no hassle listing blog

As we approach the last quarter, we have a few benchmarks that reveal market trends this year. Rather than trying to sweep this in to one cohesive thought – we simply offer you some observations in no particular order of importance.

Much like our weather, the real estate market has “seasonal patterns’. Keep this in mind when the headlines scream “the real estate market is declining” as they often report in the back half of the year. Two things happen once the spring buying season is over, less luxury homes sell (thereby dropping the average price per square foot of sales – as smaller and less expensive homes dominate the mix) and the volume of home sales begin to gradiently taper monthly as we head towards the end of the year. These two factors can look like a “declining market” rather than a yearly seasonal pattern that is both expected and normal. As our local real estate guru Michael Orr of the Cromford Report comments:

“So the apparent drop in pricing in the overall market is an illusion. The real cause is a big shift in the luxury market with strong sales of homes under $1 million compensating for weaker sales over $2 million. This is a normal pattern every year, but this summer the effect is particularly strong because the super-luxury homes had such a successful spring season.”

The Luxury market performed very well the first half of the year.

Although typically posting the smallest number of sales in the market, the luxury market still has the power to fascinate. Fascinate it did this year, posting some remarkable numbers. Here is what Michael Orr shared about July (a month that often is a rather tepid one for luxury sales as those buyers typically flee for cooler climates):

“Luxury single-family home sales in the Northeast Valley remained surprisingly strong during July 2015. There were 354 closed transactions over $500,000 in the Northeast Valley though ARMLS, up 25% from last year. Almost all the strength was concentrated in ranges below $1 million. Over $1 million, sales were up only 2% while between $800,000 and $1 million sales rose an astonishing 69%. The top end went suddenly quiet with only 5 closed sales over $3 million, down from 16 in June. Unit sales over $500,000 were the second highest we have seen for any July since 2000 with July 2005 still holding the record at 479.”

 

The Supply/Demand situation

The supply/demand front remains much as it has this entire year. New listings coming to market are still very weak when compared to historic trends. In fact 2013, 2014, and 2015 all posted anemic amounts of homes for sale. While agents bemoan this trend (after all, who wants a store with nothing on the shelves?) it has actually been beneficial to sellers. This year’s normal demand levels juxtaposed against the below average supply – led to very constricted supply in some price ranges and areas. This helped prices not only stabilize, but in most cases to gently increase.

“Overall demand is nothing special, but it is still much stronger than last year. Supply remains weak overall and although new listings are arriving at about a 5% higher pace than last year, this is well below long term average levels…

Active Listings…: 19,459 versus 23,900 last year – down 18.6% …Under Contract Listings (including Pending & UCB): 9,705 versus 9,066 last year – up 7.0%….Monthly Sales: 7,942 versus 6,858 last year – up 15.8% …

… We may see a little more supply over the next few months for the popular ranges between $150,000 and $400,000. This may in turn bring a little welcome relief for the average buyer and stop the market getting even more favorable for sellers.”       -Michael Orr

 

The “solar lease” trend.

This is a rather controversial subject – as solar leasing companies have done a very good job in selling the 21^st century solar which is dramatically different from the 20^th century solar some of us (cough) are old enough to recall. While “going green” is a wonderful ecological trend and one we happily support, we are often asked “will a solar lease add value to my home”? Sadly we must report the answer is “no”. In fact, our experience thus far indicates just the opposite. Buyers may happily accept a “no strings attached” solar unit (i.e. one that is owned by the seller) leases however pose a challenge. First, the buyer must qualify for the lease – not only in terms of credit worthiness, but also it must be factored in to their debt/income ratios. Secondly, buyers seem to dislike the idea of a long term commitment (many leases are 30 years) that they cannot be freed from. These factors not only fail to increase value, but in some cases prohibit a sale or even slightly reduce the value of the home. While this is not a popular answer, it is the current reality. Perhaps this will shift with time. Only time will tell.

