The real estate market is still alive and functioning –despite social distancing and stay at home orders. Like food, shelter is not optional. Understandably there have been changes. The number of transactions has dropped, but prices are not dropping as supply continues to be much lower than current demand.
2020 began with such a disparity between supply and demand that many buyers were shut out of the housing market trying to compete against multiple offers (we would receive as many as 10-30 offers on homes). Add to that the iBuyers and investors trying to pre-empt the purchasing of homes prior to coming to market and you can see why normal buyers had a very tough road to obtain housing. The extreme lack of homes for sale resulted in accelerating prices – causing many to compare it to 2005 (erroneously I might add, as 2020 had very different traits from what was fueling the 2005 marketplace).
And then came COVID-19. To quote Tina Tamboer, Senior Housing Analyst with The Cromford Report:
“The COVID-19 pandemic came in like a wrecking ball in March shutting down tourism and crashing the stock market single-handedly over the course of a few weeks. Hedge funds and iBuyers (funded by Wall Street) bowed out of purchases and vacation rental buyers put their plans on hold. This is providing much needed relief to normal home buyers, if only they could leave their house. Stay-at-home orders to stem the impact of the pandemic has “pinched the hose” on what is arguably one of the hottest housing markets in the country. This is causing a build-up of pent up demand that will undoubtedly return with some gusto when travel restrictions are lifted and a level of stability returns. Do not expect prices in Greater Phoenix to drop like they did in 2008, however. Back then when investors pulled out of the market, prices were so high that families making the median income could only afford 27% of what was selling. This time around as investors once again pull out of the marketplace, families making the median income can afford 68% of what’s selling with today’s incomes and interest rates. This is well within normal range and puts regular home buyers in a better position to pick up the pieces left by Wall Street and vacation rental investors.”
As usual, housing markets are not only local in nature but different price points within that local market behave differently. While the under 500K price point seems to be functioning well, the luxury market has felt a larger impact. Tina Tamboer further explains:
“… The effects of COVID-19 span the job market, stock market, corporate profits, and exchange rates. This has had the highest impact on high-end luxury market buyers. Not only are these buyers restricted from leaving their home cities at the moment, they have instability in their portfolios as well. Under these circumstances it should not come as a surprise to see that weekly contract activity over $500K has slowed down by 64% since their peak on February 24th while price points under $500K have only seen a 30-40% slow down.”
If you are struggling to understand whether to buy or sell in this market, and the changes we have put in place to do so safely, please contact us. We are here to answer questions with facts and advice.
The COVID -19 virus and the housing market are squaring off. It is early in the fight, so we are loathe to predict too much at this point. In our 42 years of practicing Phoenix real estate in all its iterations – a pandemic virus is one we haven’t lived through. But “disasters” whether war or terrorism or a housing bubble – all have one thing in common. They do not survive long term. So really, what is the worst case? Demand drops until the virus abates or is medically solved (vaccines, medication etc.) Demand can only be suppressed for so long. In the long run, the basic needs of man – food and shelter, always prevail.
Given how strikingly low the valley’s housing supply is – our market has the potential to weather a significant drop in demand. Let’s look to the Tina Tambour of the Cromford Report for some interesting statistics. Tina points out the number of active homes for sale is running chronically below the number that have contracts on them – i.e. the active supply is being gobbled up by contracts:
“For every 100 active listings in the Arizona Regional MLS there are 111 that are already under contract. Greater Phoenix is officially a frenzy and it’s only March. We can expect to see this continue at least through May without relief as buyer demand is typically highest in the Spring.
It’s even more dramatic in the Southeast Valley, West Valley and North Phoenix and all areas where prices land between $175K-$300K. For a stark example, on March 7th in Glendale there were 3 properties for sale between $175K-$200K and 25 under contract. In Chandler there were 3 properties active between $200K-$250K and 37 under contract. In the North Phoenix Moon Valley area there were 8 properties for sale between $250K-$300K and 30 under contract.
There is a reason why people continue to pounce on what’s available for sale. The average price for a 1,500-2,000sf home is now $331K and continues to rise. That may seem alarming considering it was $324K at the peak in 2006, but contrary to popular belief it’s more affordable today because of the interest rates. In April 2006, with an average of 6.51% the monthly principle and interest payment on a 30-year fixed loan with 10% down was $1,854. Today at an average of 3.45% the same home is $1,331, a savings of $523. More recently, over the last 16 months despite prices having risen 9.4% for median-sized homes the monthly payment dropped by approximately $112/month.”
In short, whatever the impact to the market – we will keep you informed. We would urge you to not be overly concerned at this point. We have one of the strongest housing markets in the country and any change to that would be a temporary one. This too shall pass.
