The real estate market of 2020 will likely go down as one of the strangest years in history. That is saying something given the meteoric rise of 2005 and the catastrophic fall of 2008. The pandemic hitting in March quelled the market for a few months – then released the normal patterns only time lapsed a quarter later. Exemplifying this is the spike in the above 600K sales in August. Typically the luxury market goes soft in the summer months as those with the most income tend to escape the summer heat. Not this year. Homes in the 600K+ range saw a rise of 17% in August! Normally the stock market drives the luxury market – when wealth increases, purchases increase. The 2nd quarter for corporate profits was far from stellar – with only a few exceptions (Amazon!) they were lower than any time in the last decade.
So why the spike in luxury purchases? You can thank taxes and our California neighbors. To quote Tina Tamboer of the Cromfort Report: “The answer may lie in what’s been dubbed “wealth flight”. Some states like California are considering increases in income taxes, corporate taxes and a new “wealth tax” in the wake of the pandemic. As a result, the threat of new taxes on already hurting balance sheets is enough for companies and their employees to make the decision to move. This, coupled with the work-from-home movement, is fueling demand in Metro Phoenix where taxes and the cost of housing are comparatively more affordable than other cities. For buyers waiting for prices to decline, there is no indication of that happening soon despite apocalyptic predictions of another foreclosure wave; at least not while the Valley has a net increase in population moving to the area.”
Building has been much lower than our growing population warranted over the last 14 years. Not surprising, given the overbuilding that occurred in 2005-2007 and burned many a builder. But builders finally are responding as Tina further explains: “However, last July saw over 3,000 single family permits filed; the largest number filed in a month since March 2007. This should provide some much needed relief for buyers and some added competition for sellers in the coming months. While exciting, this increase in new home permits is not alarming. The biggest month recorded was July 2004 with 6,291 permits filed.
For buyers this may mean that relief is on the way. But building takes time. For sellers, currently they are the main game in town and may want to take advantage of this window of high demand, low supply.
Do you have a question about the market we didn’t address? Please contact us – we are always here to help.
It is hard to believe that we are in the waning weeks of 2020 – a year not likely soon forgotten. While real estate was certainly not the top headline (pandemic, fires, protests, politics – need we go on?) it was in its own way a valley headline grabber. The chronically short supply of housing was the byword, while buyers proved that even a virus could not dampen their enthusiasm and demand for housing. In fact the virus had seemingly two effects: a temporary pause in buying resulting only in a delay in our seasonal patterns; and sellers more reticent to come to market. The outcome was one of the strongest seller’s markets since 2005.
2005 vs. 2020
Having lived through the 2005 frenzy and subsequent 2008 collapse of the housing market, fears of history repeating itself are understandable. But the underpinnings of the 2005 market and the 2020 market are very different. No one points out those differences better than Michael Orr of the Cromford Report.
“There are dozens of things that are different now compared with 2005, but the most significant include:
In 2005, thousands of homes were being purchased and left vacant as they were snapped up by speculators
In 2005, rents were low and headed lower because there were more homes than people who wanted to live in them
In 2005, almost anyone could get a 100% loan with minimal documentation, and thus had no skin in the game if prices were to fall (as they did)
In 2005, few people thought the market could decline
Mortgage fraud was rampant creating artificial demand
The developers had built (and would continue to build through 2007) more homes than were demanded by the population growth
For all 6 of these, the opposite condition exists today.
Vacancies are very low
Rents are high and rising sharply
Qualifying for a mortgage requires financial resources (for example, a job) and must be supported by documentation, and almost all home owners have equity
Many people think the market could go down, supported by articles claiming this is likely (although it is not)
Mortgage fraud is at a relatively low level
The developers have built fewer homes than demanded by population growth between 2008 and 2020.
It is not normal for the CMI to be above 200, never mind 300, so it will certainly come down from its current level eventually. However this is more likely to be as a result of much higher prices damping down demand, rather than a flood of supply entering the market. We would need to see almost three times the current level of supply to get back to normal.”
Many fear that storm clouds are gathering on the horizon given the expiry of both forbearance programs and elevated unemployment pay. Others tie doom and gloom to post election fallout. Ultimately, whatever the source – the fear basically translates into a looming housing price crash. These fears fail to take in to account the most basic fundamental underpinning of the housing market – supply and demand. As the Cromford Report states: “There have been a number of articles written predicting that home prices will fall next year because of the damage to the economy by the COVID-19 pandemic. This will cause some people, those who took those articles seriously, to be very surprised by the huge increase in pricing that is currently going on. The extremely high CMI (CMI = Cromford Market Index; which predicts short term future pricing trends) reading indicates that the upward price trend will continue for the near and medium term, making any price reductions in 2021 rather unlikely. …
The economy has severely damaged the finances of a large number of people. However most of those people were unlikely to be in a position to buy a home anyway. Those who are in a position to buy a home have had their determination to do so increased dramatically by the pandemic. The gap between the haves and the have-nots is widening.”
