Balancing Act

A Balancing Act

By now most homeowners have heard the news “the market has shifted”.  While that is true, as usual the story is more complex.

In the first quarter of 2022, Sellers held every card.   Now they are handing them back one by one.   As financial markets tend to run on two emotions (either fear or greed) understandably in the first quarter greed drove the market.  Now?  Hello, fear.  Likely too many people remember the debacle of 2008 and fearing a repeat, the market reacted swiftly.  Therefore, we have rapidly and officially arrived at a balanced market.

So why all the hand wringing?  Isn’t a balanced market a dream come true? An egalitarian market – favoring neither seller nor buyer?  The first thing to realize, is that the last time we were in a balanced market was in 2015.  Many real estate agents have never even seen a balanced market.  Further, after 7 years the abnormal starts to feel normal. Additionally, not all areas and price points are moving in sync – despite the fact they have all shifted.  The lack of consistency across all areas and prices creates further uncertainty- and moving targets are hard to precisely pin down while in flux. So what is known?  Recently the Cromford Report examined the 17 largest cities and found that 6 cities have now moved in to a buyer’s market (i.e. a market where supply exceeds demand – therefore buyers have the negotiating power).  Those currently in the buyer’s market: Surprise, Tempe, Gilbert, Buckeye, Queen Creek and Maricopa. Six cities are in the balanced zone: Chandler, Peoria, Glendale, Phoenix, Mesa and Avondale. A balanced market is one which neither favors buyers nor sellers on negotiation.  This leaves 5 cities still hanging on to a gentle seller’s advantage: Fountain Hills, Cave Creek, Paradise Valley, Scottsdale, and Goodyear.

But just as the location is affecting the relative strength or weakness of the market, so is the price point.  As a case in point, The Cromford Report analyzed the changes in the average sale price per square foot in Phoenix (the largest market) from mid-May to the beginning of August. They found the peak for closed prices was May (but note, those are contracts that actually went together in April when demand began to erode).  They found the median sales price from just Mid-May to the start of August eroded 6.25% – an average of 2% per month. Looking more closely at individual price points – the largest drop was for properties between $1M-$1.5M – with an average decline of 3.2% per month. The runner up was the $500K-$800K with an average decline of 1.2% per month. Not shockingly the low end and high end are fared the best.  The high end of the market is not interest rate sensitive.  The low end of the market simply has restricted supply with negligible new supply being created.  Proving once again that housing is very neighborhood/price specific. 

What you should know

So what should would be sellers take away from all this?  A few points:

1.If you sell now, today’s value is still above this time last year’s value.

2. This a market that is rebalancing.  Yes, it is still eroding, but the rate of decline is slowing.  What will future values look like?  No one can predict.  See point 1 for today’s answer.

3. Supply and demand are determining who holds the strength in negotiations.  The answer is area specific and price point specific.  Get hyper-specific when evaluating your home.  This is a moving target.

4. You need a good real estate agent again.  At the peak of the market, 93.3% of all homes on the market sold.  That number is now 70.4% (the lowest number for this time of year since 2010 which came in at 58.1%).  The difference between selling now or not, is back to the agent’s marketing and knowledge.

We are back in the land of normal – although it will likely take a bit for everyone to absorb that fact.  The slowing of the rate of decline is our earliest hope that this market will settle in to the much overdue correction.  As always, we will keep our friends and clients aware to the changes.  We are here to inform.

Russell & Wendy

(mostly Wendy)

The Current Market

Gary Keller …The current market is ‘the most confusing I’ve ever seen…

There’s a lot to worry about in today’s market — coronavirus infections are near 2021 peaks, health officials are ringing the alarm about monkeypox and polio, inflation and mortgage rates are steadily climbing, home sales have slowed and the industry’s biggest real estate companies are bracing for a possible recession.

Even as strengthening headwinds pushing agents and consumers to the brink, Keller Williams founder Gary Keller encouraged agents at the brokerage’s annual Mega Camp conference on Tuesday to take a more tempered approach to analyzing the current market.

