sales activity. In 2021 there were 6.1M existing home sales, the second most sales behind 2006. A 10% decline in sales would put us at about 5.5 million sales which pre-pandemic was considered a healthy market.
Total available single family homes increased by 8.2% to 344,000 homes last week. That’s an increase of 26,000 more homes than last week, and 6% more than this time last year.
This is the first we have had year over year inventory gains since 2019. Available purchase inventory has been falling each year for a decade. During that time, Americans have turned about 8 million homes into rentals, capitalizing on the low mortgage rates.
National Demand:
NAR’s pending home index declined by 3.9% month over month in April to the slowest pace in 10 years. It was the sixth consecutive monthly decline.
This week nearly 27,000 went under contract immediately. But so many new listings hit the market, the immediate sales percentage declined down to 24%. Last week it was 25%. A year ago it was 26%.
Price reductions continue to increase. 21.7% of listings are reducing their price before selling. That is up from last year’s 15.8%.
Fannie Mae expects total number of home sales to decline by 11% this year from last, a 3.7% decline from Fannie’s April forecast.
The median price of a resale home sold in April was $391,200, the highest on record and an increase of 14.8% from a year ago. Remember, sales prices tell us what the market was doing 30-60 days ago, not today.
Existing-home sales declined for the third month in a row. In April sales decreased by 2.4% from March and 5.9% year over year as declining affordability continues to challenge today’s buyers.
Midwest increased by 3.1% (month over month)
Northeast increased by 1.5% (month over month)
The South declined by 4.6% (month over month)
The West declined by 5.8% (month over month)
New Home Sales:
Leading indicator because this market shifts faster than the resale market.
Builder confidence declined by 8 points in May to 69, dropping to its lowest levels since June 2020.
April new home sales dropped for the fourth month in a row by 7% month over month and 27% year over year, matching the lowest level of sales since April 2020, at the very onset of the pandemic.
Available new home inventory has skyrocketed from 4.7 months in April 2021 to 9.0 months in April 2022! Economist Logan Mohtashami with Housingwire uses this rule of thumb for anticipating builder behavior basing it on the three-month average of supply. He writes:
“When supply is 4.3 months and below, this is an excellent market for the builders. They will happily build.
When supply is 4.4 to 6.4 months, this is just an OK market for the builders. They will build as long as new home sales are growing.
When supply is 6.5 months and above, the builders will pull back on construction.
The monthly supply has spiked, the 3-month average is at 7.4 months, and the headline number is at 9.0 months!”
Real Estate News:
Realtor.com is the first to add wildfire risk data to properties listed on the portal.
Opendoor is expanding in AZ and just committed to over 100,000 square feet in Tempe. The location will employ 500 people and will be Opendoor’s largest office.
Microsoft created a real estate venture called Bing Rentals and is currently creating a team of engineers to build it, very little is known about this venture.
Google Trends saw a huge increase in searches for the term ‘housing bubble’ in March, and it hasn’t fully returned to normal levels. Clearly this remains a concern for many. This is not good for consumer sentiment.
Final Thoughts:
The negative year over year reports can easily cause fear when it shouldn’t. Consumer sentiment can have a greater impact on a market than actual data. Zillow Economist, Jeff Tucker, recently raised concern that talk of a bubble could create fear which could actually negatively impact the market.
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
The market is indeed softening, locally no doubt, nationally – it is just becoming visible. The AZ market had a four-week head start. The pressure on affordability hit nationally last week when we saw purchase mortgage applications decline by 17% year over year. 2014 was the last year total housing inventory increased (this is true both locally and nationally). Currently, inventory is up 19% in a month.
*Before going further, I want to be clear, market softening does NOT mean the market is crashing nor does it mean prices are declining. We remain in a strong seller’s market that is weakening quickly. Prices are still increasing and will continue to do so for the foreseeable future. In this case, market softening means that buyer demand is declining.
Negative year over year reports illustrate what we know, 2021 was a record-breaking year for (re)sales units and volume. 2021’s records happened because of a perfect storm between 2020’s pent-up demand and the nation’s current demographics with about 33 million Americans aged 27-34, the perfect home buying age.*
Nationally it is up 8.5% year over year in March, a 40 year high, and has cut buyers budgets of upwards of $40,000. The average consumer is spending $511 more a month than they were a year ago. There is early evidence that inflation may have peaked in March. Consumer sentiment increased by over 10% due to gas price declines since March.
The AZ Market:
Greater Phoenix’s higher than average inflation has everything to do with housing. Both purchase and rental prices are up 25%-30% year over year. With appreciation rates like that it is easy to see why investors flooded the market with capital. But keep in mind that the prop-tech startups have been investing here for several years. The most notable are Opendoor’s launch here in 2014, Offerpad’s launch here in 2015, and Treehouse Group launched in 2005 which evolved into Invitation Homes in 2012, the largest single family rental company in the country.
Why Greater Phoenix? Yes, the founders of those organizations have significant ties here. Yes, our local MLS is well run and covers the entire region (some areas have separate MLS’s for each city). The most simple reason is also the biggest reason why Greater Phoenix…it is because most of our houses are the same. Sure, we have custom homes, horse property, agriculture, etc. but the properties in the buy boxes of these companies are all the same. I can admit that I have pulled into the wrong driveway before and only realized it when my garage door opener didn’t work. Also, I grew up in a house built in 1892 and it wasn’t a particularly old house for the area (north shore Chicago). Here an old house was built in 1980. The math is simply easier which allows for large scale activity.
According to the Case-Shiller Index, in February, Greater Phoenix had a 32.9% year over year appreciation rate. Experts believe that the rate of appreciation has peaked and we will see it begin to slow. Declining demand and increasing inventory stifles price appreciation.
The redevelopment of Metrocenter Mall is expected to cost $1 billion!
Available rentals owned by Progress Residential, one of the biggest single family rental buyers, increased by nearly 24% in 22 days (3/21-4/12). Their median asking price declined by 2% in the first two weeks of April.
ES America purchased 650 acres of state land for $84.4M in Queen Creek. ES America is partnering with LG Energy Solution to build a lithium battery manufacturing plant. More jobs!
New Construction:
In 2018, when rates reached 5%, new home construction all but paused for 30 months. Interest rate changes impact new home sales more than existing home sales, combine that with stocks declining and continued labor and supply chain shortages could lead to buyers backing out of contracts prior to completion due to buyer affordability challenges.
Builder sentiment declined by 2 points to 77 in April, which was the fourth month in a row of declines. Keep in mind, any measure over 50 is considered a good market.
National Real Estate:
For the 5th month in a row, pending home sales declined in March from February, down 1.2%, according to NAR.
Existing home sales declined 2.7% in March month over month and the sales pace is down 4.5% from last year.
