After a slow and non-spectacular beginning to the year, the market appears to be finally waking up. March heralds the beginning of the spring buying season – so
prognosticators watch closely for signs of market health. In the valley the supply side of the economic seesaw (supply & demand) has been fairly stable, if persistently undersupplied. Supply changes tend to be slow moving. Demand, as we have mentioned in the past, can change far more quickly. Jitters were set off in the last quarter of 2018 when the erosion of summer demand persisted. The erosion should not have been shocking given the hit affordability took both in years of rising prices combined with a rapid rise of interest rates. As Tom Ruff in the ARMLS Blog so brilliantly explains: “The decline in year-over-year sales volume began in October as interest rates rose. Adding angst to the problem, employees saw their 401(k)s shrink as the Dow Jones Industrial and the S&P 500 indexes fell 18.8% and 19.6% respectively between the first of October and Christmas Eve. Attempting to soothe nerves, the federal government shutdown from December 22 thru January 25. Happy Holidays everyone! “
We could not have stated that better.
The “sky is falling” predictions of prices dropping, however, have no economic basis to them. That happens only after time in a buyer’s market. We repeat, we remain in a “gentle” seller’s market. In fact, despite the sluggish start – demand is picking up steam. So naysayers predicting a buyer’s market or drop in prices will likely have to wait beyond this year. At least in the valley. The proof is in the numbers as evidenced by Michael Orr of the Cromford Report:
The market started the year far behind 2018 in terms of demand – the monthly sales rate was down 11% on January 1 from a year earlier while the count of listings under contract was down 17%. At the end of January these numbers had changed to down 17% and 14% respectively. At the end of February they had changed to down 8% and 12% respectively.
What can we conclude from this? First, we know the under contract count is a leading indicator for closed sales. The 17% gap at the start of January suggested that January closings would be weak and they were indeed, down 17%. The slight improvement in under contract counts to 14% down suggested a mild recovery in February. We actually saw an even stronger recovery to just 8% down. This is quite respectable when you consider that because pricing was up year over year, the dollar volume in February was $2,127 million, not far (2.6%) below 2018s $2,184 million.
At 12% down compared with last year, under contracts counts are recovering from 17% and 14% down at the beginning of the previous 2 months. We anticipate that March sales will reflect that recovery and it is possible that the sales gap could narrow further, even enough to close the dollar volume gap completely. This assumes that current trends continue, which is not certain, but reasonably likely.
Not all areas were impacted equally. Phoenix and Central Valley fared the best (down 2.4%) and the Northeast Valley the worst (down the 4.7%). All in all – not much to fret about. To quote Mark Twain ““The reports of my death are greatly exaggerated.” And so it is with our market. As always, we will continue to keep you informed as the trends solidify for the year.
Russell & Wendy Shaw
The seesaw of supply and demand is our best barometer of the health of the housing market – so naturally we closely watch it. We have been in a seller’s market for such an extensive period that like most veteran agents, we are expecting a correction. A rebalance of the market we hope will come in the form of a gradual increase in supply due to a lessening of demand; ultimately resulting in a balanced market.
In fact some early signals seem to indicate supply is building in most price points. Here are some numbers from the Cromford Report:
“October marks the 4th month in a row that supply has continued to rise between $200K – $400K, which is good news for many buyers as it provides them with more choice and fewer competing offers. However, for those buyers with budgets under $200K, this trend in supply doesn’t apply to them and their choices are still extremely limited..
As usual, nothing is quite that simple. Supply comes from homes already on the market (not yet sold) and new listings being added (or built). But at the same time the supply seems to be increasing – the first weeks of October showed a dearth of new listings coming to market. In fact, new listings hit historic lows for any previous October. The Cromford Report further explains:
We are examining the first week of October in more detail to study how new listing counts dropped unexpectedly. We counted 2,017 new listings in Greater Phoenix during the first full week which is down dramatically from the same week in 2017. The overall decline is 23% year over year and this is the lowest number of new listings we have ever seen for the first week of October. The previous record low was 2,343 in 2014….
For whatever reason, sellers are surprisingly rare this month. Even if we change the measurement week to Oct 3 to Oct 9, the picture does not change – new listings down 25% from 2,520 in 2017 to 1,885 in 2018. This latter total is once again the lowest we have ever recorded for those dates.