It is worth repeating a few facts. First, price is a trailing indicator – meaning that it shows up months after the market shifts. Second, we need three times the number of homes on the market to be at a balanced market. Three times! Even in the housing debacle of 2008 it took a few years for the market to shift to a buyer’s market. (2006-2008)
Although predicting the housing market is really a short term game, there are a few trends in play.
First, price increases. Again the Cromford Report shares this information that may surprise you:
“Over the last 12 months, the average price per sq. ft. has increased over 17% and the current rate of increase in around 2% per month, meaning we are probably headed for an annual rate of over 20% fairly soon.” This is the reason we so adamantly tell our clients to avoid investor offers. The market can move upward without the general population having any idea. Your house is likely worth more than you know and an investor “fair market offer” can really be anything but.
Second, what about the foreclosures that have been temporarily squelched by forbearance programs? Isn’t a flood of foreclosures headed our way? Undoubtedly there will be some delinquencies that will need to be dealt with. But thankfully the numbers the lenders are releasing imply that those numbers will be nothing like the avalanche we saw in 2007-2012. And unlike those years, sellers have equity! There is absolutely no reason to allow a foreclosure on a home with equity. That is just a sale that needs to happen within a timeline. We Realtors’ do that daily – sell a home quickly and hand a check to the seller. To look at actual numbers rather than fears, Black Knight Mortgage Monitor report shares the following facts: “The state of Arizona has 5.7% of first position loans that are delinquent by 30 days or more. Only 0.1% are in foreclosure and the remaining 5.6% are non-current. Arizona ranks 38th among the states, with Mississippi worst (11.7% noncurrent) and Idaho best (3.8% non-current).”
Third, another trend relates to new builds. Buyers who cannot find the resale home of the dreams often turn to new housing. Unlike in days past, some builders are trying to benefit from the rising prices of homes by only accepting contracts on homes that are nearly complete. Locking in pricing 6 months before the completion (traditional new builds) puts equity in the buyer’s hands rather than the builder’s hands. Some builders are trying to change that by building specs and then selling right before completion at “today’s price”. It is an interesting trend and one that will likely only survive in a strong seller market.
For those who have read all the way to this point, our apologies for the length (thanks mom!) We wish you and your family a wonderful upcoming holiday season and we look forward to serving you in 2021.
Talking about the 2020 real estate market causes even seasoned agents who
survived the 2005 run up to shake their heads. This is truly a year that feels like “there is nothing for sale”. While listings coming to market are lower than last year’s numbers, the truth of the matter is that 30,343 new listings came to market between July and September. (source: Tina Tambour, Cromford Report) The fact is that demand has so outpaced supply that very few listings last on the market for even a week. In fact over half the listings in the 3rd quarter were active only 9 days or less prior to contract. And most of those had multiple offers – thereby lengthening the time on market just to field all the offers.
Unbalanced markets make for unbalanced emotions for agents and their clients alike. Many a buyer, after losing home after home, is tempted to step to the sidelines for a more favorable buyer market. Unfortunately for those buyers, stepping to the sidelines is not a great solution. The median sales price is up 18% since last October with the bulk of the appreciation occurring in the last 4 months. As this strong appreciation in pricing continues, it will eventually dampen demand and increase supply. But at that point buyers will be paying more for the same home months earlier. To quote Tina: “As exhausting and stressful as it is for buyers and their agents, supply and demand measures indicate prices in Greater Phoenix will continue to rise well into 2021. Hopefully the short-term pain will lead to long-term gain for those who ultimately win a successful contract.”
Have questions about buying or selling? We are always here to answer your questions.
The effect the pandemic has had on the real estate market has been surprising to say the least. Most homeowners are quite shocked when we inform them that the current market is the strongest seller market we’ve seen since 2006. We certainly expected 2020 to be a sellers’ market, given that 2019 so strongly favored sellers thanks to a low supply of homes combined with strong demand. But we have to confess that we didn’t imagine a pandemic would further strengthen that. But, as counterintuitive as it sounds, it has fostered a frenzied real estate marketplace.
