When interest rates rise, prices fall. Actually, no.

There are a number a false myths circulating in the housing industry at the moment. Many are obviously untrue when you examine the history of the market, but are often stated as if they were natural laws.

• when interest rates rise, home prices fall - this is hardly ever true, but I hear it claimed quite often
• when sales volumes fall, home prices fall - this is hardly ever true, but certainly happened in the great crash of 2005-2009, so is fresh in our memory

Home prices fall when supply exceeds demand by a substantial margin. If supply is lower than demand then it is extremely unlikely that home prices will fall. We can find no examples in history of prices falling when demand exceeds supply.

Rising interest rates decrease demand, but they can also decrease supply if many home owners have an existing mortgage with a low rate. If supply is abundant and interest rates rise, then it is likely that home prices will fall. However it is surprisingly uncommon to find this situation in the last 70 years. This is because interest rate have tended to fall far more often than they have risen, and because supply has tended to be low far more often than it has been abundant. At the moment, interest rates are on an upward trend (although this trend has halted recently) but supply is a very long way from being abundant, Supply remains very low by historic standards, though it is slowly increasing.

Sales volumes fall when demand falls, but this tells us nothing about supply. Supply sometimes rises when sales volume falls (as in 2005-2009). If it rises enough to exceed demand then prices will fall until the balance is restored between supply and demand. Eventually lower prices will stimulate demand (as it did between 2009 and 2013). However it is often the case that demand falls without falling enough to match supply, and in this case prices continue to rise. This has been a common situation in the last 70 years and is also the situation right now.

If demand falls so much that it matches supply, then prices stabilize. We have not reached that point, but it did occur in 2014 for a short period. Demand then bounced back and has exceeded supply ever since.

If demand falls so much that it drops below supply, then price will tend to move lower. This is a relatively uncommon occurrence, but happened between 1989 and 1991, between 2006 and 2009 and for a short period between 2010 and 2011. The 1989 and 2010 declines were very mild, but the 2006-2009 decline was a true bubble bursting. This is something that tends to happen only once or twice a century, after almost everyone who remembers it has passed on. Bubbles require a suspension of disbelief that is impossible for someone who has already experienced one. In 2005 the most popular false myth was that house prices never go down.

National Update

The S&P/Case-Shiller® Home Price Index® numbers have been released for the latest sales period (August through October) and the 20 focus cities fared as follows on a month to month basis:

1. Phoenix +0.70%
2. New York +0.41%
3. Las Vegas +0.33%
4. Charlotte +0.30%
5. Tampa +0.27%
6. Atlanta +0.16%
7. Miami +0.14%
8. Boston +0.13%
9. Los Angeles +0.11%
10. Washington +0.02%
11. Dallas +0.01%
12. Detroit -0.02%
13. San Diego -0.12%
14. Minneapolis -0.13%
15. Denver -0.28%
16. Chicago -0.35%
17. Cleveland -0.52%
18. Portland -0.55%
19. San Francisco -0.71%
20. Seattle -1.05%

Once again Phoenix is at the top of the table has opened up a gap ahead of number 2 New York.

We see almost half of the focus cities with negative changes, but this is partly due to seasonality and the national average was +0.10%. Phoenix was seven times the national average and is over-performing again. As a result, it even made a mention in the Case-Shiller press release. Seattle took another large hit for a single month while San Francisco and Portland are slowing after very strong gains over the past 4 years.

For the year over year numbers we see:

1. Las Vegas +12.8%
2. San Francisco +7.9%
3. Phoenix +7.7%
4. Seattle +7.3%
5. Denver +6.9%
6. Tampa +6.4%
7. Detroit +6.0%
8. Atlanta +6.0%
9. Minneapolis +5.9%
10. Los Angeles +5.5%
11. Boston +5.4%
12. Charlotte +5.0%
13. Portland +4.9%
14. Cleveland +4.8%
15. Miami +4.8%
16. Dallas +3.9%
17. San Diego +3.8%
18. Chicago +3.3%
19. New York +3.1%
20. Washington +2.9%

The national average was +5.5% so Phoenix was well ahead of that, and it moved up to 3rd place from 5th place last month. None of the focus cities is showing a negative move year over year.

________________

Chris Tiller Commentary: The cautionary note with the Case-Shiller® Home Price Index® is that it is reporting data that's several months old (August - October).

What we're seeing currently in the Valley and Statewide generally are modest price gains; shorter market times and relative supply / demand balance. 

"Thank You Cailifornia" - AZ Real Estate

This adage has been on the forefront of Realtor's conversations for years.  Very few justify this with provable data.  So let's do just that...

Trying to determine how many buyers in Maricopa County come from California is slightly complicated. We need to exclude many banks and companies like Opendoor who are headquartered in CA.

If we look only at the people who buy as individuals or couples, then we see significant growth over the last year. The annual purchase rate for people with Californian addresses is up 23% to 4,391. It is also up 43% from 2 years ago.

A similar (and slightly more pronounced) situation exists in Pinal County, where purchases by Californian couples or individuals are up 30% from last year and up 47% from 2 years ago. The absolute numbers are smaller however with the annual rate at 655. This is in line with the relative sizes of the Maricopa and Pinal markets.

We conclude there is a lot of truth in the rumor that more people are moving sideways from California to Central Arizona. In doing so they can often get 2 to 3 times as much home for the same money or release equity while same-sizing. Their property taxes will also be significantly lower.