What is happening? We can only speculate about why October has had such a low supply of new sellers. Certainly consumer sentiment is a factor. A large stock market “correction” can affect the market. Politics can of course play a role. Also, interest rates affect not only buyers but sellers too. Again, the Cromford Report points out:
Mortgage rates tend to increase when the economy is strong…. People usually worry about higher rates discouraging buyers and while that is a reasonable concern, I am also of the opinion that higher rates discourage sellers, because in most cases they are going to move somewhere else and pay a higher rate too. If they have the option to stay put, they may choose to do so when rates are increasing.
… Freddie Mac reported an average of 4.63% during September for the 30 year fixed. This is the highest we have seen since May 2011, more than 7 years ago. Of course in 2011 this seemed like a very low rate because we had experienced rates over 6% almost continuously between 1970 and 2008, with occasional short periods in the mid 5s.
Now we have a lot of homeowners with loans bearing rates of 3.5% to 4.25% taken out over the past 7 years. To move to a new home, they will need to pay off that cheap loan and take out another at closer to 5%. This effect is likely to be a drag on the supply of re-sale homes for a long time to come. It is likely to be good news for remodeling companies as many home owners decide to preserve their cheap financing by staying in place and spending their upgrade money on improving and modernizing their existing home instead.
Of course we cannot ignore the demand side of the equation. A gentle lessening in demand appears to be underway – which ultimately effects supply. When fewer buyers buy, supply typically begins to rise. Which piece of the equation will affect 2019? Will the lessened demand help shift the market towards balance or will sellers be reluctant to sell causing supply to remain scarce? Either way, we will continue to monitor it and comment on it.
In the meantime, we want to give our heartfelt thanks for our wonderful friends and clients who place so much trust in us. We are grateful every day. We wish you all a wonderful holiday season.
Russell & Wendy Shaw
Recently national housing statistics have made headlines regarding the diminishing demand of homebuyers. This is understandably unsettling to homeowners in the valley who recall all too well the housing crises where supply and demand went topsy turvey. As interesting as it may be to listen to national housing statistics, they are generally antidotal. Even in the midst of the housing crisis of the “Great Recession” there were markets that saw little downturn – proving that real estate markets are local. Is the valley in the midst of dwindling demand? The short answer – a slight abating of demand is possibly underway. Is it so great to affect pricing or cause any significant impact to our market? No. This is due to the largely chronic lack of supply. Perhaps some numbers can better put this in perspective.
Demand The first thing to understand is the seasonality component of real estate – i.e. different times of the year perform differently. Headlines can rather easily claim “buyer demand is down” simply by comparing April’s numbers to September’s numbers. Buyer activity reaches its peak in April and then increasingly slows through the rest of the year. To have meaningful comparisons year over year numbers should be examined. One key measurement of buyer demand is contracts. We can then see for instance, that contracts have dropped 26% from the April peak this year, compared to a 20% drop in 2017 over the same time period. That can lead us to the conclusion that a slight weakening in demand may be underway. Slight being the keynote concept.
Supply Like demand, supply also follows a seasonal pattern. Listings typically hit their low point in August and then rise until Thanksgiving (with a large exodus of cancelling listings at the end of the year). In 2018 we hit the low point a bit early – July – and supply has been drifting upwards since. But before we hit the alarm button, the overall numbers put this in perspective. Here is an interesting analysis made in June of this year by the Cromford Report :
The total number of active listings … is 19,736 today for all areas & types across the ARMLS database. This is just slightly above June 15, 2011 when we saw 19,696. We have to go all the way back to October 2005 to find another 15th date (19,715) with lower active listings.
Active listing counts have been on a declining trend since April 2014 when we hit a short term peak of 30, 506. We would consider somewhere between 30,000 and 35,000 to be sufficient for a balanced market. The all-time record high for a 15th date is 58,195 in November 2007.
Between 30,000-35,000 active listings would be considered a balanced market. As of this writing the active listing count is at 19,860 – not even close to a balanced market (and remember, that even balanced markets do not cause price drops – they just stop or slow appreciation).
Of course, different areas and types of properties are reacting differently on supply levels. As Cromford comments:
There are some areas that have seen a dramatic rise, often from abnormally low levels. Florence is probably the best example. At the end of June we had just 100 active listings without a contract, but since then the count has shot up 38%. The trend does not affect mobile homes, but single-family listings have jumped from 71 to 111, an increase of 56% in just 8 weeks. A similar but smaller event has occurred in Casa Grande and Coolidge. The only areas outside of Pinal County with a jump like this (albeit more moderate) are Litchfield Park and Surprise.