“When times are good, understand at some point, they’ll get tougher,” he said matter of factly while sporting a black graphic tee that read ‘Charge the storm.’ “And when times are tougher, at some point, they’ll get good. That’s just the way the world works.”

However, Keller couldn’t help but acknowledge that today’s market shift is much different than past cycles when it was easier to read the tea leaves and understand exactly what to do to survive. However, he said today’s market is filled with ‘mixed signals’ that can make it hard to strategize.

“I would say this is the most confusing market I’ve ever seen in my entire 40-plus years in our industry. It’s confusing, and it’s only confusing because you have mixed signals,” he said. “Normally, you would expect all the signals to aim in one direction. And that’s not what’s happening.”

Keller noted that although home prices are rising, average days on market are still at an all-time low, despite being longer than two to three-day timeline agents got used to at the height of the pandemic. He also highlighted the false alarm around rising mortgage rates, which, despite hovering near six percent, are also near historic lows.

“If you’re talking to individuals that don’t understand mortgage rates, they do not realize that 2.9 percent was a gift from the gods maybe never to be seen again in your lifetime,” he said of the past two years’ trends. “But a lot of people remember, again, that when I got in real estate, and interest rates were below 10 percent. That was considered amazing.”

“Then they rose to almost 18 percent, and I remember all of these experienced agents in the office where I worked — they all went, ‘Nobody’s gonna buy real estate at these rates, we’re just gonna sit and wait for it to come back,” he added. “I don’t think they lasted in the industry. Right?”

Keller directed agents to be attuned to the market, but resist falling into the belief their businesses can’t continue to thrive even in such confusing times.

“I ignored the market and kept doing my activities,” he said hearkening back to his first years in the business,” he added. “I just kept going on about my activities, and there were four or five months where I actually didn’t have any closings… And by the end of the year, I hit every financial goal I set for myself and I even took December off.”

“The trick was ignoring the market and keep doing the activities,” he added. “That’s where you’ve got to be real careful because some of you will see this data and go ‘Oh crud, things really suck. The sky is falling and I can’t do any better.’ Don’t fall into that trap.”

Home sales are slowing — but don’t freak out

In 2020 and 2021, agents easily smashed their previous sales records as rock-bottom mortgage rates, remote working, a pause on student loan payments and several stimulus checks pushed buyers to battle each other for scant listings. However, 2022 ushered in a slower pace as inflation, rising mortgage rates and other socio-economic factors tempered buyers’ ravenous appetite for homebuying.

As a result, Keller said the industry will end the year with 5.1 million home sales, which falls in line with other predictions that place year-end sales around the 5.7 million mark. Although 5.1 million is a far cry from 2021’s 6.1 million home sales, Keller said that’s still a healthy number of transactions compared to the early 90s when annual home sales struggled to break four million.

“If you look at 5.1 and you go all the way back to 1995, 5.1 [million] looks pretty darn good, so perspective really matters,” he said. “There’s plenty of real estate being bought and sold to build fantastic businesses and have fantastic income around that business.

So why does the current market feel more like a drought than a monsoon of opportunity? Keller Williams Vice President of Strategic Content Jay Papasan said it comes down to one thing: more competition.

“The last time we were at 5 million [transactions] there was a third of the Realtors that there are today,” he said. “So there’s just more people chasing the same transactions.”

With that in mind, Keller and Papasan said agents need to focus on mastering the fundamentals of real estate and focus on becoming better at handling hard times rather than wishing for easier ones.

“When interest rates went to almost 18 percent and the transactions really dropped off dramatically, my attitude every day was somebody’s going to buy or sell a house and I’m gonna go work with them,” he added. “Everybody else? Good luck.”

Slowing home price growth ≠ buyers’ market

Rising home price growth has been the bane of homebuyers’ existence for the past seven years, as homebuilders struggled to fix a worsening imbalance between supply and demand.

That imbalance has worsened over the past two years as coronavirus-induced supply chain issues and rising labor and material costs slowed builders, and market headwinds encouraged a record-level of buyers to enter the market. As a result, home prices have continued their meteoric rise with national home price growth reaching around 18 percent in 2021, which Keller Williams Senior Economist Ruben Gonzalez won’t last for long.