The market is on the cusp of the “spring buying season” and early prognostications are beginning to form. As with all economic markets, supply and demand determine our market forecasts. Typically we see one side of the equation having a bigger impact than the other – a situation that our market is currently experiencing.
Demand is staying in a normal range – about 1-2% above average. This is always good news – given that it is the more elastic of the two factors. It is all the more impressive considering the last quarter of 2019 saw a push up in price per square foot, typically a dampener of demand. As Michael Orr mentions “…this comes after a rise of over 7% over the 4 months between September 15 and January 15. The market is generating strong upward pressure on prices.” A rise of 7% in 4 months is a fairly remarkable number. The fact that demand remains strong despite this rise, is fairly remarkable as well.
Supply is a very different story. It should not be surprising that since demand is in a normal range, supply must be well below normal to see an upward push in pricing. Exactly. In fact supply is less than half of what is needed for a balanced market. New listings are arriving to the market in much smaller than usual numbers. Although it is a bit early to confirm a trend, the first two weeks of the year had 15% fewer new listings than 2018 did. Add that to an already very low base supply of homes for sale, and 2020 is running at a 30% deficit of homes for sale compared to early 2019. Obviously different price points can have different supply issues – but this shortage is impacting all price levels up to one million. In fact it is the weakest start to a year since 2005. No one comments on this issue better than Michael Orr of the Cromford Report:
“The lack of supply can only be described as shocking. A 30% decline since this time last year to reach the lowest level since August 2005. This to satisfy a population that has grown more than 20% since 2005. Anyone who thinks this severe shortage will not result in a significant rise in prices is going to have another thought coming pretty soon. The median sales price is already up 11% over the last 12 months and the average price per square foot is up almost 9% and probably heading for a double figure appreciation rate.
…The big hope for buyers must be for a surge in new listings arriving over the next 12 weeks. Perhaps sellers will be tempted by the higher pricing they can achieve. However if they are staying around Phoenix, they will have to pay more for their new home too. Phoenix is currently the strongest large-city housing market in the USA and this is fueled by inter-state population movements. Retirees are a big part of that, but so are people moving here from California and other Western states for work and the lower cost of living. Demand is likely to remain healthy despite the rising prices.
The primary question is whether we will see any change in the meager supply of homes for sale. If this is to take place it is likely to be visible over the next few weeks. There has been no sign of an improvement in new listing flows in the last several weeks of 2019. But 2020 is a new year, so we will be watching closely for signs of change.”
This lack of inventory has spawned some interesting theories as to why homes are not coming to market as usual –with theories ranging from “shadow inventory” (the theory that floated around erroneously during the mortgage meltdown years) to interest rates and pocket listings. But let’s remember why people sell at all. People sell for one of two reasons – personal motivation and market conditions. Personal motivation encompasses things like job changes, household formation or disintegration, and retirement. The second reason -market conditions – encompass things like home values, interest rates, and consumer sentiment (fear/greed). It is worth remembering too, that homeowners are keeping homes longer than in years past. Why? The average number of people occupying a home is less than in earlier decades and homes are generally larger. Meaning they are staying longer because there is less personal motivation to move. The average home today can accommodate the average number of family members. If it is suitable, why move? Hence, market conditions are left to impact home selling. At some point pricing if it continues its move upwards will spark selling (i.e. market conditions) and ultimately dampen demand. We saw that in the 2006/2007 market. The real question is when.
At the moment, 2020 looks to be firmly a seller’s market. As always, we will keep you informed on market changes as they manifest.
As we head towards the end of the year, the market seasonally follows a pattern that tends to favor buyers. Typically between September and December, active listings grow as demand cools. This year is no exception – although the impact is a gentle one at the moment.
2019 was an interesting year. It began with the market heading towards balance – something we hadn’t seen in a while. But by the end of February, it reversed course and began to strengthen on the seller’s side. June, July, and October produced fewer new sellers coming to market. In fact October set records on the scarcity of new sellers. This dearth of new listings has kept the market favoring sellers, and the seasonal shift has only slightly mitigated that power.
Typically the most interesting thing to real estate buyers and sellers alike, is price. Pricing is a trailing indicator as we have mentioned in the past – often responding 6 months or more to an imbalance of supply and demand. The first place pricing shows up is in list prices followed by pending sales. Price per sq. ft is a pretty reliable indicator. Notice in the chart below how the impact on pricing starts to show up mid – August, literally 6 months after the market shifted in favor of sellers.