The Answer -So what is the take away of all this? If demand is showing early signs of lessening, and some areas are seeing increasing supply – when is the tipping point? The answer is contained in the supply numbers. Again, to quote Cromford :
Fluctuations in demand are unlikely to have much impact on the market until we see an increasing trend in listing counts. This was the first sign of a slowdown in April 2005 and will be the first sign of a slowdown if and when we get one in the future. It came suddenly and unexpectedly in April 2005 and it may do the same at any time. However, nobody paid any attention in 2005 and I am assuming we are all older and wiser now. Any unusual activity in the listing counts will show up in the daily Tableau charts which we create and study each and every day.
We too watch the listing counts. When we see shifts, you will hear it from us. Until then, do not believe the headlines. As always, we are here to help you with any questions or concerns specific to your home or neighborhood.
Russell & Wendy Shaw
While some areas of the nation are at long last reporting a slowing of sales, the valley’s market is continuing to power forward both in rising sales and appreciation. Real estate has always been area specific, so while national trends are interesting, they are not particularly meaningful when interpreting a local market. New listings to MLS in the first quarter of 2018 for Maricopa and Pinal County under 400K are logging the lowest numbers for a first quarter since the Cromford Report began tracking in 2001. Not surprisingly given the low supply, appreciation is higher than it’s been in the last several years. To quote the Cromford Report:
“The annual $/SF for all areas & types is 7.3% above this time last year. The increase last year was 5.2%, with 5.5% the year before that while 2015 gave us 5.3%. Back in 2014 we were still experiencing the coiled-spring effect and $/SF had jumped 17.7%.”
Given the amount of market strength most sellers have (particularly under 400K), it would seem improbable that sellers are still managing to give away thousands, right? Well history has a terrible habit of repeating itself – so just like in the past (anyone remember 2005?) – overheated seller markets don’t just cause trouble for buyers. Yes, seller markets can still cause problems for sellers.
Here are a few of the top mistakes we currently see sellers making:
- Thinking that having one buyer is a success story. As sellers and agents so often say “we just need one buyer” – and of course there is some truth in that. But one of the perks of a seller’s market is the potential of multiple offers. Too many sellers (and their agents who should know better) take the very first offer that they receive. That may be a great strategy in a buyer’s market. The premise “your first offer is often your best” – is based on the fact that long days on the market create the perception the property is over-priced or has condition issues making it harder to defend value to buyers. By contrast, in a strong seller’s market taking the first offer eliminates the option of multiple offers. From our years of experience, creating the opportunity for multiple offers is how we really maximize your profits. Agents who don’t do this (which sadly is the majority) or “for sale by owners” who find one buyer are likely giving up thousands of dollars.
- Thinking the new business models of online offers or investors are paying “fair market’ value. It is interesting to us, given that we have seen about every business model in our 40 years of practicing real estate, that this business model of online offers is getting a lot of hype. Admittedly they have tapped in to the public’s desire for Amazon type selling. But at the end of the day, they are investors who don’t represent the homeowner. Their pitch says things like “commissions are too high” while charging “customer experience fees” averaging 12% – far more than any commission. Or they say “this is a competitive offer” while eliminating any competition – costing sellers 10-30% in unrealized net dollars. Also, while telling sellers there is no need for them to go on the market, these same investors always put their homes on the market when they resell them. Shouldn’t that be a dead giveaway as to how to get top dollar? It would be far more accurate if they said “we are investors who want to buy your home for less than it is worth and then re-sell it for a profit”. But then, that wouldn’t look like a sexy new business model would it? Take away the online component, and this is the same old investor model that has existed since we began our careers.
- Thinking that preparing your home for sale is a long and expensive process. Most sellers overthink and over prepare for the home sale process. The truth is that many homes can be sold in their current condition. We sold a house that had the garage caved in and was tagged by the city as unlivable until repaired. We had multiple offers, sold it in 4 days, obtained over list price, and the seller made no repairs.
- Thinking that you have to show your home 24/7. Depending on the price range, we have had “weekend only” sellers or even “one weekend only” sellers. This is a supply and demand equation. The higher the demand and the lower the supply, the smaller the window for showings required to sell. Many sellers can allow one full weekend of showings, review the multiple offers on Monday and be under contract by Tuesday.