Prices are up! Fannie Mae says year over year appreciation is 20%, the highest in 47 years. Redfin says prices in March increased by 6% month over month, the highest monthly jump since 2013. NAR says prices are up 15% year over year. And Case-Shiller says 20% year over year in February.
87% of homes sold during March were on the market for less than a month.
For the second month in a row, demand for second homes declined in March. At only 13% above pre-pandemic levels, demand for second homes declined by 85% year over year.
Fannie Mae adjusted its unit sales forecast. Home sales are now expected to decline by 7.4% this year and 9.7% in 2023, a big drop from March, when Fannie Mae forecast a 4.1% decrease in home sales this year and a 2.7% decrease in 2023. They also predicted a modest recession during the second half of 2023.
This is what I mean about expected home price appreciation cooling. The rate in which homes appreciate will slow but they will continue increasing in value. All forecasted amounts are positive. Keep in mind, normal annual appreciation is 3%-10%. Normal appreciation in the late 20th century was 3% annually.
Another headline to be mindful of is the one mentioning the increase in foreclosure starts. Yes, foreclosures are increasing. Keep in mind that last year there was still a foreclosure moratorium, there were essentially zero foreclosures at this time last year so the year over year data looks dreadful. Look at the chart below, it shows an increase in foreclosures. However, the number of current filings remains substantially lower than 2017-2019 filings.
Final Thoughts:
Economist Dr. Peter Linneman is aware of the headwinds but he will not bet against the American economy. The US economy has grown 3.5% since February 2020, no one expected that. We are back at full employment, business is up, wages are up, equity is high, and costs are high. Focus is shifting from growth to profitability and sustainability; both typical in late-stage growth markets. Economics are cyclical and recessions are a natural part of the cycle, and the next recession will be very different from the previous ones. And remember it was residential real estate that pulled us out of the shortest recession in history.
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
After reading my update from last week, a friend and client said she was confused. While the market is softening, as discussed, her listings are still selling immediately, above asking, and with multiple offers. That is just it. These things are all still happening. Houses are actually selling faster than they were last year. The supply/demand imbalance isn’t new and yet today’s market doesn’t make a lot of sense.
Over the past two years, we have spent so much time analyzing and watching the market. It seemed to change almost every day. It is still changing but not to the extent it was. I am not sure if it is that our industry is still running on urgency, waiting for the other shoe to drop, which ultimately provides no protection from the pain if and when that happens.
Was the other shoe, when mortgage rates increased? They have. The interest rates have removed some buyers from the market. It isn’t just about interest rates though. Demand remains about 350% higher than supply. And that isn’t because demand is crazy high, it is because supply is crazy low.
After interest rates increased last week by 0.5%, Amber Kovarik, Senior Loan Officer with Guild Mortgage wrote on Monday, “This is an environment, unlike anything we have ever seen. We have a gas crisis like the 70s, inflation of the 80s, a stock market correction like the late 90s, and housing affordability nose-diving like we had in the early 2000s. All of these independent events up until now have been unprecedented. Now they are all occurring at the same time. Nobody can know for certain what the FED is going to have to do to rates to stop inflation.”
Inflation is defined as too much money chasing too few goods. At a time when production was low for everything, Maricopa County, the fourth most populated county in the country, grew more than any other county. The state as a whole gained 98,330 people from July 2020-July 2021. 90% of our growth came from out of state relocation.
Greater Phoenix ranks fourth on the 2022 Milken Institute Best Performing Cities Index, up from the seventh spot last year. Phoenix is only behind Provo, Austin, and Salt Lake City. The ranking is based on wage, job, and economic growth. The job growth is why our current unemployment rate at 3.6% is lower than the national rate of 3.8%. We were fortunate to recover all of the jobs lost due to pandemic shut downs very quickly. The job growth has been a big driver in bringing people to the area. Many come from high-cost coastal regions.
The jobs have brought the people who brought the demand. Locally and nationally we were already facing a low inventory market. The new demand brought the inventory to new all time lows so prices spiked. As noted by the recent Case-Shiller Index report, January was the 32nd month in a row that Greater Phoenix led the country in year over year gains with an increase of 32.6%. The national average was a healthy 19.2% gain.
Investors took notice and saw the double-digit growth and dove in. The rental market exploded and rental rates in some places increased by 30%. That sizeable increase got the attention of more corporate investors.
Not being able to keep up with all of the demand and sheer amount of capital coming into the market birthed the build for rent (BFR) market in a big way. And true to form, when Greater Phoenix housing sees success, we jump in headfirst and all in. At 20% market share, Greater Phoenix has more BFR projects than any other city in the country, by more than double!
“The bottom line: Opendoor (and Offerpad) are going to benefit tremendously from rising home price appreciation in the first half of 2022.
It’s worth noting that this key financial driver isn’t within Opendoor’s control. Wildly rising home price appreciation isn’t a business strategy, it’s the market.”
This is true for all of us. The bottom line is that this will not last forever. Nothing ever does. We must stay students of the market and pivot accordingly, so hopefully, we will never be too surprised by the market shifts.
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
“A great sense of enthusiasm could be found in the housing market in February, but something else started to creep in – a mild sense of panic.” -Ali Wolf, Zonda’s chief economist
That mild panic may be caused by volatile interest rates, low inventory, 7.9% and growing rate of inflation, housing affordability challenges, labor shortages, supply chain disruptions (growing problem as more and more of China goes into lockdown), giant annual home appreciation rates, war, pandemic, etc.
The newness of the market frenzy has worn off. Buyers are exhausted and sellers hesitate to list, unsure where they will go. While we know that this market will not last forever, no market ever does, we do not need to wait for the other shoe to drop. Real estate moves slowly and as long as we watch it closely and carefully, we should have a general idea of what to expect.
National Real Estate:
Available single family homes nationwide saw a tiny decline last week of 0.4%, leaving total inventory at about 248,000. This means the previous week’s increase of 3% held steady. In the past mid-March was the time of year with the largest inventory increases. Two years ago, available inventory was three times higher.
Sales velocity remains strong with 31% of last week’s new listings going under contract within 24 hours of going active.
At 81,000; there were 10% fewer new listings to hit the market last week versus the previous week (just shy of 90,000), last week had the second most new listings come to market this year.
Over the past 10 years, about 8 million single family homes have moved from resale inventory to rental inventory. That is 9.5% of all single family properties in the country! Due to low mortgage rates the most common way properties transitioned is when would-be sellers opt to keep their previous home as a rental rather than sell it when they move to their next home. As rates go up and money is more expensive the frequency of this declines. In 2018 when rates increased fewer homes moved from resale to rental inventory. Listing inventory increased and the appreciation rate slowed (but did not go negative). This could cause inventory to rise later in the year.
After 120 consecutive months of annual price increases, national home appreciation is running at 15% since February 2021, despite the fact that monthly payments are up 28% year over year.