As Michael Orr of the Cromford Report comments “This was looking weak during the second and third quarters but has perked up dramatically since August 7…. $181.97 is the highest we have seen since the bubble year of 2005.”
He further comments: “Price momentum is rising, and in normal markets this tends to bring the market closer to balance. It does this by giving sellers better reasons to sell and giving buyers greater affordability problems.” When will the market shift in to balance? That is anyone’s guess but 2020 could be the year.
Like any financial market, real estate is subject to two key emotions – fear and greed. When pricing escalates the initial euphoria often gives way to unease. One can hardly blame residents who survived the valley’s market debacle for assuming rising prices equates a bubble. How does one accurately differentiate a bubble from a rising market? Again, Michael Orr provides succinct insight:
“Higher prices should encourage more sellers and discourages buyers which will eventually have a balancing effect on the market. If you ever see that higher prices encourage buyers to buy more, that’s when you have a bubble developing. This is what happened in 2004 and early 2005, but it is not happening now.”
We repeat, a bubble is not happening now. For those who like more in depth analysis of pricing, continue on with Tina Tamboer’s comments:
“The news media is filled with short-term predictions regarding the economy and how it will, or will not, affect real estate prices. It’s understandable for buyers to want their home to appreciate in value after they purchase, who doesn’t? However there is far too much attention paid to short-term influences and fluctuations these days and not enough attention paid to the long view. Real estate is a long-term investment for many people. Despite the euphoria of 2005-2007 and the nightmare of 2008-2011, on average homes are selling 81.6% higher today than they were in the year 2000. That’s an average appreciation rate of 4.3% per year over the course of 19 years. Smaller homes appreciated the most over time while larger homes appreciated the least. Homes under 1,000 sf have appreciated 122% since 2000, an average of 6.4% per year. Those between 1,000-2,000 sf appreciated 106%, an average of 5.6% per year. 2,000-3,000 sf appreciated 68% at 3.6% per year. 3,000-4,000 sf appreciated 49% at 2.6% per year and homes over 4,000 sf appreciated 11% at 0.6% per year.
In short, we are in a normal seller’s market. We expect to see prices rising throughout at least the first quarter of 2020 – if not longer. We will follow the numbers and keep you posted as they unveil.
We thank you for allowing us to assist you with your real estate needs in 2019. We consider it our duty to advise and inform our clients – whether that means buying, selling, or staying put. We wish you and those you love a very happy Holiday season. Here’s to a terrific 2020!
Russell & Wendy Shaw
In our last paper we discussed demand and its strong rebound (up 8%) from 2018. But we didn’t expound upon the supply side of the story. We will now attempt to remedy that. While demand is more elastic (and therefore perhaps the sexier story) supply might actually be the buried headline.
The valley has been chronically low in supply for so long that it has become somewhat normalized – but it isn’t normal. As of the writing of this article, residential properties actively for sale are at 17,460 (and only 13,241 without offers). To put that in perspective, average supply would be just under 30,000. While we have certainly seen more extreme past markets such as in 2005 (8,342 active) this low supply is putting tremendous pressure on buyers trying to find properties. It isn’t just the increased demand that is causing the issue – it is also the dearth of sellers coming to market. June 2019 was the second lowest new listings to market for a June since the Cromford Report began tracking it in 2001. July 2019 was the lowest July recorded for new listings. August, the second lowest August. To quote Michael Orr of the Cromford Report:
What is unusual is that supply is 43% below normal. We have had supply below normal ever since May 2011. But the weak flow of new listings has exacerbated the situation.
Does this mean prices are skyrocketing? Perhaps surprisingly to most, the answer is not yet. To understand why Michael Orr further explains:
Pricing is showing no excitement whatsoever, behaving as if the market was normal. This cannot last. Remember that sales pricing is a trailing indicator, often as much as 12 months behind the leading indicators. We expect to see fireworks in pricing over the next 12 months. In fact the current situation reminds us of 2004. The huge imbalance between supply and demand and the absence of distressed properties are very similar.
Now before you scream in fear that if this year resembles 2004, then we are just a year or two away from another housing meltdown, read on:
The big difference is that 2004 was seeing large price increases and a significant number of the homes were being bought for resale by speculative investors and remained empty. The level of mortgage fraud in 2004 was also extraordinary. Hopefully that is not the case in 2019.
These are very interesting times, unlike the past 5 years which were stable and predictable.
Interesting indeed. In fact this year began headed towards a balanced market and has now evolved in to one of the best seller markets in 13 years. But no market lasts forever. Supply and demand are constantly in flux.
What affects demand? The factors are interest rates, affordability, inbound relocation, income/employment, lending practices (i.e. strict vs. easy), population growth, consumer sentiment. It is noteworthy that the millennials have overtaken baby boomers as the largest US adult population.