“For some perspective, the last time we had a double-digit price increase, that was followed by seven years of single-digit price increases,” he said. “So having multiple years of double-digits is very unusual and it’s not something that’s going to persist.”

Before homebuyers pull out their bullhorns in celebration, Gonzalez and Keller said a slow down in home price growth doesn’t necessarily mean homes will become more affordable.

“We don’t believe we’re going to see negative price [appreciation],” Keller explained while noting it’ll take at least four years for the market to reach the historic trendline of 4 percent home price growth. “We believe that we will simply see a reduction in the rate of inflation [for home prices].”

Keller said homebuyers are currently spending 25 percent of their income on housing costs, which albeit high, is still lower than previous decades when homebuyers spent up to 35 percent of their monthly income on a mortgage.

“I’m so oriented towards my days of selling, that I go, ‘Yeah, what’s the big deal?’ Keller admitted. “Because in 1979, which isn’t on this chart, in 1979, I promise you that number was 32 to 35 percent and I thought that was normal.”

Keller said inventory is still at 3.3 months, which signals sellers still have the upper hand. However, if the United States market follows Canada, a true buyers market could be on the way.

“The reality is that what we just came out of  — and I can’t say it enough — is unprecedented. And people are going to have to forget that. That was [about making hay when the sun shines,” he said. “Canada is experiencing exactly what the US is experiencing.”

“Sales are dropping at about the same pace, price appreciation a little less than what we’re gonna experience this year, but almost right in line with that, and inventory? Same thing,” he added. “They’re moving into a buyers market rapidly.”

Inflation is taking the gas out of people’s tanks — literally and figuratively

Although the past two years have been heartbreaking, Keller said there’s still been plenty of opportunities as evidenced by record-low unemployment rates, robust home sales (until now), and relatively solid personal finances among homebuyers compared to the Great Recession.

However, consumer sentiment is at a record low. Why? Inflation.

“There is more money sitting out there in bank accounts than ever before. People are unemployed at one of the lowest rates in history and son-of-a-b — they’re unhappy. Desperately unhappy,” he said. “It’s just a little weird, right? You’ve got a job. You’re just got a great pay raise. You’re living a good life.”

“I truly believe that gas is the number one determinant of how consumers feel about the economy, and the reason is an extra $100 to $200 a month just on gas, is the extra money — that’s new clothes for the kids to go to school. That’s just that extra money for that, that three-day or four-day vacation trip,” he said. “It takes some of the little fun out of it.”

Keller said it’s important for agents to help consumers properly process economic stressors, which will help them make better financially-sound decisions about homebuying and selling.

“It’s going to take through 2023, most likely, to grind through all of this,” he said. “But the last three years have misled people to believe that buying real estate was like owning an ATM. “Yeah, I can buy it and tomorrow, I’ll just flip it.’ This real estate game is amazing, but that was a moment in time. That’s not reality.”

Keller said agents must help homebuyers think about real estate in the long-term and that any

purchase that’s made with the intent of staying seven years or more, is a winning decision even in this market.

“If your holding horizon is anywhere from seven to 10 years, the facts show that you’re good to go,” he said. “Someone says, ‘Oh, you know, I don’t want to buy right now. I’m afraid prices go lower.’ Well, institutional buyers are seizing opportunities.”

“I remember reading the books when it was really hot and heavy about buying versus renting, and the investment world was saying buying a home is never good,” he added. “Call Blackstone and all the other institutional investors and say ‘You shouldn’t buy.’”

“But ultimately it’s not your life, it’s their life, and your goal is to give them the perspective and give them every chance to understand all the issues so they can make an informed decision.”

Even through the confusion of today’s market, Keller said agents can still create some of the best years of their careers if they’re willing to charge into the storm instead of running from it.

“Buffaloes are an interesting animal. When a storm occurs, they’re the singular animal that runs into the storm. Somehow they figured out that if you face the storm and run into it, you get through it better and faster,” he said. “That’s how you win.”