So there are few tidbits about our current market trends. As always, we will strive to keep you posted on the shifts that continue to “normalize” our market.

After a year and a half of the real estate market being in the doldrums – low supply and low demand – demand has fully corrected. In fact, demand is now in a “normal” range.  Supply however, has failed to follow.  In fact supply is down about 15% from last year.  That is great news for sellers.

In the last 2 weeks of February, demand finally began increasing.  That increase appeared to primarily come from first time home buyers.  Even that picture has shifted a bit, and now demand is largely coming from the move up buyers.  This move up buyer has allowed improvement in higher price points as well as in most geographic areas. In real estate, this is the “trickle up theory” – that improvement begins in the lower price ranges and migrates upwards.  If demand remains strong, and supply continues to be constrained, then with time, prices follow.

Supply and demand trends tend to follow certain patterns, ultimately adjusting with the effect of coming in to balance.  For example, when supply stays low but demand accelerates, the first signs of the shift are multiple offers – often pushing contract prices above listing prices.  Then the appraisals begin to come in “low” (as rising prices are not supported by historical prices) often forcing sellers to accept less and thereby artificially holding down prices.  Eventually enough demand creates buyers who will pay above appraisal or enough attractive cash offers, and prices begin their climb.  Higher pricing then encourages more sellers to come to market, and as supply builds price appreciation moderates. Supply and demand then are brought back in to balance.

Where are we currently in this cycle?  At the moment, we are seeing multiple offers with contract pricing pushing upwards, only to be depressed by low appraisals.  If this trend continues, we likely will see price increases in the next few months.
Summing up the market shift is our favorite guru, Michael Orr of the Cromford Report:

Now we are fully into the height of the prime selling season it is becoming clear that it is not the first time home buyer who is making the biggest impact. It is the move up price ranges that are doing best compared with last year.
Here are the price ranges which have growth dollar volume the most between March 2014 and March 2015:

1.       $350K-$400K – up 46%
2.       $300K-$350K – up 40%
3.       $500K-$600K – up 40%
4.       $275K-$300K – up 28%
5.       $200K-$225K – up 26%
6.       $800K-$1M – up 26%
7.       $250K-$275K – up 26%
8.       $175K-$200K – up 24%
9.       $2M-$3M – up 23%
10.    $600K-$800K – up 21%
11.    $400K-$500K – up 21%

All ranges below $125,000 are delivering lower dollar volume than last year and so are the ranges over $3 million and between $1.5 million and $2 million.
The mid range and the lower luxury ranges are where we are seeing the most strength and this is in stark contrast to last year.

All in all, encouraging news for most sellers.  After a year and a half, it’s nice news to report.

The early suspicions that 2015 might actually see an increase in demand are finally proving to be fact.  In real estate, improvement in a market goes from the bottom up, rather than from the top down.  This means that to stimulate a market place (i.e. see price improvement and a high volume of turnover) you need the entry level buyer to show up in force.  That purchase then allows for the seller to buy their next home, which then allows that seller to buy and so on.  It is said that the first time home buyer can spark a domino effect of 7 sales on average.  This was the thought process that spurred the dubious tax credit back in 2009.  The government seeing that the housing market was in severe meltdown mode, decided to stimulate the first time home buyers through a purchaser tax credit.  In one sense it worked – first time home buyers started buying.  In another sense, it was an utter failure. Unlike a “normal” housing domino effect, in the distressed market it simply meant that the first time buyer bought the foreclosed home or short sale – spurring exactly nothing.  Once the tax credit expired and the artificial stimulation of the market ended, the market dipped and simply reverted to the full blown distress market.