“Monthly payments have risen by 28 percent from one year ago – which, interestingly, is not a part of the consumer price index – and the market remains swift with multiple offers still being recorded on most properties.”
-Dr. Lawrence Yun, NAR’s chief economist
The AZ Market:
According to Redfin, in Q3 2021 30% of the homes sold in Greater Phoenix were purchased by investors and rents increased by 30%.
According to AZ Family, using data from the Maricopa County Assessor’s Office, the 700 largest investors own more than 71,000 residential properties in Maricopa County. Invitation Homes is the county’s biggest investor, owning 8,744 homes.
Zip codes with the highest concentrations of investor-owned homes include:
Mesa – 85209 with 3,251 investor properties
El Mirage – 85335 with 2,155 properties
Scottsdale – 85260 with 1,596 properties
Mesa – 85202 with 1,438 properties
Buckeye – 85326 with 1,223 properties
Phoenix – 85015 with 1,194 properties
Click here to see an interactive zip code map that shows how many properties are owned by an entity/person with 20 or more properties in the county.
In 2021, residential real estate in Sedona appreciated by 35% and the inventory is currently running 85% below normal. Sedona’s median asking price for new listings is $1,295,000!
75% of this Tempe Habitat for Humanity house was made with a 3D printer, a first for Arizona. Printed using laticrete or “fancy concrete” the building is highly efficient in minimizing future energy costs as well as creating less waste during the build.
New Construction (national):
“Buyers are out in force and builders are ready to sell them houses, but unpredictable interest rates and a lack of materials are making it almost impossible to gauge the market.” Ali Wolf, Zonda’s chief economist recently wrote. Demand is slowly declining and yet there are still bidding wars and homes are selling above asking. 97% of builders raised their prices from January to February.
Single family starts reached their highest levels since 2006.
Housing permits declined by 1.9% from January to February.
In February, for the second month in a row, new home sales declined. They are down 2% month over month, and down 6% year over year. At the same time, new home inventory is up 3.3% month over month and up 40% year over year.
The new home market has a greater impact on the overall economy than does the resale market, more money flows to more sectors. Rising interest rates impact the new home market more also; builders must budget their projects accordingly. Completions are slow and there are a lot of homes under construction, which allows for more opportunities for a buyer to cancel.
Real Estate News:
According to Redfin, national rents increased by 15% year over year in February. At the same time mortgage payments increased by 28% (NAR) to 31% (Redfin). As rental prices do not keep up with purchase prices, would-be buyers may opt to rent. Another factor that could lead to inventory increases.
Redfin’s portal will now include homes and apartments available for rent. Last year Redfin acquired RentPath which operates Rent.com, ApartmentGuide.com, and Rentals.com.
IWG PLC, a flexible office company which operates brands like Regus and Spaces, is teaming up with Instant Group, an online listing portal for office space, to create the largest online marketplace for flexible office space rentals. Offices can be booked by the hour, day, week, etc.
Final Thoughts:
These are a series of recent tweets from Redfin CEO, Glenn Kelman, he captures the nature of our market nicely.
“It feels crazy for demand to be so strong in the midst of war, market volatility, and inflation. We expected rates to increase over 2022 from 3.3% to 3.8%. That happened just in January. Then, mostly yesterday in a few hours, we got a hike of nearly the same size, to 4.4%.”
“Even still, we’re supply-constrained. Last quarter, 18.4% of homes sold to investors, a record; the 10-year average prior to the pandemic was 12.6%. Another record: 71% of homes in February sold in bidding wars. Pre-pandemic, when inventory was still low, the average was 55%.”
“Year to date, the number of new listings is down, but only 6%. The average number of homes for sale is down much more: 24%. The amount of food being served is nearly the same, but it’s being eaten much faster.”
“Even when the market cools down, it may not slow down: good homes’ll sell in a weekend. The rest’ll be discounted after two. Pundits gauge our impact on commissions, which in 30 years fell from 6.1% to 4.9%. Brokers are a bit cheaper, but a lot faster: a lifestyle gig is now 24/7.”
“Another misconception: that rising rates affect home-buyers more than owners, limiting demand not supply. But the monthly payment for a median-priced U.S. home with a 2.65% mortgage is $1,264. That home will rent for $1,900. Many would-be sellers would rather have ~$600 a month.”
“That difference is why investors & individual homeowners would rather rent than sell. The Fed’s actions saved the economy in 2020 but will limit housing inventory for 30 years to come. The bidding wars created by this inventory crunch have been the worst I’ve seen in 17 years.”
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
Brad Inman recently wrote, “Realtor optimism can be necessary for survival” but giddy over-confidence is a bigger problem. He went on to say, “In our industry, the euphoria is characterized by a common sentiment that a real estate market boom can go on forever. It never does.” The newness of a growth market is exciting. Residential real estate has a lot to be proud of; housing demand and low rates pulled us out of the shortest recession in history. Home appreciation made a lot of money for a lot of people and gave options to struggling borrowers. This all happened in the face of some very real headwinds.
Those headwinds are changing and getting stronger. The excitement is shifting into uncertainty. Sky-high inflation (reaching 7.9% in February with expectations that March will be significantly worse), the Federal Reserve’s short term interest hikes, stock market volatility (SPACs have all but disappeared), mortgage rate spikes, a war that only one person wants, and a pandemic that just entered year three.
National Real Estate:
Demand is stable. Do not let the headlines fool you, demand is not crazy high right now, it is stable. It seems that demand is so high because of the extremely low inventory. Remind sellers on the fence that it will not last forever. Demand may further weaken, or inventory could rise; both of which limit the strength of the seller’s market.
February’s median home-sale price increased 16% year over year, reaching an all-time high of $363,975, according to Redfin. The median asking price is up 15% year over year and up 27% since 2020.
Available single family inventory increased by 3% this week! This is the first increase in months. There are now nearly 249,000 homes on the market. Available inventory remains 21% lower than this time last year. This is good news for buyers but is too early to be a trend. Typically, it takes three weeks for a trend to emerge. This increase is due to a supply side addition versus a decline in demand.
23% more new listings hit the market this week versus last week. About 33% sold within 24 hours; the same week over week. If demand were declining, fewer homes would sell immediately.
Flip investor profit margins reached an 11 year low due to increased holding costs, additional competition from consumers, iBuyers, and institutional investors.
Second home demand declined quickly to its lowest level since May 2020. While second home demand remains 35% above pre-pandemic levels; in January that demand was 87% above pre-pandemic levels.
A record, 1 in 12 homes is valued at or over $1 million or roughly 6 million homes.
“Owning a home continues to be a proven method for building long-term wealth. Home values generally grow over time, so homeowners begin the wealth-building process as soon as they make a down payment and move to pay down their mortgage.”