August Market Update

The Balancing Act

The greater Phoenix market continues to shift to rebalance.  The emotion of the market has shifted from greed to fear – which in our opinion has been the driving force behind the market’s unusually fast shift.  But not all areas and price points are moving in lock step.  The Cromford Report reports on the 17 largest cities and shows that 6 cities have now moved in to a buyer’s market (i.e. a market where supply exceeds demand – therefore buyers have the negotiating power).  Those currently in the buyer’s market: Surprise, Tempe, Gilbert, Buckeye, Queen Creek and Maricopa. Six cities are in the balanced market: Chandler, Peoria, Glendale, Phoenix, Mesa and Avondale. A balanced market is one which neither favors buyers nor sellers on negotiation.  This leaves 5 cities still in a seller’s market: Fountain Hills, Cave Creek, Paradise Valley, Scottsdale, and Goodyear.

But just as the location is affecting the relative strength or weakness of the market, so is the price point.  The Cromford Report further analyzed the changes in the average sale price per square foot in Phoenix (the largest market) mid-May to present. Here is what they found:

“The peak of price for 2022 so far was May, since then the median sales price has declined 6.25% from $480K to $450K. That’s an average of 2% per month* thus far, however the downward trend has not been consistent across all price ranges; a detail not reflected in the median sale price measure. To analyze the price response by sales price range, we use the sales price per square foot.

Price RangeMay 2022 MeasureAugust-to-Date Measure% Total Change since May
Up to $300K              $213.89 $212.50 – 0.6%   -0.20%
$500K-$800K           $287.30 $277.15 – 3.5%    -1.20%
$800K-$1M        1    $333.11$327.41 – 1.7%    -0.60%
$1M-$1.5M             $384.36 $347.26 – 9.7% -3.20%
Over $1.5M             $583.57 $586.60 + 0.5% +0.20%

The table shows that properties between $1M-$1.5M have seen the strongest decline since May, with an average decline of 3.2% per month. This is the only price range above the overall average decline of 1.8%. The runner up is the $500K-$800K with an average decline of 1.2% per month. “

To summarize, this a market that is rebalancing.  Yes, it is still eroding, but now more slowly.  Supply and demand are determining who holds the strength in negotiations.  The answer is area specific and price point specific.  Not shockingly the low end and high end are faring the best.  The high end of the market is not interest rate sensitive.  The low end simply has much more restricted supply and negligible new supply being created.  Proving once again, housing is very neighborhood specific.  As always, we offer our help and counsel to any buyer or seller considering a move.

Russell & Wendy Shaw

(Mostly Wendy)

Good bye seller market. Balanced market is that you?

News has spread about the shifting market – largely driven by spiraling interest rates suppressing demand.  That was a wakeup call to sellers who began rushing to place homes on the market.  While the shift in the market was not unexpected, the velocity of the change was.  We have seen a 220% increase in supply over the past 15 weeks.  Gulp.  It’s been so long since we’ve been in a balanced market- do you even remember what a balanced market is?  It is when the amount of supply is balanced in relation to the demand (4-6 months of supply).

But not all areas and price points are behaving the same. The below $400,000 is holding up, as is the 3 million+ price range.  The mid-range is where the supply is arriving at a rapid rate.  In particular, the most vulnerable range is the $500,000-600,000 – where supply has grown most rapidly.  Why is supply building so quickly in the mid-range?  Largely, builders.  Tina Tamboer of the Cromford Report explains: “Supply across all price points is up, with 53% of active listings added by new home developers and investors. Builders especially are dropping prices and offering unique buyer incentives to compete.”

As in new homes, the resale home seller is feeling the impact.  Offers trickle in rather than flood in. As Tina further explains: “… contract activity has dropped 28% in the last 6 weeks. The number of listings under contract at this time of year should be around 10,000, putting today’s count of 8,680 well below normal.”

To summarize, Buyers now have choices and a bit of time to choose.  Sellers are back to needing show-ready homes and realistic pricing.  What will this market look like by end of year?  No one can say with certainty. In the short term it seems likely the shift will continue. We could see prices regress a bit from their peak. Whatever the future holds,   we will continue to track the trends and report it here.  As always, contact us to address your particular circumstances and concerns.  After 44 years, we can help no matter the market.