- Thinking that all agents are the same. Oh heck, we’ve taught you better than that, haven’t we? One of the pitfalls of a strong seller’s market is the amount of inexperienced agents it attracts. Even the “experienced” agent does around 6-10 deals a year. If you subscribe to Malcolm Gladwell’s theory of 10,000 hours of experience are needed to get expert at something, most agents will be retired before they hit 10,000 hours. In the last year alone we helped over 300 sellers sell.
- Failing to be aware of market value. The problem with either improving or declining markets is that history is not repeating itself. Therefore using only past sales will not tell you where the market is now. In evaluating pricing, we examine the supply/demand ratio in your neighborhood which determines value. Even then the market can move more quickly than can be seen. Demand can be very volatile while supply is not. That is why exposing the home to the most buyers possible secures the highest price – it accommodates demand volatility.
- Thinking that commissions are where the most money is saved or lost. Shakespeare said “A rose by any other name would smell as sweet”. Perhaps, not the best analogy when discussing the second most dreaded word in the English language “commissions” (the first being “taxes”). The truth is that the seller is going to pay someone to sell their home. Sellers will either pay by hiring a professional, paying “seller experience fees” to an instant offer company, or selling to an investor who “charges nothing” but takes a minimum of 10-30% off the price. Rather than quoting Shakespeare, perhaps the better quote is “there is no free lunch”. With that said, are we still an advocate for a flexible commission structure? Sure – we too love to save money. Just don’t give away way more than the cost of a commission in an attempt to avoid commissions. Instead make sure you are paying for the best representation money can buy.
Thank you for allowing us to share our thoughts on what pains us the most – watching sellers give away their hard earned equity. As always, we are here to serve you.
Russell & Wendy Shaw
Supply continues to be the story in the valley (or lack thereof). But it really is a tale of two cities – if the cities were price points – the 200K range vs. all other price ranges. Single family homes under 200K seem to be the wooly mammoth quickly headed for extinction. Understandably entry level buyers and their agents are bemoaning the lack of inventory in that coveted price range. Perhaps there is a need for a bit of a reality check. Phoenix is the 5th largest city in the US. The rankings currently are:
- New York
- Los Angeles
Phoenix has enjoyed a reputation of “affordable housing” due to its large land mass. Whenever more houses were needed, builders had plenty of land to build them. A steady source of new supply kept pricing low. This brought about the “drive until you qualify” phenomena as the valley expanded ever outwards. Builders are happy to build but land, labor and material costs make them unable to bring single family housing to the market in the price range most needed. When we look at the valley in the context of cities such as New York or Los Angeles – do most buyers in those cities expect single family housing to be available at 200K? No. So it may be that we simply are struggling to come to grips with our big city status.
In any case, let’s take a look at where we stand in the early stages of 2018. The year began with 14% fewer homes for sale than in 2017. We are currently seeing a slight improvement over 2017 for the number of homes entering the marketplace (up 1.4%) – but it is early and the improvement is very small. To quote Michael Orr of the Cromford Report:
“So the good news for buyers is that we do have slightly more homes coming onto the market. The bad news is that this is not enough to ease the supply shortage. In fact it is not even enough to compensate for the higher sales rate in 2018 over 2017. Closings are so far up 3.2% year over year so a 1.4% increase is less than half what is required to replace homes sold.
Looking specifically at Greater Phoenix we have 6,859 listings with a list date of Jan 1 through Jan 21, 2018. Compared with last year we have seen
- 26% fewer new listings under $200,000
- 5% more new listings between $200,000 and $300,000
- 5% more new listings between $300,000 and $400,000
- 12% more new listings between $400,000 and $500,000
- 21% more new listings between $500,000 and $1 million
- 5% more new listings between $1 million and $1.5 million
- 36% more new listings over $1.5 million
So perversely, but not unexpectedly, we are getting the largest percentage increases at the high end of the market where more supply is not really needed. Below $200,000, where supply is already extremely thin, the new listing flow has dropped even further from last year’s rate….
However the 2% of the market over $1 million benefits from having 12% of the active listings – six times its fair share. Consequently buyers have a much easier time if they are planning to spend $1 million or more and sellers are rarely in control of the negotiations. This is why you see some spectacular price cuts in the high-end market and a sales pricing trend that is flat to slightly lower. We should emphasize that this applies to the re-sale market and not the new home market…”
If you are a seller – the price point you are in will affect your “home selling experience. Typically, the lower the seller is on the pricing scale – the higher the odds of multiple buyers competing for your home. When demand is out of balance with supply, in favor of sellers, multiple offers occur and there is upward pressure on pricing.