-Dr. Lawrence Yun, NAR’s chief economist
Rentals:
Nationally, in 2021 rents increased by 11%, triple the typical increase in a normal year. In Greater Phoenix rents increased by 30% in 2021, among the highest increases in the country. These increases have caused more than 12 states to re-open rent control policy talks. Wages are not growing quickly enough to keep up with prices. In the past rent control talks have slowed new build projects so this time new builds may be exempt from the rules. Many cities currently have rent control policies in place with annual increases capped anywhere from 3% (St. Paul, MN) to 10% (CA).
In Greater Phoenix rents are up nearly 80% over the past five years while wages are up on 22% over the same time period.
The AZ Market:
In Greater Phoenix, the median sales price in February reached $450,000 – an all time high. That is a 28.5% year over year increase and there are no signs of slowing. The median sales price for properties in escrow, likely to close in the next 45 days is $470,000!
In February, 64% of the buyers purchased with the intent to live in the property, this is a decline from 2015-2019 when this number was closer to 73%. A huge group of those absentee owned properties are owned by institutional buyers who purchased more than 9,000 homes since the beginning of last year to use as rentals.
STAT writer, Tom Ruff with the Information Market quotes Michael Orr with the Cromford Report, who explained that single family rentals on the market have increased by 99% year over year. And rents are down to $1.80 per square foot versus $1.93 a year ago. In May 2021, prices reached $2.01 per square foot.
“These conditions suggest that the era of quickly rising rents in Greater Phoenix may be coming to an end. A large amount of new rental supply is coming on board this year, judging by the number of multi-family permits issued in the last 2 years. Rent looks likely to stay fairly flat, which will change the buy versus rent equation as home prices and mortgage rates continue to increase. In the longer term, this could seriously dampen demand for homes to buy.”
-Michael Orr, Cromford Report
Diamond Age, a home construction startup, recently moved its headquarters from CA to AZ, and plans on building 20 homes this year using a combination of 3D printing technology and traditional building processes.
Federal Reserve:
Earlier this month, the Fed ended its bond and mortgage backed securities purchases. And has shifted its focus on combating inflation. At this week’s meeting, they raised the short term interest rate by 25 basis points to 0.25% – 0.50%. The Fed expects to increase rates six more times this year and three more times next year. With the seven planned rate hikes, the Fed expects to be back at a 2% rate of inflation after 2024.
Lending:
Interest rates are up nearly 1% in eight weeks. While yes, rates are still at historic lows and yes, in 1980 rates increased 3.5% in eight weeks, today’s buyers are not connected to 1980’s buyers (my parents bought their first house in 1980 at 18% interest). However, we can easily connect with the 2018 rate increases that totaled over 1%. Inventory increased some, home price appreciation slowed but stayed positive, and homes took a little longer to sell.
“The bottom line is that rates were never going to hold at the record lows we have seen, and we need to just accept the fact that they will continue trending higher as we move through the year but are not yet at a level that suggests impending doom for the housing arena.”
-Matthew Gardner, Windermere’s Chief Economist
Loan servicers support a permanent forbearance option. It has been a very successful program and the program as it exists today is winding down over the next few months. Of the roughly 8 million borrowers that entered into forbearance, only about 3% or 275,000 remain behind on their payments.
While yes, cash out refinances did hit a new record in 2021 with a volume of $1.2 trillion, the loan to value ratio declined, meaning the amount owed compared to the house’s value decreased. 60% of 2021’s refinances included cash out and values increased. Despite continued equity gains, due to an increase in rates, cash out refis declined by over 10% in February.
Real Estate News:
Judge rules that Oregon’s real estate love letter ban violates free speech and struck down the proposal.
The state of Washington has proposed a bill to make real estate love letters illegal stating that they may violate fair housing laws.
Power buyer, Knock.com, has abandoned its plans to go public via SPAC, was nearly acquired in December, recently laid off half of its employees, and is now attempting to hit profitability by the end of the year.
Matterport added virtual staging company, Sketchfab, to its platform which also allows agents to take screen shots and use virtually staged Matterport images as photos too.
Six former Realtor.com employees are suing Move, operator of Realtor.com, for discrimination, abusive work environment, and being forced to lie to Realtors among other complaints.
President Biden signed an executive order urging the Federal Reserve and Treasury Department to study and identify cryptocurrency’s impact on financial stability and national security and establish whether or not the federal government should create its own, regulated, cryptocurrency.
Final Thoughts:
And yet we move forward in spite of it all. Human resiliency never ceases to amaze me. Let’s hope that resiliency can help all of those who are suffering through the humanitarian crisis in eastern Europe.
I regularly quote several of my subscribers. Thank you for your input and contribution to our industry and your support of the AZ market!
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
People are resilient. There is chaos in the world and uncertainty is looming in every corner. This is as true today as it was two years ago. Quite frankly, it has always been true. In January 2020 when Tina Tamboer stood in front of a packed room and told us that we could see a 10% appreciation rate in the coming year, I thought to myself, “Oh no, we can’t handle that, that is way too much, it will be terrible for our market!” 2020 ended with an appreciation rate of 18%. Not only did our market handle it, it did so during a pandemic, civil unrest, and a presidential election. Residential real estate quickly became the solution to the shortest recession in history. Then we handled the 2021 market and now we will figure out how to handle the 2022 market.
War & Economics:
In order to slow inflation, which is currently 7.5% year over year, the Federal Reserve is planning to raise rates from 0% to 0.25% during its meeting on March 15-16. Economic sanctions often lead to even greater inflation which could lead to additional rate hikes or larger hikes. Some analysts predict that rates could be increased as much as 0.5% during the upcoming meeting.
Georgia Kromrei of Housingwire explains, “Economists have said that the conflict in Ukraine could bring a short-term reduction in mortgage rates, as investors flock to safe haven assets like mortgage-backed securities and bonds. But longer term inflation brought on by the conflict will cause mortgage rates to rise.”
The Fed is also concerned with home price appreciation which is another to say home price inflation. Fed Chairman Powell expects that by raising the rates, home buyer demand will weaken, slowing the rate of growth. This will not cause prices to decline.
“We won’t get back to pre-pandemic levels. We’re not trying to get prices back down, we’re trying to limit future prices.”
-Fed Chairman Powell
Supply & Demand:
Nationwide, available single family inventory declined by 1.4% last week. There are now fewer than 245,000 homes on the market. That is 25% lower than 2021’s bottom on April 30. And over 66% below January of 2020.
In 2018 inventory increased as interest rates increased. Rates declined in 2019 and inventory decreased. The expected inventory increase due to increased rates has not yet emerged in the national data. Declines in demand will emerge locally before it does on a national level.
According to NAR, pending home sales declined by 5.7% month over month in January, continuing a three-month decline in transactions. Of the four major U.S. regions, only the West had an increase in month over month pending sales. All four regions saw a year over year decline. The declines are likely due to lack of homes available for purchase.