What affects supply? New builds, equity (positive and negative equity), foreclosures, outbound relocation, personal events (divorce, illness, tragedy, job loss), conversion to rentals or Airbnb, homeowner tenure, consumer sentiment.
How the factors affecting supply and demand will play out is anyone’s guess. We do expect demand to cool in the last quarter as part of our normal seasonal patterns. This should stabilize supply until we arrive at our next spring buying season in February. Pricing of course, will respond to these two factors and affect them as Michael Orr points out:
Once prices have increased sufficiently then we can expect a cooling of demand will follow and the market will start to move towards balance again. No market can stay unbalanced indefinitely.
As always, we will keep you posted as the future unfolds.
Russell & Wendy Shaw
“This is now an exceptionally strong market with no sign at all of the weakness we were seeing between September and February.” Michael Orr of the Cromford Report
If you are someone who prefers headlines over articles, the above quote summarizes the valley’s current market. For those who prefer more details, read on.
We entered 2019 with sluggish demand that had taken root in the final quarter of 2018. All signs and numbers supported the fact that we were headed for a balanced market. That is until March of 2019 when demand awoke and began reversing trends with vengeance. So what is driving this demand? We can only speculate but there are certainly some likely suspects.
Interest rates Interest can impact the market as they directly affect affordability. By November of 2018 Interest rates hit an average 30-year mortgage high of 4.94%. Fast forward to March and rates had come down almost 1%. As of this writing they are in the 3.75% range. That increases buyer’s buying power considerably and certainly seems to be fueling this demand.
Rental rates When it is cheaper to buy than to rent, the first time home buyer market jumps. This is incredibly impactful as the first time buyer drives the housing market – creating a domino effect allowing for their home seller to in turn purchase their next move up home, and so on with an average chain of seven sales. It is easy for headlines to skip the rental market and focus solely on the resale market but the valley’s rental market is noteworthy. To quote the Cromford Report:
“In June, the average monthly rent per sq. ft. was $1.01 for listings closed through ARMLS. This [is] the first time we have recorded a figure over $1.
In June 2006 the average monthly rent was only 71 cents per sq. ft., so rents have increased by 42% since then. In comparison the average purchase price per sq. ft. has moved from $188.53 to $172.02 since June 2006, a fall of 9%.So average rent has increased 42% while purchase prices have fallen 9% since June 2006 on a cost per sq. ft. basis.”
Job market The valley‘s long term job creation averages around 40,000-50,000 new jobs yearly. However 2018 saw a jump in new jobs to 86,800 according to labor statistics. In fact only Orlando had greater job growth in 2018. Jobs bring people and people need housing. Simple.
Affordability We may get eye rolls with arguing for affordability in a market that has seen such a strong recovery in pricing and appreciation since 2011. But it is worthy to note that Phoenix is the 5th most populous city in the country. Our median sales price of $279,000 is unheard of in cities of our size.
What about supply? We would be remiss to not comment on the other half of the supply/demand equation. Supply hasn’t been abundant for years, so it is easy to dismiss low supply and focus solely on volatile demand. But factually, June was notable for the low numbers of sellers coming to market. As Michael Orr of the Cromford Report shares (emphasis added):
“The most unusual change during June was the 8.5% drop in active listings … which lurched from 5.3% higher than 2018 on June 1 to 4.1% below 2018 on July 1. Much of this decline was due to the low number of listings activated during June – 8,731 is our current count, the second lowest number for June since 2001 and down 11% from June 2018. On top of a very busy month for contracts and closings this has caused the supply to tighten dramatically….This is the greatest imbalance in favor of sellers that we have seen in almost 6 years.
Not surprisingly this is pushing up pricing. As the Cromford Report further reports:
…The monthly median sales price of $279,000 is a new record high. The annual median sales price is also at a new record high at $268,000.
But before you celebrate (or begin having sleepless nights over another “bubble” in housing) there is a secondary set of numbers that typically are more accurate on tracking value. Read on…
Average price per sq. ft. is nowhere near setting a new record, because the homes being sold today are much larger than those being sold at the last peak. The monthly average $/SF record is $190.05 set in May 2006. We edged up very slightly to $172.30 from $172.01 during June.
There are no indications we are in a bubble. Rather, we simply have a very strong sellers’ market underway. Will it last? History says no. Supply and demand are a seesaw that affect each other. Short supply causes prices to rise. As prices rise, demand tends to falter allowing for a rebalancing of supply. The question is when. As always, we will continue to report the market trends as they unfold.
Russell & Wendy Shaw