Russell & Wendy

(Mostly Wendy)

The Market Dramatic Shift

“Only when the tide goes out do we discover who’s been swimming naked”

– Warren Buffet

It is a sobering time for the housing market.  The last two years has been like an unending drunken party.  Home Buyers enjoyed record low interest rates making home ownership more affordable, despite rising home prices, than the equivalent rental.  Home Sellers watched their home values soar courtesy of scarce supply and above normal demand.  But all parties come to an end and it seems very clear that March was the beginning of the end.  The number of properties for sale has more than doubled since March, pending sales are dropping, closed sales are dropping, and the percentage of homes failing to sell is increasing.  It all sounds pretty dire but despite that, we are still in a slight seller’s market. For the moment.  If the current trends continue we will be in a balanced market as of Mid-August and a buyer’s market as soon as the first week of September.  But history has taught us that trends are rarely systematic and predictable.  To quote Michael Orr of the Cromford Report:

“If the current trend continues…. We would enter a buyer’s market in the first week of September. Of course, this is just one of billions of possible scenarios and we do not pretend to know what will actually happen. Demand could improve or get worse tomorrow and supply is equally unpredictable. You cannot foretell the future, but you can study the present. Most market observations you will see elsewhere are one to three months old. This is why we measure the market every day rather than waiting until the end of the month.”

Supply

Supply (or the lack thereof) has been the controlling factor in the housing market for the last two years.  It still is – only this time it is the rapid increase of supply that is the story.  “If we were just suffering deflating demand, the market would be cooling off gently. But if 34% more new listings are arriving every 4 weeks, supply is increasing just at the wrong time and it just cannot be absorbed. This is why we are seeing the fastest cooling trend that the Greater Phoenix housing market has ever experienced. What we do not know is whether the extra listings will keep coming or if this excess new supply will dry up sooner rather than later.”

Demand

It was predictable that rising costs and interest rates would dampen demand.  But the fluctuations in supply and demand have not impacted all price ranges equally.  The under 400K market is not seeing new listings surge – and demand still currently exceeds supply.  Interestingly enough, homes in the over 2 million range also remain in low supply even though demand is down.  The most vulnerable price range is the $400,000- $1 million – which has the largest amount of extra supply while also experiencing a huge drop in demand.  This price range is also where a flow of new supply is being created by builders – accelerating the situation.  As Michael Orr points out “The mid-range is likely to become a balanced market before the low-end or the high-end.”

Prices

For most – the biggest question is “what will happen to prices?”  As we have mentioned many times, prices are a trailing indicator – not a leading one.  Prices do not drop in a balanced market.  In a balanced market prices simply tend to follow inflation.  Prices do drop however,  when demand is low and supply is greater than can be absorbed.  That market favors buyers over sellers – and lower prices reflect the buying power of those limited buyers.  A very good statistic to anticipate dropping prices is the listing success rate (i.e. what percentage of homes sell in their listing period). At the peak of the seller’s market 93.3% of homes sold. Compare that to January of 2008 (the nadir of the market) when the listing success rate was an anemic 20.4%.  The average rate is 68.7% – which means it is “normal” for roughly a third of homes not to sell. Prices tend to decline when the rate is below 50%.  As of the writing of this article – the listing success rate has dropped in the last 3 months to 84.2%.  We expect this number to continue to erode.  This is a statistic worth monitoring.

Message to Sellers

Sellers are now having to manage their expectations – which is difficult after years of holding all the cards.  As competing supply continues to rise sharply, sellers should be prepared for more extensive marketing periods, less showings, more flexibility in negotiations, and even correcting unrealistic pricing (i.e. price reductions).  As mentioned before, if our current rate of change continues a balanced market would be achieved by August.  Transitioning markets such as we are in, can be tricky to manage. Most agents are ill prepared – having never been in a balanced market (much less the buyer’s market that we may be headed for).  Only extreme markets hide mistakes. The agent’s ability to counsel, advise, and negotiate are getting very important again.  Our best advice?  Choose wisely.