In Greater Phoenix, demand has been declining slowly since early January when demand was 23% above normal. Yesterday’s demand was about 15% above normal. Because inventory is 75% below normal (about 4,000 available single family homes in Greater Phoenix), the decline in demand is nearly unnoticeable. Listings may now only receive 10 offers instead of 20. Despite the decline in demand those remaining buyers still want to buy that property which usually only goes to the highest bidder.
“The last time the Valley saw a ‘normal’ supply of inventory was in January 2019 when there was a four-month supply. The last time there was a five-month supply was January 2016. From March 2019 to January 2022, we have not hit three months (worth) of inventory. That’s crazy.”
-Thomas Brophy, Colliers Phoenix housing research director
One reason given for the tremendous lack of available supply is homeownership tenure. According to Redfin, the typical homeowner is staying their home for 13.2 years, up from 10.1 years in 2012. At 18 years, Los Angeles has the longest median tenure in the country.
Appreciation Rates:
In Greater Phoenix, February’s median sales price was $450,000. That is $100,000 more than the median sales price in February 2021 of $350,000! And is nearly a 29% increase year over and year. Wow!
The Case-Shiller Index released its 2021 report last week showing that US homes appreciated 18.8% last year which is the biggest increase in the 34 year history of the index. 2020’s appreciation rate was 10.4%. Phoenix topped the charts with a 32.5% appreciation rate in 2021. Behind Phoenix, Tampa’s appreciation rate was 29.4% and Miami’s was 27.3%.
While the Case-Shiller Index is not often used in residential real estate pricing because of its lag time, the data is used by Wall Street, the federal government, and many other businesses. The index calculates price changes monthly by looking at the three month moving averages of single family home sales.
New Construction:
Labor and supply chain challenges continue to pressure new home builders. The timelines are difficult to estimate, each week there is something else slowing things down. The latest hold up: garage doors.
“It used to take us 20 weeks to build a house and now it takes us 20 weeks to get a set of garage doors.”
-Adrian Foley, Brookfield Properties President & CEO
These delays have made new home inventory difficult to track. In years past, the number of permits pulled and the number of new home sales was essentially the same. In 2021, there were 31,069 permits pulled (up 7.26% from 2020) and only 24,039 new home sales (down 1.33% from 2020). While these counts exclude single family rental permits, RL Brown Reports is tracking 144 build-to-rent communities in Maricopa, Pinal, and Pima Counties. Thank you, Jim Daniel – President of RL Brown Reports for sharing these numbers with me.
Both locally and nationally, new home demand is consistent and sales are increasing but not at breakneck speeds. The reason demand feels so strong is because available supply is nearly non-existent.
Real Estate News:
Blackstone, the nation’s largest commercial real estate holder, continues its investment in rentals with its recent $5.8 billion acquisition of Preferred Apartment Communities with about 12,000 rentals units in the southeast United States. Real estate accounted for almost half of Blackstone’s $5.66 billion earnings in 2021.
The Property Listing Service (formerly the Pocket Listing Service) has rebranded to the National Listing Service. The company’s federal antitrust lawsuit against NAR and the Clear Cooperation Policy remains ongoing.
After Airbnb surpassed its goal set in August of providing 20,000 Afghan refugees with free, temporary housing; the company has set a new goal to help another 20,000 refugees.
Last week Fifth Wall, a venture capital firm, withdrew its request for a SPAC with the SEC. Fifth Wall had planned to raise $150 million to take a real estate tech company public. The withdrawal is likely due to the stock market volatility, particularly surrounding proptech stocks.
The Host Co. is a digital market place that allows short term rental owners to sell items like furniture, artwork, crafts, and even food. Guests are able to pre-order items or purchase on-site.
Final Thoughts:
Today’s uncertainty is different from that of 2020 and 2021. After all that we have been through, I am more optimistic about our ability to adapt. I know we can because we have done it before. And as Logan Mohtashami of Housingwire always says, “Be the detective, not the troll, listen to serious people who don’t need money from clicks.”
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
At 7.5%, inflation is at its highest rate in 40 years, the sanctions against Russia will lead to more inflation, combined with rising interest rates, rising (home) prices, low inventory, and solid demand; today’s home buyers face a lot of hurdles. We remind the buyers that real estate ownership is the number one wealth creator. With 28% year over year home appreciation in Greater Phoenix, a bullish Wall Street (with some recent corrections), and risky crypto/NFTs capital is flowing and is getting more expensive and more unpredictable. Yet, the average American homeowner with a mortgage has $185,000 in equity. Equity provides options.
Appreciation Rates:
As always, supply and demand dictate price. In Greater Phoenix, in 2007 when there were over 58,000 active listings (including UCB) demand declined to 43% below normal, and prices declined. Earlier this month there were about 8,300 active listings (including UCB) and at the same time demand was 21% above normal, and prices are increasing – a lot. The supply deficit is significant.
Tom Ruff with the Information Market recently wrote about the local median sales prices. He said, “ARMLS reported the median sales price for homes sold in January as $430,000. Our daily monitoring of pending sales contracts tells us that the median sales price for closed listings will hit $460,000 around April 1. In March 2017, the reported median sales price was $230,000. If our projection is correct, home prices will have doubled in the last five years.”
While we are seeing early signs of demand cooling and a slowing rate of appreciation, we have a long, long way to go to get to a balanced market. According to FHFA, nationwide from Q1 to Q2 2021 home prices increased by 5.1%, from Q2 to Q3 2021 home prices increased by 4.2%, and from Q3 to Q4 2021 home prices only increased by 3.3% (remember when that was an entire year’s worth of appreciation?) Nationally, 2021 saw a 17.5% appreciation rate.
Real estate is not just an investment, although the investment element has been almost exclusively our focus, it is also shelter, a basic human need. Because of that need, demand will never vanish completely, nor will supply. And here is the kicker, due to the incredible investment opportunity residential real estate has created, especially over the past few years, we no longer know how much of the supply is actually available for shelter. Short term rentals are not part of supply because no one calls them home.
The total number of short term rentals is unknown. The New Times recently mentioned that there are 5300 in Scottsdale alone, which is over 6% of Scottsdale properties. Sedona and Paradise Valley have the largest percentage of short term rentals, pushing 20%. If 5% of Maricopa County’s roughly 2 million housing units are short term rentals, that would be 100,000 units. The Arizona Department of Housing recently estimated that the state is short 250,000-270,000 housing units based on today’s demand.
These numbers are based on assumptions. If and when demand declines, these properties will be sold and put back into available supply. The lack of data makes the actual shortage unknown. What we do know is currently demand significantly outpaces available supply.
Additional Supply?