This would all appear to be good news for sellers, right? Well yes, but a strong seller market can hide mistakes that cost sellers thousands of hard earned equity. For example, sellers can decide to “go it alone” by either selling the home to a friend or neighbor or to a “we buy houses company”. To many that looks like success – one buyer and the home is sold without placing it on the market. To us in the business, that looks like a disaster. How can you know for certain what a “competitive” offer is without competition? Any home has a range of value. What pushes homes to the top end of that range? Competition. Capitalism is based on that very concept. Competition (thru marketing) is how we as agents create bidding wars for the home.
Sadly it isn’t enough to create the competition, once created one must know how to handle it. How an agent handles multiple offers separates the men from the boys. This again is where thousands can be made or lost. Make sure that whomever you hire knows how to get the highest and best out of each offer and to successfully exploit that competition.
It is important to note that supply and demand imbalances will correct with time. In fact, we are already seeing lowered demand than last year. The cycle basically goes like this: tight supply increases pricing; increasing prices dampen demand; lowered demand creates more supply; more supply lowers prices. So the pendulum of supply and demand (and thereby pricing) self corrects with time. When will that correction begin and supply begin building? We don’t know but we will be watching for it and will keep you alerted to any shifts. Wondering about something we didn’t address here? Contact us. As always, we are happy to answer your specific concerns.
Russell & Wendy Shaw
We hope you all had a wonderful holiday season! Now that we are off to a fresh new year it makes sense to note where the market currently stands.
Undoubtedly our serial readers are already well aware that the 500K and under range has been in a “sellers” market for all of 2017. What most may not know is that inventory usually sees a build up in the fall as demand tapers off. Fall 2017 saw a very minimal increase in inventory and in the under 200k single family supply is so paltry as to seemingly be headed for extinction. Entering 2018, active Listings are down 12% from this time last year. There appears to be no relief on the horizon. As our favorite real estate market watcher the Cromford Report states:
“It is easy to get complacent about the low inventory and assume that this is somehow the “new normal”. The long term decline in active listings just keeps going and we have now reached the point where days of inventory is the lowest we have seen for week 50 since 2004 (at the height of the bubble). …To try to get a handle on what life is like in the regular market, let us focus on homes priced at under $500,000 in Greater Phoenix. The inventory for this segment is 52 days. If we use $250,000 as the price limit we have just under 40 days of inventory. These are not normal readings and we start to wonder how low can these numbers go.”
This means buyers are going to have an even tougher time buying than last year in any price range other than luxury. For most sellers, they should enjoy competition from buyers and stronger pricing.
Demand has remained relatively stable and unremarkable especially compared to its counterpart supply. Demand was on a weakening trend in the 3rd quarter but that seemed to shift upwards mid-November and certainly provided a busier than normal December. An interesting side note is that buyers are now primarily in-state buyers (i.e. local house changers) . The Cromford Report notes :
“… migration into Arizona is weaker than it was during the 2000-2007 era. In 2004 we saw 30,564 purchases by out of state buyers. 2017 year to date is 16,443 …The total sales count is lower and the percentage of sales going to out of state buyers has dropped from 20% to 16%…The flip side of this is that in-state demand has increased from 80% to 84%. Areas that appeal most to in-state buyers have seen stronger appreciation.”
Supply and demand ultimately dictate appreciation. It should come as no surprise that appreciation was greatest in the lower price ranges due to low supply. Turning back to the Cromford Report we can see exactly how true this is:
”After peaking on July 28 at 8.6% the appreciation rate for all areas & types went into a declining trend until November 9 when it bottomed out at 3.6%. It then changed course and over the last 5 weeks has risen sharply to reach between 7% and 7.5%…. Such a rapid change in direction is quite unusual.