Fast forward to today’s market which for the last year and a half has stubbornly remained in the doldrums. In that time an abnormally low number of homes exchanged hands despite extremely favorable interest rates and flat pricing.  The only thing that saved that market from becoming a strong buyers market is that sellers disappeared at the same time the buyers did.  So the recent spike in demand is a welcome one.  But even welcome changes bring challenges, demand is not spiking in all areas and price points – and demand changes much more quickly than supply can. The areas and price points that are currently adding supply are not where the demand is strongest.  As  Michael Orr of the Cromford Report recently so succinctly stated :

“Demand is up strongly for the lower and middle price ranges but new supply is heavily skewed towards the higher price ranges, where demand is actually lower than last year. As a result, sellers of properties over $800,000 are facing stronger competition from other sellers. Sellers below this price point are in a much more favorable position than last year, particularly those with homes priced below $400,000.

When we look at listings added from February 7 to March 6 in 2015 and compare with the same dates in 2014, we find:

• new listings priced below $100,000 are down 30% (total value at list down 27%)

• new listings between $100,000 and $200,000 are down 16% (total value at list down 15%)

• new listings between $200,000 and $400,000 are up 1% (total value at list up 2%)

• new listings between $400,000 and $800,000 are up 6% (total value at list up 7%)

• new listings at $800,000 or more are up 13% (total value up 12%)

 

The surge in demand is for homes between $75,000 and $800,000, so the extra supply above $800,000 is joining inventory that is already plentiful.

Meanwhile inventory for the first time home buyer is in short supply and contract ratios for the well-located areas that are dominated by such homes are headed into “frenzy” territory.”

So does this “frenzy” mean that prices are immediately rising?  No.  As we’ve mentioned in the past, price is a trailing indicator.  It will likely take a few months to begin showing up in pricing – but price improvements do seem to be on their way.  That is very good news for sellers and a strong nudge to buyers to get buying sooner than later.

Spring is here, bringing not only spring breakers but also the real estate spring “buying season”.  Real estate is cyclical – in both long term and short term trends.  Annual trends typically follow the same pattern year after year.  Demand begins picking up in February, continues to climb to the peak in May then remains at this peak thru July (yes, even with our summers) and falling as it approaches the end of the year.  Because of this, the first signals for the year’s pattern really begin to emerge near the end of February.

As pricing and the health of the market depend solidly on supply and demand, we tend to focus our lens solely on those two factors.  Let’s begin first with supply.  In 2014 sellers were placing their homes on the market at very low levels.  2015 has continued that trend to date.  In fact, supply is actually weaker than this time last year.  The supply of short sales is down 38% and is continuing to fall.  REO (foreclosed) properties are down a whopping 49.6%.  If the supply of active listings continues to remain at low levels, this should bode well for sellers and actually result in some upward price movement in the second half of the year.  While we can speculate as to exactly why sellers are not coming to market in great numbers (i.e. distress properties are diminishing, sellers who survived the distress market still lack sufficient equity, etc.) the fact is they simply are not.  Given the recent jump in FHA refinances due to changes in the mortgage insurance premiums (the Mortgage Bankers Association reports a rise of 76.5% of FHA refinances at the end of January) if one were looking for proof that sellers are staying put, the level of refinancing seems to provide that proof.  So if the story of supply can be summarized by the word “constrained”, how is demand shaping up by comparison?

The good news is that demand is far more robust than supply.  While demand seemed to be in a deepfreeze in January and the early part of February, the later part of February saw a very different story.  As Michael Orr of the Cromford Report so perfectly states:

“Since the Super Bowl ended we have seen the liveliest two weeks for demand for a long time and we can see several areas with very strong numbers of listings under contract compared with this time last year.  The most popular ranges are $150,000 to $600,000, which is good news for developers and for sellers of existing homes. Here we see a very sudden upswing in buyer interest that wasn’t there in January…

In 2014, pending listings grew from 5,420 to 6,395, between January 15 and February 15, a jump of 18%

In 2015, pending listings grew from 5,047 to 6,689 between January 15 and February 15, a jump of 33% …

We have not seen such a large percentage increase between January 15 and February 15 since 2009 when investors started to snap up the low hanging REO fruit.