Despite the fear-mongering headlines, foreclosures will not drive an increase in supply. Nationally, foreclosures are running 76% below normal and locally there were only 256 foreclosures last year. Yes, 2022 will have more but probably not a whole lot more.
New home inventory will also not solve our inventory problems. New home sales declined 4.5% in January from December and declined 19% year over year. The labor and supply chain issues are preventing new home sales to make a dent in today’s demand. While new home permits are up, completions are flat.
Institutional Investors:
Last year in Greater Phoenix 28.4% of homes went to investors. Smaller investors are struggling to keep up with the larger investors, thus driving up prices, not only for local buyers, but smaller investors as well.
In 2021, iBuyers sold 20% of their inventory to corporate buy and hold investors, up from 5% in 2020. Mike DelPrete recently wrote, “Selling to investors may be a sound business decision, but there are real world implications that directly affect thousands of American families.”
This year Zillow has sold about 200 houses in Greater Phoenix in three sets of bulk sales to Progress Residential. All three sales had an exemption code so an affidavit of property value was not recorded. Zillow’s acquisition price remains the most recent sales prices on all of these properties.
With mortgage rates at 4 percent, a homebuyer who could qualify to buy a $475,180 home in November can now only afford a $423,262 home. Source: First American data and analytics.
Zillow lost $528 million in 2021 a 226% year over year increase from a loss of $162 million in 2020. Zillow’s plan for the future is to better leverage premier agents, sell more of its mortgage and title services, which will then create the super app of the future.
Nationwide, single family rents increased 3x more in 2021 than they did in 2020.
According to NAR, existing home sales were up 6.5% in January month over month while existing home inventory was down 16.5% in January, year over year.
From mid-January to mid-February, 41% of homes sold for over asking. During the same time in 2021 it was 33% and in 2020 it was 19%.
Final Thoughts:
Jordan Levine, the chief economist for the California Association of Realtors summed up our current environment well when he said, “The broader economy is showing signs of continued improvement and the housing market remains an economic bright spot, yet inflation and rising interest rates are beginning to squeeze some buyers out of the market.”
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
Today is all about the AZ market. On Wednesday, Clear Title hosted a presentation with Tina Tamboer, with the Cromford Report. She always shares pertinent and timely information. Below I have combined a lot of her information from her presentation, along with additional information from my research.
To learn more about a Cromford Report membership, click here.
The AZ Market:
In order to be successful in real estate you need to know what is actually going on, clear information is the best. Ignore the noise and fear mongering headlines, it is just click bait. The sky is not falling but the market is indeed changing, it is always changing. This is what I wrote about in my update from last week, which can be found here.
Wages and Demographics:
The Census Bureau openly admits that the 2020 US Census data is incomplete and of low quality. The Census released experimental estimates for the 1-year data. Between the low quality, lack of data, and experimental estimates; establishing benchmarks, like affordability levels, is difficult. Garbage in, garbage out.
The US Census stated, “Unfortunately, even with modifications focusing on known sources of bias, the Census Bureau determined that the estimates did not meet our statistical quality standards. These inconsistencies led to the Census Bureau’s decision not to release the standard set of 1-year data products.”
Without the 1-year data, we cannot estimate population growth or accurate wage information. And without that data, we cannot accurately estimate affordability.
HUD publishes wage data once a year, from the Census data. The next update will be released in March. To measure affordability in Greater Phoenix we are still using $79,000 as the median household annual income. This number was established by using the 2018 wage data and applying inflation over time (yikes!).
Based on that amount, affordability is suffering significantly. The ideal affordability range is 60-75, meaning that of the families earning the median income were able to afford 60-75% of the homes sold that quarter.
Tina doesn’t believe it is this bad, it is unlikely that our affordability level is only at 44.5 like it is on the report. With demand still 18% above normal, Phoenix’s affordability rate is probably closer to the national number at 54.2.
Rather than using the affordability index as a predictor; we have to closely watch all demand indicators. As soon as the population cannot afford an item, demand drops.
Buyer Mix:
All residential property owners are categorized in one of three buckets. 1. Owner occupied, 2. Second home, and 3. Landlord.
From 2015 to 2019 owner occupied buyers purchased 70-76% of the properties. In 2020 it was 80-83%. In Q2 2021 a new trend emerged, owner occupied purchases began declining and by the end of the December that rate dropped to 64%.
What changed? It wasn’t the iBuyers, they pulled back on purchases in Q4 2021. It was the massive increase in landlord purchases that pushed that percentage down. We have to watch this number very closely. If owner occupied purchases go down further, then we clearly have a big affordability problem. This matters to everyone. Can the landlord find a renter? Can the ibuyer find a buyer? Ignoring this info today will cost the investors.
While the intensity of the market feels like the intensity of the bubble. The fundamentals are very different. A market correction will not hurt the consumers like it did in 2008-2011; it will hurt the investors who are asking too much in rent or sales price. Miscalculations destroyed Zillow Offers.
Mortgage Payments:
The February 2022 median sales price for a 1,500 to 2,000 square foot home is $435,000. That is a 27.9% year over year increase. Combine the increasing interest rates with the appreciation, payments are now 38% higher than February 2021. With an estimated monthly payment of $2,232 a family needs an income of $95,700 a year to make it affordable. That is up from $91,000 last month, last month’s update notes are here.
That monthly payment is based on an interest rate of 3.69% which was the rate last week. Yesterday’s, Freddie Mac survey showed a 30 year fixed rate mortgage is now 3.92%. Rates dropped from 2018 through January of 2021 when rates bottomed at 2.65%. In December 2021 rates were 3.12%
In 2018 they increased by 1%. Mortgage payments jumped, demand declined, inventory grew, and in 2019 rates dropped and houses became more affordable. Based on the market movement in 2018 when rates increased, we have a general idea of what to expect today. 38% year over year monthly payment increases is unsustainable.
A fixed rate mortgage is one of the best hedges against inflation.
Rentals:
Single family rental rates have been flat for the past 5 months. It is very typical to see rents hold steady in the fourth quarter of the year. Any prospective landlords must make sure there is room for rents to grow when investing. The median monthly rent is up to $2,195; up 17.1% year over year and up 34.3% since Q1 2020. Some luxury rentals have declined, February is not outperforming January.
For apartment, rents are an entirely different beast and they have been increasing significantly as well. For details on apartment rents, evictions, and distressed properties, check out these new charts from the Maricopa County Association of Goverments.
Now that the median mortgage payment is higher than the median rent, some potential buyers may be on the fence. The advantage of homeownership remains. Real estate ownership is still the greatest wealth creator.
Where can landlords get the biggest bang for their buck?
West side
Southeast valley
85254 – the magic zip code
Median size of rentals is 1,600 square feet. Rentals follow the same law of diminishing returns. Properties over 1,700 square feet have lower price per square foot rentals. Larger homes do not have huge price per square foot prices.