The overall appreciation rate based on annual sale price per square foot in Greater Phoenix is 6.2%. However, supply and demand are not the same by price range. The greatest appreciation rates are under $200K due to a lack of new construction that would typically balance out the supply shortage. Sales under $200K are 33% of all sales this year, so their rate has a large effect on the overall average. New multi-family and single-family homes are being added to the $200K-$500K price range to accommodate increased demand, but it’s still not quite enough. The market is balanced between $500K-$1M, while supply is still higher than demand over $1M despite a 10% rise in 4th quarter contracts. As a result, appreciation rates are as follows by price range:
- Under $200K: 7.7%
- $200K-$500K: 3.5%
- $500K-$1M: 1.7%
- Over $1M: 0.1%”
We rarely talk about real estate agents – although they certainly can impact the marketplace in subtle ways. It may be of interest that there was a 6.6% increase in the number of real estate agents since last year as rookies continue to enter the field. While agents certainly don’t set the marketplace (supply and demand does) they certainly can influence the buying and selling experience. Agent skill impacts the counsel clients receive on market behavior or not; negotiate the highest market value or not. They should be the client’s biggest advocate and legally in fact have a fiduciary relationship to the client. As the institutional investment companies are swarming the valley (Offer Pad, Open Door, etc.) sellers can learn the hard way the impact that a missing real estate advocate has in terms of reduced proceeds. Particularly disturbing is the institutional buyers’ offers of “no commission sale” while charging fees in excess of 9% – far beyond what might be charged as a commission. Add in the typically lower than market value and imaginary “repair costs” and sellers are paying dearly for that lack of representation. Lower than true market value sales can impact appraisals and subsequent neighboring sales – a sobering thought for all of us vested in defending neighborhood values.
As 2018 continues to progress we will endeavor to keep you apprised of the emerging trends. Of course every home sale has its own concerns, so please don’t hesitate to contact us for a customized analysis of your neighborhood. Here’s to a wonderful 2018!
Russell & Wendy Shaw
Is it just us, or has 2017 seemed to fly by? As 2017 heads to a close, inevitably we reflect and compare this year to the previous year. Although the final tallies are not in, we still can draw some solid comparisons.
Most homeowners and would-be homeowners (buyers) find pricing statistics the most interesting of all statistics, understandably. Yet it is wise to remember that pricing is a trailing indicator – not a leading one. Pricing trends take time to show up and become meaningful. Further there is a seasonal factor that can obfuscate the market trends. For instance, in a “typical” year pricing rises during the spring buying season and tends to peak in June. Then the second half of the year goes flat on pricing (and can even have a small retreat). Pundits who don’t know or care to factor in the seasonal component of the market can write alarming headlines about the market when fall arrives – only to see it miraculously “recover” again in the spring. Annual prices tell the actual story of what occurred.
At the moment the overall market appreciation stands at 5.8% – but understand that this includes all price points and areas and is simply a market average. Separating pricing into categories tells a far more accurate story. Appreciation under 200K remains strong as demand is outpacing supply. Luxury sellers are having a very different experience – even with supply currently lower than 2016. Some luxury price points have seen a small erosion in pricing. To quote our favorite real estate source, the Cromford Report:
Price trends remain weakest for the high end of the market and despite much stronger sales numbers than last year, the top end remains over-supplied. This is not unique to Central Arizona as we see similar weakness in luxury pricing across most of the USA. The low-end and mid-range still have price momentum and given the deterioration in supply, especially in the Southeast Valley, we expect that to continue for some time.
Interestingly, condos & townhomes are enjoying a faster appreciation rate than single family homes at the moment. This is largely due to the price point and the demand they are able to answer that single family homes simply cannot fill.
Because supply/demand ratios ultimately tell the story of the market and are a leading indicator, let’s turn our focus there.
Given that appreciation has been strongest in the under 500K range – especially under 200K – it should come as no surprise that supply is most constricted under 200K. What started as a promising year of a crop of new listings, fizzled in to only a small advantage over 2016. As prices have risen, the low end of single family homes is evaporating as homes previously valued at less than 200K now rise above that mark. New supply, which usually is typically supplied by builders, is simply not coming. Builders cannot provide single family product at that price point due to land costs, labor costs, and the cost of the commodities needed to build a home (concrete, wood, roofing materials, etc.). Not surprisingly multi-family building has risen to provide needed apartment rentals for those who cannot afford to buy entry level housing. Again the Cromford Report summarizes the situation:
So far in 2017 we are up only 1.15% for new listings over this time in 2016. Overall, the supply remains chronically weak and there is little sign of any improvement… Here we can see the huge reduction in supply that has occurred over the past 4 years. The seasonal pattern clearly shows up, but each year is much lower than the year before. It is starting to look as though there will not be much of a market below $200,000 before too long.