As usual the recovery is not spread evenly…

Our first observation is that the price ranges

• $175,000 to $200,000

• $200,000 to $250,000

• $300,000 to $400,000

 

are the ones that are very hot and are seeing a large spike in listings going under contract. There were more normal listings under contract on February 14 than there were at any time during 2015 for these three price ranges.”

2015 is now underway and all eyes are searching the horizon for signals foretelling this year’s real estate trends.  Will 2015 differ from 2014, or will history repeat itself?  Trends by their nature involve time.  So attempting in February to predict the market of 2015 is a dicey proposition.  But we certainly have a few early clues.

Not unlike 2014, supply is still very constrained.  Sellers are failing to come to market in any significant numbers – causing the supply of homes for sale to fall well below “normal” amounts.  The first signs of this showed up in December, which was the first month in 2014 that active listings were lower than they were in the corresponding months of 2013.  As a case in point, in the last 7 days of December, new listings were down 13% compared to 2013 and down 14% compared to December 2012.  Beginning 2015, available homes were lower than any point of 2014 for Phoenix, Anthem, Avondale, Gilbert, Glendale and Tempe.  In fact, El Mirage was at its lowest point of available homes in the last 10 years!  Of course there were exceptions – such as Sun Lakes, Maricopa and Paradise Valley.  But, this still seems to have been the first signal for 2015 trends – low supply of homes.  Here is what our favorite real estate trend watcher, Michael Orr, recently had to say:

“There have been a total of 4,353 new listings added since the start of the year (across all areas & types) which is 9.1% below 2014 and 1.3% below 2013. This is a low number and suggests that supply trends are weak despite the seasonal increase in active listings that we see in January every year. In fact it is a new record low for the 15 year period 2001-2015.

New supply is particularly weak at the bottom of the market under $200,000 while it is quite strong over $800,000.

Sellers of entry level homes are going to have less competition while sellers at the top end are going to have more competition compared with last year.

The new supply of short sales and REOs across greater Phoenix is much lower than in any of the years since 2008, but is higher than 2007 and all previous years since 2001. HUD homes are down to insignificant levels, lower than all years since 2001 except 2005 through 2007.”

As referenced, the luxury market is a market unto itself.  It rarely acts in unison with the market as a whole.  For instance, supply remains heavy in the luxury market, despite December 2014 being a huge month for luxury homes sales.  December 2014 was the best December for luxury sales since 2006 with 109 closed transactions across Greater Phoenix for homes priced at $1 million and above. But make no mistake; luxury supply still well outpaces demand.

Thankfully, the buyer mix has shifted away from investors and back to an owner occupied dominant market. We are of the mind that this is a good thing – as we have mentioned in previous articles. Abnormally large investor activity is a sign of a very unhealthy market – such as was the case in the over-exuberant market of 2005 or the walking dead market of 2009.  In 2015, we are back at a market where the buyer is the end user.  Recent changes to lending are now arriving to stimulate the market – particularly the first time buyer market (are you listening millennials?) President Obama’s visit to Russell’s alma mater (Central High) was perhaps more news worthy than noteworthy – but he did announce the changes to FHA‘s insurance program that will assist a small segment of the population.  The drop in the cost of FHA insurance gives buyers in this price range an approximately additional $20,000 of buying power.  Add to that Fannie Mae and Freddie Mac’s new lending programs with 3% down – helping homeowners who didn’t have the 5% down typically required and who may have exceeded FHA’s loan limits (currently $271,050 for FHA, $417,000 for Fannie/Freddie conventional loans).

Given our low supply and our slightly stronger demand, our market has drifted from a slight buyer’s market to a balanced market.  If this trend continues, we could very quickly see seller’s regaining the upper hand in negotiations. In fact, should demand increase in any significant way, it will rapidly overtake our supply. It will take a bit of time for the constraint to result in higher pricing – price being a trailing indicator- but it will show up.   If this comes to pass, Buyers may be wishing they bought in 2014.  What is good for the duck hunter is rarely good for the duck.