44 years of experience has allowed us to see every market – and develop proven sales strategies for each. To Warren Buffet’s point – the tide is going out and we are about to see which agents have been swimming naked.

Russell & Wendy

(mostly Wendy)

June Market Update

Market Shift Confirmed

Enough time has lapsed that it seems fairly certain the peak of the market was reached in March.  Since then, one market indicator after another have been tipping – confirming a rather dramatic market shift is underway.  The number of properties for sale is up (more than double since March), pending sales are dropping, closed sales are dropping, and the percentage of homes failing to sell is increasing.  It all sounds pretty dire but despite that, we are still in a seller’s market. For the moment. 

For Buyers:

In the last 10 weeks, Buyers in the above 400K range have seen a steadily increasing supply of homes.  Tina Tamboer of the Cromford Report shares this:

“In a nutshell, when sellers have to compete, buyers win. What they win at this stage is their sanity and some normalcy in the home buying process. By normalcy, typical contract requirements such as appraisal and inspection contingencies remain in place. There may be multiple properties available that fit a buyer’s needs, instead of only one with multiple offers already submitted. The median number of days prior to contract is now 11, up 4 days from last month, which provides more breathing room for scheduling showings.”

For Sellers:

Sellers are now going to have to manage their expectations – which is difficult after years of holding all the cards.  As competing supply continues to rise sharply, sellers should be prepared for more extensive marketing periods, less showings, more flexibility in negotiations, and even correcting unrealistic pricing (i.e. price reductions).  At the current rate of change we could be in a balanced market as soon as August.  In a balanced market, a third of the properties for sale will not sell with their first agent.  Not surprising given that most agents are ill prepared – having never been in a balanced market – much less a buyer’s market.  Although sellers still retain a gentle advantage over buyers, only extreme markets hide mistakes. The agent’s ability to counsel, advise, and negotiate are getting very important again.  Our best advice?  Choose wisely.

The Exception:

The under 400K market is not seeing new listings surge like the other price points.  But it is more sensitive to interest rate fluctuations and pricing than higher price points – which is causing demand to drop.  So far the impact in that price range has been minimal and it currently remains stronger than the other segments of the market.

Wonder about your specific neighborhood?  Contact us for a free supply/demand evaluation.  After over 40 years, we have seen every market.

Russell & Wendy

(mostly Wendy)

How to Decide Between Buying Your Starter Home or Your Forever Home

If you’re ready to buy your first house, it may be difficult to choose between a starter home or your forever home. Here are some ideas to think about when you’re reviewing your options.

Buying and Insuring a Property

When you buy a home, you also need insurance. Homeowners insurance only covers the structure of the property, injuries, or belongings in a burglary. A home warranty is another option that covers your home systems and appliances. Home warranties are renewable annual plans that help cover the costs of appliance repairs and major systems breakdowns, such as HVAC, plumbing, and electrical. To choose the best one for your needs, home warranty reviews are a good place to start.

Starter Home Pros and Cons

Buying a starter home is one way you can be a homeowner. A starter home is a property you plan on selling at some point in the future when you’re ready to upgrade. Here are factors to consider with a starter home. 

Affordable

Housing prices continue to rise, with the median U.S. home price at $375,000, according to the U.S. Department of Housing and Urban Development. Starter homes are usually lower than the national average.

Less Upkeep

Your starter home may also not require as much upkeep, especially if you plan to move within five years. A smaller home also costs less for repairs and other maintenance items.

Potential for Producing Income

Starter homes can also be used as rentals when you decide to move. Consider keeping a starter home and renting it out to get a second income.

Smaller Space

The cost savings may also come with a smaller living space. In most states, home sizes are getting bigger, so a starter home may feel cramped.

More Outdated

Starter homes are usually older and less modern. If you purchase a cheaper starter home, you may have outdated appliances and older decor that hasn’t been updated.

Neighborhood Issues

The first home you buy may also not be in the best neighborhood. If your home is in a bad neighborhood, there could be more property crime and safety issues.