Demand can be far more volatile than supply and more difficult to gage. Improving economic factors (jobs, interest rates, income, stock market, etc) or a decline in those factors can influence the housing market along with supply. The stock market showing sharp improvements can impact the luxury market to the positive, where it has little impact on the entry level market. Rising prices are supposed to have a dampening effect on demand – so that supply and demand in counter-reacting to each other create a balance. This is not always a tidy process, however, as we’ve seen through the last 10 years. So what do the tea leaves say currently about demand? We again turn to the Cromford Report:
…and demand has been slightly weakening for several months now and at first sight it looks slightly weaker again at the start of October, although when supply is poor, it can be very hard to detect weakening demand out there in the market because there is enough demand to soak up all the supply and then some.
Supply and demand intersecting ultimately results in sales. The Cromford Report supplies a lovely snapshot of the sales:
The first half of 2017 was more exciting than the second half is turning out to be so far for MLS sales. 1st Quarter 2017 MLS sales outperformed 2016 by 14% and 2nd Quarter sales were up 7%, so a 2% growth rate for the 3rd Quarter puts a damper on our excitement. Low supply in the lower price ranges is mostly to blame as it’s difficult to have record sales growth if there are fewer people willing to sell their home. There are more people willing to put their home on the market in the higher price ranges however. New listings over $600K were up nearly 10% in the 3rd Quarter and sales were up an impressive 27%.
We hope this gives you an accurate picture of the market so you can ignore any headlines to the contrary.
As the holidays approach, we want to take a moment to thank all our clients and friends whom we are so fortunate to work with. We are truly humbled by the trust you place in us and we are committed to always doing our best to protect your interests. Thank you and Happy Holidays!
Russell & Wendy
For those who prefer an article in a Twitter-like format â€“ supply is still constrained, demand appears to be slowing (is this seasonal or an actual decrease?) and we are in the midst of a very â€œnormalâ€ market. For those who prefer details, continue on.
The problem with a â€œnormalâ€ market is that the Valley went through such an extended period that was NOT normal (2004-2011). Long periods of abnormality can start to feel like the new normal â€“ so when normal actually shows up it is apparently unrecognizable as such. Homeowners are understandably confused when reading inflammatory housing headlines meant to snag readers. Headlines such as â€œThe Valley is in a Normal Real Estate Marketâ€ is a snooze fest so donâ€™t be startled when various news sources claim otherwise. To site a few recent examples, Ed Delgado, President and CEO of Five Star announced at a conference for â€œforeclosure specialistsâ€ that foreclosures are going to go up in a number of cities, one of which was Phoenix. Much to the contrary, delinquencies in the valley are lower than any time since 2002, to have foreclosures you must first have delinquencies. Forbes also recently published a headline â€œ58% of Homeowners think the housing market is set for a correction â€“are Bubble Fears Founded?â€ To answer the question â€“ no – bubble fears in the valley are not founded. Housing Wire similarly states that Phoenix is one of the states â€œoverheatedâ€ and â€œoverpriced by double digitsâ€. Hmmm â€“ interesting theory but again not factual.
So to state the facts again (our apologies to those who believed us the first time we spoke to this issue) we are in a normal market. Supply, when constrained comparative to demand, causes prices to rise. Rising prices cause supply to rise and demand to dampen, resulting in a leveling off of appreciation as supply and demand begin to balance or even correct to the buyerâ€™s advantage. Real estate typically goes in cycles of this pattern over and over â€“ the question is only how long each cycle will last. To summarize the current state of the market, we turn to the Cromford Report:
Supply remains lower than last year, but the gap closed slightly compared with last month in terms of active listings with no contract. We are starting to see more new listings than last year. The third quarter is up 2.5% from last year and up 5.5% from 2015. So far the extra supply is not having much effect, but if it continues for several months finding a property could start to get a little easier for buyers.
The monthly sales rate is up only 1.8% compared with a year ago. Both August 2016 and August 2017 had the same number of working days (23) so we have a fair comparison to draw. Since the year over year growth was 5.7% in June and 3.0% in July we again see a continuing slow downward trend in the advantage that 2017 has over 2016 in sales volume. Growth in the annual sales rate has almost stopped with 95,000 proving to be a difficult line of resistance. All these point to a gradual fading of demand. The serious shortage of supply obscures that fadeâ€¦
We still have a seller’s market in most locations and price ranges, but the current trends means the seller’s advantage has very little momentum. Before buyer`s get too excited, the trends are very mild in nature. As such we do not currently see major increases in buyer’s bargaining power coming anytime soon.