Supply (homes for sale) began to dwindle once the local government ordered shutdowns. Fears over contagion of the virus, homes suddenly converting to makeshift workplaces, job losses & furloughs, all combining with “sheltering in place” caused sellers to delay home selling. The already low inventory that began the year winnowed to ridiculously low levels as homes under contract were not replaced by other sellers coming to market. A balanced market is approximately 30,000 properties for sale – as of the date of writing we are at only 8500 properties!
On the demand side, the initial drop in demand that occurred in March and April strongly reversed course in mid-May. This occurred primarily for two reasons. First, demand was unseasonably suppressed in March – typically one of the highest months for demand yearly. But the demand was just temporarily suppressed and returned with vengeance (the coiled spring theory – the longer something is suppressed the higher the bounce when freed). Second, demand was strongly spurred on by historically low interest rates.
When low supply meets high demand, multiple offers collect on homes and results in upward pressure on pricing. That is exactly what has happened to our market. Tina Tamboer of the Cromford Report comments:
“Contracts on luxury homes over $1M are up an incredible 93% over last year at this time. Between $500K-$1M, contracts are up 64%. Between $300K-$500K, they’re up 39%. Between $250K-$300K, up 15%. If you need to sell, this is the time to do it.”(emphasis added)
So if prices are moving upwards, shouldn’t that dampen demand? Yes, that is the theory of supply and demand being a scale that constantly rebalances. But interest rates have a strong impact on affordability – even more than a moderate rise in pricing. Which is exactly why demand still remains strong – these historically low rates have improved affordability despite the rising prices in the valley. In fact here are some interesting numbers from Tina Tamboer regarding the “Home Opportunity Index” (HOI) which is calculated on a combination of pricing, lending guidelines, interest rates, and medium pricing in an area.
“It’s a jungle out there for buyers, but despite recent appreciation rates the HOI measure for Greater Phoenix increased to 64.8 for the 2nd Quarter 2020; the previous measure was 63.0. This means that a household making the current median family income of $72,300 per year could afford 64.8% of what sold in the 2nd Quarter of 2020. By comparison, the HOI measure for the United States was 59.6. Historically, a normal range for this measure is between 60-75. During the “bubble” years of excessive appreciation between 2005-2006, the HOI plummeted from 60.1 to 26.6. Typically if it falls below 60, the market should start to see a drop in demand. With the most recent increase however, Greater Phoenix is still within normal range and experiencing demand 20% above normal for this time of year.”
2006 market all over again?
Despite the HOI for Phoenix remaining in a viable range, there are many who fear that 2020 has all the makings to repeat the notorious rise of 2006 followed by the infamous implosion in late 2007. Despite such fears, this market is very different from the 2006 market. At that time we had a glut of supply (i.e. housing was built faster than the population growth supported). Today there is no such glut. In fact we have the opposite issue – the population growing faster than housing. Too many buyers, not enough housing is a key reason we currently have the hottest market for sellers since 2006.
But if history is a teacher, we have learned that markets like this don’t last forever. To that point Tina Tamboer further comments:
“…This type of market and appreciation is not sustainable over time; however it’s here now and properties purchased today are expected to continue appreciating over the next 6-12 months.”
If we don’t expect a repeat of the market crash of late 2007, what do we expect to happen down the road? Our personal guess (and this is admittedly a guess) is for supply to remain artificially low the rest of this year. However we do expect to see a strong increase of sellers coming to market in 2021. Why? As government programs lapse (i.e. unemployment rates reverting to former payment levels, forbearance for mortgagees, landlord/tenant relief ,etc.) some homeowners will likely need to sell in order to relocate for employment, change to housing that better suits their economic situation, or move for altered needs (homes with more workspace or to more rural settings). Additionally, just like demand, the coiled spring theory applies to supply. Sellers who postponed selling due to the pandemic cannot postpone forever. We expect that to show up in 2021. Does that mean we see a rash of foreclosures? Absolutely not. There is simply too much equity in homes (unlike 2007) for sellers to need to do that. Sometimes history does not repeat itself. Whatever the future brings, we are here to answer your questions and concerns. Thinking of selling? We are always delighted to examine the numbers in your particular neighborhood!
About that real estate market of ours – it certainly was impacted by the pandemic. Perhaps the biggest surprise to most people is what the actual impact looked like rather than what they assumed would happen. Let’s examine the impact in the key areas that compose a real estate market.