Forever Home Pros and Cons

First-time buyers also can decide to immediately buy their forever home. This approach also has some financial and lifestyle pros and cons.

Setting up Roots

The biggest pro to moving right into your forever home is to set up your roots. This can help you avoid moving again and keep you in a great neighborhood.

Potential to Grow Your Family

Buying your forever home as your first property also gives you the flexibility to start growing your family whenever you want. Couples that plan to have children can have enough space and bedrooms to expand.

Able To Invest in Unique Decor

Another pro is that you can buy big-ticket items, heirloom furniture pieces, and unique decor without having to worry about moving them later. You can also add a pool, hot tub, fence, garden, and custom landscaping.

More Expensive

The top con of buying your forever home first is the cost. A larger home may give you some sticker shock. There is also the higher cost of utilities and property taxes to consider.

Lots of Upkeep

Finally, you also may need to invest more time and money into maintaining your forever home. Maintenance and repairs may be pricier than a typical starter home and may require some sweat equity.

Investing in a starter home or purchasing your dream forever home is a big step in life. Whichever path you choose, you can be a homeowner and start living your dream. Have the Russell Shaw Group on your side. Reach out today.

Image via Pexels

May 2022

Dramatic Market Shift

We have been sounding the alarm bells for months that the market was shifting – even if no one was feeling the impact.  In the last few weeks, the numbers are confirming a dramatic shift.  Here are the facts – rather than clickbait headlines.

The alarming news

Overall the supply of active properties is up 40% from this time last year. More shockingly, the supply of MLS properties for sale is up 45% in 6 Weeks.  Pretty dramatic, right?  The Cromford Report shares these numbers:  “Inventory listed between $400K-$500K is up 35% in just 3 weeks. Counts in all segments between $500K-$1M are up 99% in 6 weeks and the count from $1M-$1.5M is up 54%, also within 6 weeks.” If you are a seller or would-be seller, this is important information confirming a radical shift is under way.  Jumping numbers of available properties are not good news for sellers.  But please, read on.

What is happening?

Not surprisingly, the rising prices along with the rising interest rates are doing what they are supposed to – dampen demand.  Interest rates rise quickly and lower slowly.  Thereby affordability is taking a big hit that is not going away soon.  For those shocked by interest rates in the 5% range (having become acclimated to rates in the 3% range) we gently remind you that historically rates have averaged in the 8% range.  But back to supply, it is not that a flood of listings are coming to market but rather less are going under contract.  That is what dampened demand looks like – less things selling.  When less things sell, supply builds.

What this means and why not to panic

Not all price points are experiencing rising inventory in our market.  The properties below 400K are still scarce and in high demand.   Additionally, the overall number of available properties remains ridiculously low.  The Cromford Report confirms: “As of this report, the supply count is 7,157, still 72% below normal for this time of year but rising quickly”.  We repeat, 72% below normal.

What does this all mean?  If you are a buyer shopping in the 500K+ market – you will have more choices and less competition.  If you are a seller, your prices are not dropping and you still have below normal competition.  The Cromford Report summarizes:

“The market is in the early stage of shifting out of an insane seller market and into a mere frenzy seller market. Before we know it, it could be a regular old hot seller market where properties still appreciate but take multiple weeks to sell…While the market is still strongly in favor of sellers, it is changing rapidly. For those sellers waiting to sell close to the peak of price, this may be the time to list. Prices are still projected to continue rising, but at a slower pace over the next few months.”

We hope this helps put in to perspective the shift.  Caution is advisable, fear is not.  If you have questions about buying or selling in today’s market, contact us.  Market knowledge is our business.

Russell & Wendy Shaw

(Mostly Wendy)

The Market Signals a Shift

“The bad news is nothing lasts forever. The good news is nothing lasts forever.”

― J. Cole

In our last article, we speculated that the market may have peaked.   More and more signals of a shifting market seem to reaffirm our suspicions. But, as we try to remind both buyers and sellers, the real estate is not the stock market. Housing moves slowly. Shifts in demand are quicker than shifts in housing supply. So while the scarcity in supply has been the controlling factor in the housing market for a number of years, demand is now the impedance behind this subtle shift.