There is not going to be a decline in rentals until the vacancy rates decline. At 5.6% vacancy rates very low. They haven’t been this low since the early 1980s. An issue during the 2004-2006 bubble was the high vacancy rates; indicating false demand. Today’s low vacancy rates indicate true demand.
What affects demand?
Population growth
Relocation (inbound)
Household formation (growing)
Population doesn’t need to grow for demand to grow if new households are forming. You can increase demand without population growth. Household formation is mostly related to affordability.
Affordability (based on the worst census data ever)
Employment/income
Appreciation/depreciation
Interest rates (can offset effects of Appreciation/Depreciation)
Because rates are going up demand may decrease, but prices will not decline. There is still too much demand for the supply, prices are still increasing, quickly.
Loose/tight lending practices (can offset effects of interest rates)
Consumer Sentiment
Population:
National population growth is very low, and it is very location dependent. Where is the population moving? (the Census will have an update in March) How much can we draw into Greater Phoenix? Some people talk about over building for the future due to lack of growth. Today’s market is telling us that we do not have enough houses for the people that are here now.
What will happen to AZ in the future? Job growth. Many people are moving here for jobs. Retirees used to drive the population growth, but now with so many new jobs more and more working age people are moving here. We depend heavily on domestic migration for our population growth.
From 2020-2021 only six states had a population growth greater than the entire country’s. Those states are Arizona, Utah, Idaho, Montana, Texas, and South Carolina. 16 states saw population declines.
Unsurprisingly, the areas with the greatest inbound flow are from southern California, Chicago, and Seattle. Check out the interactive map at https://flowsmapper.geo.census.gov/map.html
What affects supply?
New homes
FSBOs
Appreciation/Depreciation (Equity)
Foreclosures/Household Formation (shrinking)
Relocation (Outbound)
Divorce/Illness/Death/Job Losses/Tragedy
Consumer sentiment
Builders are not going to crash the market, after a decade of insufficient building the undersupply is significant. Until you see vacancies or longer days on market, builders will keep building. Are the builders overbuilding? Permit counts are where they were in the 90s, down 15.7% year over year. New home sales declined 0.5% in 2021 from 2020. We are not currently overbuilding for the demand.
Even if builders wanted to build like they did in 2005; it won’t happen. There are still far too many challenges with tight labor and supply chain issues. Typical build time is up to 12-14 months. Permits are primarily being pulled for the west valley and Pinal County.
Arizona has indefinitely tabled a recent controversial bill that would have allowed the state to override city zoning and rules.
Household formation is growing, which makes supply drop. When household formation slows, supply increases.
Investor Flips through December 2021:
The more balanced the market, the fewer flip transactions. Briefly, in 2014, we had a balanced market and was the year with the fewest flips. Today’s market is seeing nearly as many flips as we had in 2012, when investors were selling all of the properties they picked up for $1 in 2011 (the bottom of the market after the crash). iBuyers do not affect supply.
Zillow lost $880M on its failed iBuyer business. How did they do this in a market with 28% appreciation in 2021? By paying more for properties and it sold them for. Zillow’s median acquisition price was $466,765 and its median sales price was $430,000.
Opendoor is in the hot seat with a median acquisition amount of $429,500 and a median sales price of $435,000. ibuying is risky and yet Opendoor just launched in the Bay area.
Offerpad is the most conservative of the three and is not doing as poorly as the others. Offerpad’s median acquisition price of $395,000 is 8.8% higher than its median sales price of $429,900.
Traditional flips are doing great. The long term average return is 30-40% and right now the average return is about 25%. This is significantly better than the iBuyer returns.
Short term rentals might be adding some supply, maybe. Cities are enforcing ordinances on short term rentals. PV and Scottsdale are enforcing the most.
Short term rentals are mostly in the Northeast valley, primarily in Scottsdale, Paradise Valley, and north Phoenix. One reason rents are so high is because short term rentals reduce supply in these areas which makes houses in these areas cost even more. Long term rentals is a place for someone to live so it helps slow price appreciation.
Short term rental data is tough to track. Despite some available data, analysts believe that the numbers in the chart below are very low. Rather than 210 short term rentals in Paradise Valley, experts believe the number is closer to 380, which is closer to 6% of supply in PV.
Realtors:
ARMLS Agent population has grown 19% in the past 5 years. With declining inventory and increasing competition, many agents are expected to leave the business. Keep track of those agents getting out and work with them for referrals, etc.
New listings:
YTD down 3.1% year over year. In 2021 we had a lot of new listings hitting the market.
We are at the lowest count for new listings since 2001. Contract activity is higher than 2021.
Newly accepted contracts are sky rocketing.
There are 3.5% more listings in the MLS than we had this time last year.
Listings under contract are down 2.1 from last year but still very high and are expected to keep rising.
Closings are still coming in very high. Second highest closing rate since 2000 (behind 2021).
Cromford Market Index (CMI):
The best tool for predicting future price appreciation trends and is available on the main page of the Cromford Report: https://cromfordreport.com/ (without a subscription)
100 is balanced and prices rise at the rate of inflation (currently 7%), below 100 is a buyer’s market, above 100 is a seller’s market, prices drop below 90, prices rise at 110.
On 3/20/2020 we were at 241
On 5/15/2020 we were at 145.2
Yesterday we were at 471.9
We peaked on 3/14/2021 at 514.9
CMI is the predictor, it moves first and then appreciation follows. Cannot predict the CMI. It tells us where we are.
The predictor says the annual appreciation rates are going to increase. This is not good for buyers. Prices are not declining.
Supply stopped dropping so quickly. At 4.1 points in 30 days, demand is now dropping faster than supply which is down 2.4 points in 30 days. We are starting to see a slight softening in the market.
Prices are not going down. Prices are going up quickly. Currently at a 2% month over month rate. First half of 2021 we saw a 3-5% rate of appreciation. In the second half of the year, we had 1.1% monthly appreciation.
Cities with the most new home completions have the weakest CMI. Cities with fewest new homes have the highest CMI.
Median Sales Prices:
The median sales price is up 50% in 2 years!
Prices are increasing slightly faster than they were at the end of 2021 but not as quickly as they were in the first half of 2021. Currently prices are increasing at a 1.8% month over month, up from 1.6% just last month. We may see this go up but unlikely to go up to the 4-5% we saw last year. Definitely be faster than 1.1% from last year. Average and median prices are increasing at about the same percentage together.
2022 will not be like 2021, buyers are exhausted and pulling back slightly.
What is normal anymore?
It could be another year before we see demand drop to near normal. Demand dropped in 2018 due to rates. No softening in price anytime soon. The rate of growth is slowing. Supply has to go above demand for prices to drop. It is not worth waiting for prices to go up 20% for a slight possibility of a small drop maybe in the future. The interest rates hikes have slightly decreased demand, slightly.