A further interesting Cromford Report discussion point is does a normal market mean the valley has â€œrecoveredâ€? The Report brilliantly speaks to this point:
â€¦Many people assume when prices have returned to 2006 peak levels then the market has recovered. However understandable, especially for those who purchased during that time frame, thatâ€™s not necessarily the case. Average sale prices per square foot are still 27% away from the peak of 2006. However, the market could arguably be considered recovered once prices reach the range that corresponds to the long term average rate of inflation, which from 2000-2016 in the United States is 2%. In 2000, the average sales price per square foot for MLS resales was $96. Had the bubble and crash never happened, and annual appreciation stayed between 2-3% per year as normal, then prices would land between $134-$158 per square foot today. Currently theyâ€™re running at $149, which equates to averaging nearly 2.6% annually and a 55% total gain since the year 2000.
So normal and recovered seem to be hand in hand in the valley. That should be good news for jittery homeowners reading way too many headlines. As always, we are here to help you understand your home in todayâ€™s marketplace. We appreciate and welcome your questions and comments.
Russell & Wendy Shaw
Low supply has stubbornly remained the major theme of the housing market for the last three years.Â In fact active counts of homes for sale were lower in only 4 years (2004, 2005, 2012, & 2013).Â In 2004 & 2005 â€œthe bubbleâ€ was underway with heady demand voraciously consuming inventory.Â In 2012 & 2013, buyer demand was stimulated by 2011â€™s â€œbottom of the market pricingâ€.Â Thankfully 2017 is neither a bubble market nor a bargain basement sale â€“ but rather a normal sellerâ€™s market.
Despite the overall low supply of homes for sale, there are certain segments that have been showing an increase recently â€“ such as homes under 175K (unexpected) as well as price ranges over 1 million (yawn -predictable). To quote Michael Orr of the Cromford Report: â€œWhile some areas & price ranges are doing better than others, the overall supply is very low representing only 84 days of inventory. We consider 120 to 150 days normal.â€
Supply is the easier of the two factors (supply & demand) to quantify.Â So how do we track demand relative to supply? The Cromford Report answers this dilemma by using an interesting tool to gauge the state of the market (i.e. supply vs. demand) called the â€œContract ratioâ€.Â The contract ratio specifically measures the number of completed sales contracts relative to the supply of active listings. For those who enjoyed their grade school math class, it is specifically â€œ100 x homes under contract divided by active listingsâ€; the higher the number the greater the buying activity relative to supply.
In August the Cromford Report posted this insightful analysis:
â€œAlthough it is subject to seasonal effects, the contract ratio is a useful tool for examining the state of a segment of the market. If the contract ratio is rising then the market is heating up and if it is falling the market is cooling. It is quite normal for the market to cool during the third quarter since the second quarter is when the peak buying takes place. So anywhere where the contract ratio is higher in August than it was at the beginning of June is bucking the trend and doing well. Here are how the price ranges compare (August 10 versus July 1, all property types):
We mentioned (on August 7) signs of cooling in the $150K to $200K price range for single family homes. However this is swamped by the heating up in several of the higher markets, particularly $225K-$250K and $350K-$1M.
Overall this table is unusually positive with the exception of the market over $1 million and between $125K and $175K.â€
Considering annual price appreciation has been running around 7.6% (with inflation only around 2%) it would be expected for rising pricing to reduce demand.Â This appears to be happening â€“ but it is an early trend and only time will confirm if demand is going to abate enough to offset the low supply.Â As interest rates, income and pricing all affect affordability; dampened demand would be the reaction of a normal market.Â Despite alarmists saying otherwise, this is a normal market.Â As Michael Orr states:
â€œAppreciation is fine for the home owner, but translates into loss of affordability for the potential home buyer. Prices are being driven higher by a natural and persistent lack of supply, not irresponsible speculation. In this situation it is normal for prices to rise until they suppress demand enough to match the weak supply and we reach equilibrium. That is fundamental to economic theory. So we should not be surprised if sales volumes lose some of the momentum they have seen during the first half of 2017.
Of course the nature of demand is always in flux.â€
Whatever the market brings we will endeavor to keep you apprised.Â Of course, we always welcome your comments or questions.