The primary concern for most home owners in real estate is pricing. When a sudden economic shift occurs (such as a pandemic, war, acts of God, etc.) fear tends to take over the financial markets. This can cause dramatic swings in the stock market as well as other industries – but the housing market is very slow to react. In fact it can take months or even years to react. The Valley has been in a very strong sellers’ market for a long time. A few months of pandemic was not enough to really move the needle on pricing. But like normal times, different price points behave differently. It may surprise you to hear that prices in the under 500K range actually rose during this time. The 500K-1 million market saw some minor softening in pricing as did the upper luxury market of over a million. But any reports to the contrary, sellers do not need to give away homes or take low priced investor offers to sell. The average home is holding steady and improving in value. Even the luxury market very recently is showing renewed strength.
Real estate prices are tied to supply and demand. As long as the demand exceeds the supply, prices will rise. The bigger the gap, the faster prices increase. So what happened to supply and demand? The market was at the beginning of the spring selling season – typically the most active time of the market- when the pandemic hit. By the second week of March, the news and subsequent shuttering of states finally impacted the market. Within a two week period a large percentage of buyers exited their contracts (including the “iBuyers” such as Open Door, Zillow, Offer Pad). The “back on market” status did a jump as these cancellations accelerated. In fact demand dropped a whopping 39% – indicated by the number of contracts accepted. So while demand was dropping rapidly, what was happening on the supply side of the equation?
Sellers fell in to one of two camps. One group, fearing that prices were headed for a fall, jumped on the market immediately to avoid the looming future price drops they feared. This caused a short term spike in new listings of about 2000 homes. The other group, concerned that “no one would buy now” or concerned about allowing buyers in to their homes, moved to the sidelines removing their homes from the market.
The net effect was a shrunken market. As supply and demand fell in nearly equal measure, sellers retained the control as they have for years but less transactions occurred. To sum it up succulently, Michael Orr of the Cromford Report writes:
“I would say the impact on the Greater Phoenix housing market has been less so far than many people expected. Transaction volumes are lower than normal, but not dramatically so. Home values have not been noticeably affected at all and are likely to increase during the second half of the year.”
What is selling has changed – Another effect of the pandemic was the mix of what was selling changed. The above 500K saw more of drop in demand than the below 500K. Stock market fluctuations tend to impact the above 500K market, and the pandemic’s economic impact was certainly reflected in the stock market. Jumbo loans were temporarily suspended by some lending institutions and others changed their lending criteria for the worse. Consequently, what was selling changed. The upper market faltered, while the below 500K began to dominate the solds – dropping the average price per square foot price. When you have fewer high priced per square foot homes selling – the overall average for the market drops. So if you see headlines saying “price per square foot is dropping” implying prices are dropping, be aware that the author has not examined the underlying numbers. Another interesting factor is that the 55+ community homes have suffered in sales numbers. Perhaps not surprisingly, considering they are the most vulnerable population in the pandemic.
The market is expanding and moving rapidly to catch up with the 2019 numbers. If you are a buyer, please don’t wait for price drops that are not coming. Buy now while interest rates are at historic lows. If you are a seller, please don’t panic and sell to investors for fear that prices are plummeting or that your home cannot be marketed to the entire pool of buyers safely. We are armed with tools of the trade like virtual open houses and selling without physical showings. All of which protect you as well as your pocketbook. And that remains our goal – unchanged by market conditions- to protect you, our client.
After 19 offers we have accepted what we thought fit our objectives best. Thanks to Wendy for all of your counseling and advice. Outstanding job of taking things a measured step at a time and explaining the process in detail. We appreciate that. We haven’t sold a home in 15+ years. Your patience with us was so genuine and sincere and after your counseling we felt like old pro’s. Andrew, I hope we didn’t make you work too late dealing with those offers! You can blame it on JC. JC’s initial consultation and telling us how to stage the house was priceless. And I can’t leave out the big guy….I loved the personal calls from Russell. I felt like I was talking to a movie star!
After a whirlwind 55 showings and 19 offers it sold in 4 days with a SUBSTANTIAL premium! We aren’t at the finish line yet but we are sprinting towards a quick appraisal free close with the Shaw Team leading the way. I’ll make sure my neighbors know that the experience and professionalism of Wendy Shaw just increased the value of their homes (comps) by thousands of dollars due to her negotiation skills and getting such a magnificent price for my house.
This has been a life changing event for my wife and I and it looks like our dream of living in northern New Mexico is one BIG step closer. To all he Dream-makers at Russell Shaw Realty One, thank you all.