Demand is dropping

What is driving this drop in demand?  Not surprisingly – reduced affordability. The combination of rising prices and rising interest rates are doing exactly what they are supposed to do, reduce demand.  At least in the case of the owner occupied buyer.  However, supply and demand are still strongly unbalanced in favor of sellers.  This makes the change imperceptible to most.  From the Buyers perspective, selection is sparse and prices steep.  On the Seller’s side, they have gone from receiving the once typical 20+ offers in the first 2 days, to now typically only 3-4 in the first week.  But sellers are still selling at above asking prices to exhausted buyers.

Tina Tamboer of the Cromford Report confirms what we are seeing:

The market continues to heavily favor sellers. Supply is still 76% below normal for this time of year and demand is 6% above normal. However, demand is declining in response to recent increases in interest rates. Just 30 days ago, demand was 12% above normal, and 30 days prior to that it was 21% above normal… However, in just a few short months, the average interest rate increased from 3.1% in December to 4.7% by April. This resulted in a $500 increase in the estimated payment on a 1,500-2,000 sq. ft. home, pushing the cost to buy significantly higher than the cost to rent in Greater Phoenix.

This does not mean the market is at its peak, or at the precipice of a price decline. The only response we are seeing at this time is a sharp increase in supply between $500K-$1M over the past 2 weeks, a price range that happens to have less interest from investors and 2nd home owners and a higher market share of owner-occupants.

Rental rates are dropping

Most people think that the rental market and the resale market are two very distinct markets with little connection.  Not exactly.  Any increase in net migration to the valley must be met with the near equivalent in housing –either in the form of ownership or rental.   When rentals become more plentiful than tenants, rental rates decline.  When rental rates decline below the cost of a house payment, first time home buyers rent rather than buy.  This further reduces demand for resale homes and interrupts the chain of buying (i.e. the first time homebuyer does not buy the entry home which allows that seller to buy their next home, and so on up the chain about 7homes deep).  Losing thefirst time home buyer to the rental market has a serious impact on the resale market.  Further, when rental rates decline, investors with a rent and hold business model leave the home purchasing market for better returns on their dollar– further weakening demand.  As the Cromford Report confirms:

“Over the past 4 weeks we have seen a 34% increase in the number of new rental listings added to ARMLS compared with the same 4 weeks in 2021. There has also been a 20% increase in the number of rental homes available in Phoenix on the Progress Residential web site over the past 4 weeks.

Renters of single-family detached homes are seeing far more choice than they did last year and we are starting to see homes advertised with “the first month’s rent is free”. Rental supply is particularly strong in Gilbert.

This appears to be a significant turnaround in the rental market and it does not seem to have been recognized by the media outlets, who are mostly still referring to rising rents. That is so 2021.”

Supply is slowly rising

When demand drops, it allows for supply to increase.   As of the writing of this article, the active properties for sale on MLS sits at a meager 5,487. To achieve a normal level of supply, we still need about 20,000 more properties for sale than are currently on the market.  As we mentioned, increases in supply take time.  How quickly that supply builds will determine the alacrity with which the market rebalances.

Pricing

Does this mean prices are posed to plunge? In the short term, no. Price is a trailing indicator in housing, not a leading indicator.    In order for prices to level out or drop, supply needs to exceed demand. Pricing can trail a shift in the market by as much as a year or more.  Therefore, we expect pricing to continue to rise this year.  As the Cromford Report points out: “While it’s reasonable to expect price appreciation to slow down at some point, there is little evidence at this stage to show prices declining in the near future.”

Selling your home

This market has allowed for all methods of selling to appear successful – as a strong market can cover up mistakes.  As this market shifts, it will be increasingly important that sellers hire the right agent to sell their home.  Whether seeking a no commission cash offer or professional marketing program to maximize your net – the right agent can give you all the choices that protect your selling power.  We certainly know that we can.

Have more questions or are curious about your home and when is the best time to sell?  Contact us we are always here to help.

Russell & Wendy Shaw

(mostly Wendy)