Past 21 Years:
Buyer’s market – 3.6 years
Balanced market – 4.6 years (2001-2003, 2014)
Seller’s market – 13 years
What we are used to is not a balanced market. We are used to a weak seller’s market, like 2015-2019. There were seller concessions and some wiggle room for negotiations.
Contract Ratio:
We are mirroring last year.
Phoenix has slight weakening in demand.
Pinal County has a lot of demand.
The demand is many areas is not unusual demand. Pinal and northeast valley cities have high high high demand and crazy low inventory. None of our areas have much supply, way below on where we should be. The highest contract ratio you should see is 105. All cities are currently over 200.
Closed Sales:
We currently have a 22% annual appreciation rate (normal is 4-10%).
46% of homes sold over asking in February.
Median over asking $11,000 (up from 10,000 last month)
List to sale price ratio is rising. Great to be a buyer in Q4. Normal is 97-98%.
Median days on market is currently 7 and will likely drop to 5.
Median sales price is $445,000 up 27.1% from February 2021.
Summary:
Prices are expected to rise through June, possibly even at a faster rate than last year. Even in a booming market, buying still wins. It’s a hedge against inflation and provides greater opportunity as the value increases.
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
Inventory is still declining, demand remains consistent, and prices are still increasing. There is no relief in sight. The anticipated January inventory increase never materialized. The expected foreclosure boom didn’t come. The builders are constrained as ever. Mortgage rates are up. Something has to give, but what and when? Our buyers are exhausted and potential sellers don’t know where they will go when they sell.
National Real Estate:
Available national single family inventory hit another new all time low this week at 272,000. Down 1.9% from last week and 11.4% below the record low on April 30, 2021. In normal markets, early to mid-January is the low point of inventory for the year. By February, inventory has already started climbing. Inventory hasn’t slowed its weekly decline yet. Like last year, it may not be until the end of April before we start to get a little inventory increase for the year.
It is too soon to see the impact of the financial corrections on housing. It will take a couple of months to show its impact. Home buying is more driven by life events (married/divorced/babies/empty nest) than it is by financial events. Second homes and vacation rentals are more impacted by the market volatility. This has the potential to create opportunities for first time home buyers.
First time home buyers gained some ground in 2021, making up 34% of the year’s buyers, up from 32% in 2020. Prior to the market crash in 2008, first time buyers made up 40% of the market. With the largest group of the largest generation aged 28-34, this number is expected to rise. Affordability and lack of available homes will likely dampen growth though.
Despite expectations, foreclosure filings declined in December making 2021 the all time low for foreclosure filings. The forecasted increase did not materialize and bring additional inventory to market.
Fannie Mae expects existing home sales will decline in 2022 by 3.2% due to increased mortgage interest rates creating affordability challenges. Fannie also predicts that 2022 will be the second biggest resale year in the past 15 years only behind 2021.
Source: Fannie Mae Economic and Housing Outlook, January 2022.
Prices increased so much nationwide that the value of our housing market grew by $6 trillion in one year!
The AZ Market:
Join us on February 16 for our next Cromford Market Update with Tina Tamboer. She will spend an hour doing a deep dive into the Greater Phoenix real estate market. For details and registration, click here.
To see my notes on our recent deep dive with Tina, please click here.
According to the Marcus & Millichap annual US Multifamily Index, Phoenix ranks number five in top investment markets due to the job growth and household formation rates.
Tom Ruff with the Information Market summed up 2021 and the challenges we face in 2022 beautifully. He wrote:
“What we do know, we begin 2022 with the lowest number of active listings at year’s end on record. And, while we all know the 28% year-over-year increase in the median sales price last year is unsustainable, there is nothing holding back continued price gains in the short term. We know a change is coming, but there are two questions I can’t answer: When will our market moderate? Where will the increase in supply come from? We do know, it isn’t going to moderate tomorrow. New construction and distressed sales will not increase our supply as new construction did in 2004 and 2005, and distressed properties did in 2009, 2010 and 2011.
It’s time for your year in review records:
• Highest year-end sales units: 104,850
• Highest year-end average sales price: $528,940
• Highest year-end gross dollar sales volume: $51.763 Billion
• Highest year-end median sales price: $427,000
• 11 consecutive years with year-end gain in the median sales price
• The number of new builds sold in Maricopa County declined this year after increasing 6 straight years”
New Construction:
Recently I attended an event that discussed the future of land development and building. There were multiple national and local builders who all believe we will see new builds appreciate 10% in the next 6 months. They anticipate increased delivery of backlogged product later this year. Labor is the number one struggle for builders and is why a regular house now often takes over 12 months to complete. Supply chain issues are a close second. Builders expect to see an increase in completions during the second half of the year, but it will be sometime before the low inventory struggles improve.
Nationally, a record high of 34.1% of homes on the market in December were new construction, up from 25.4% a year ago.
According to Ivy Zelman of Zelman & Associates, about 70% of mortgage holders are locked into a mortgage interest rate at or below 4%. That is a big disincentive to move as rates incrase. Zelman thinks that the rate increases will hurt the primary buyer but not the investor who is paying cash and buying and holding.
Before covid each year about 2.3 million renters converted into homeowners. By the end of 2020 and Q1 2021 that number increased to 2.8 million and has since moderated to about 2.4 million. The increased demand we are seeing now is from the investors who were 20-21% of the market and now are 26% of the market. A substantial amount of the surge in prices has been from corporate buyers. Second home buyers have also been a big part of the market and pushing up prices.
Inventory is coming from the new builds. A ton of product is coming. Backlogged single family inventory is at 2007 levels. The pipeline is massive in the mountain west. Tons of options coming both for build for sale and build for rent.
Real Estate News:
AIG is not renewing 9,000 homeowner insurance policies for high end homes in CA due to future flood and fire risks. Backup insurance is offered with premiums of upwards of $40,000 a year for a $10 million house, or $100,000 a year for a $30 million home. This could have a significant impact on CA home values.
With the goal to reduce inflation, the Federal Reserve announced it will begin raising rates on 3/16/22 after it completes the bond and mortgage backed security purchase tapering.
In an effort to boost homeownership, a quasi-governmental group in Cincinnati out-bid 12 other investors to purchase nearly 200 homes. The properties will be renovated and sold to local residents.
42% of homeowners with a loan are equity rich, which means their home’s value is at least double the loan amount. The top three states are 1. Idaho, 2. Washington, 3. Arizona.
Final Thoughts:
For years, the simple rule of thumb has been if a city has a solid job market and a growing population to handle those jobs then the city would have a healthy real estate market. That seems easy enough. But what happens when you have a growing job market and growing population of over 5 million with ever declining resale options and new homes are taking 12 months to build? I do not know but we will find out soon enough.
Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.