The favorite locations for 2018's Californian buyers to originate are as follows:

1. San Diego
2. San Jose
3. Los Angeles
4. San Francisco
5. Irvine
6. Huntington Beach
7. Corona
8. Riverside
9. Fremont
10. Sacramento
11. Anaheim
12. Long Beach
13. Temecula
14. Mission Viejo
15. Rancho Cucamonga
16. Chula Vista
17. Carlsbad
18. Oceanside
19. Murietta
20. Simi Valley

This is an interesting list since you might assume the larger population segment (Los Angeles and San Fran) would have the highest number however both San Diego and San Jose have overall larger numbers, therefore, a signifigantly higher percentage of the population.

The potential inter-state movement here from California is vast and the current numbers represent only a trickle, given the total size of the Californian population.  This means the number could grow substantially.  For instance, even if the number doubled it would have limited immediate impact to CA but would show up quickly in the demand impact here in Maricopa.  I personally anticipate this to have a snowball impact on CA as when they finally do realize the "smart" money has left they will have to make drastic changes economically which will only increase the exodus.  They'll be caught chasing their tail unfortunately and AZ will be an obvious alternative pending the options in AZ maintain their appeal.  

Regardless of your political stance, or opinion, on the direction of CA it clearly is causing movement.  The benefit of this influx depends on your stance as well.  However, from a strictly real estate perspective if statistics 101 is applicable and all other factors equal the increase in demand is clearly good for us here in AZ.

_______________

Side Note: Californians have long been the largest source of Arizona homebuyers outside of Arizonans.  This is nothing new. The point of measurement is to gauge if this process is increasing overall in relation to the normal flow. The Cromford Daily Observation has the metrics to confirm the rumor!  The number is increasing!! 

This happens for several reasons from what we can see in interviews and questionnaires.

- Increase in Taxes (This combines personal, property, sales etc.)

- Aging population - A change in life cycle (kids move out, retirement, health) create the ability to move.

- Employment - Growth in certain sectors among a mobile population.  Change in remote work options etc.

- Weather - Mudslides, Wild Fires, Smog,

This is not an all-encompassing list but among the leaders in why many are making, and have the ability, to make the move.  Since these major factors seem to only be increasing we can safely assume so will the number of people who leave.

Slowdown Is Here!!

Comparing the annual non-distressed single-family sales in Greater Phoenix between November 1, 2017 and October 31, 2018 with the previous year we find that the annual sales rate increase was 2.0% and the annual average $/SF rose by 7.3%.

The top-performing areas for appreciation were as follows:

1. Florence & Coolidge (85128 & 851320 - up 15.6%
2. Sky Harbor South (85040) - up 13.9%
3. Far West Phoenix (85037) - up 12.1%
4. I-10 and I-17 (85009, 85015, 85017, 85019, 85031, 85033, 85035) - up 11.8%
5. Maricopa (85138 & 85139) - up 10.7%
6. Southwest Phoenix (85043) - up 10.3%
7. Tolleson (85353) - up 10.2%
8. Sky Harbor North (85006, 85008, 85014, 85034) - up 10.1%
9. El Mirage (85335) - up 10.0%
10. South Buckeye (85326) - up 9.8%

The bottom performing areas for appreciation were as follows:

1. Gold Canyon (85118) - up 3.1%
2. South Tempe (85284) - up 3.5%
3. North Goodyear (85395) - up 3.8%
4. Downtown Phoenix (85003, 85004, 85007) - up 4.1%
5. Northeast Phoenix (85050, 85054) - up 4.1%
6. North Surprise (85387) - up 4.5%
7. North Phoenix (85083, 85085, 85310) - up 5.0%
8. North Scottsdale (85255, 85259, 85262, 85266) - up 5.1%
9. South Scottsdale (85250, 85251, 85257) - up 5.3%
10. Anthem (85086) - up 5.4%

For the first time in many years, the monthly dollar volume today is lower than it was this time last year. This confirms the market slowdown and indicates that the drop in monthly sales volume is now having a greater impact than the annual rise in average sales price.

The last time this crossover occurred was in December 2013. On that occasion dollar volume remained lower than the prior year for 9 months but re-crossed in September 2014 and has remained above the prior year from then until today.

If history is any guide, the dollar volume is likely to remain lower for the rest of 2018 and part of 2019. However it is unlikely to remain lower for the whole of 2019. In fact we can gauge the severity of the current downturn by how long it takes to cross back over the prior year's dollar volume. We are unable to make any specific prediction for this date, but we can see that the current downturn has so far proven to be less dramatic than the one that occurred in 2013.

Seller contribution to buyer closing costs...

One of the first signs of a softening market is the seller's contribution to buyers closings costs.  This can be used/justified for loan costs, repairs etc.

This is NOT reflected in the closed price so it's the first thing we start to see increasing as buyers become pickier and their expectations of homes increases.

Multiple offers go away and if your home is not on point you will sit on the market frustrated and confused.

Knowledge is power...

We leverage power into more money for you : )

More evidence of a 'market cooling down' (NOT a bubble burst)

Once again we are showing the table of Cromford® Market Index values for the single-family markets in the 17 largest cities:

If you thought last week's average 8.4% decline was impressive, then you will be even more impressed with the 9.3% fall we have this week.

Glendale managed a very small increase but the other 16 cities saw declines, most of them over 10%.

The common story is that listings are going under contract slower than usual which makes active listings start to build up. We are NOT seeing an increase in the number of new listings arriving.

Despite the declines, all the cities (even Buckeye) are still in the seller's market zone over 110. Remember that 100 represents normality. We expect Buckeye will drop below 110 by next week, but the overall market is still much stronger than it was for most of 2014. We are approaching a more balanced market at some speed, but given the continued weak supply, we are very unlikely to overshoot. We would need a large increase in supply to create a buyer's market. It is not at all obvious where this extra supply would come from. The situation is very different from 2005 when tens of thousands of empty homes had been purchased by speculators with ill-advised and reckless loans. Anyone who thinks the current situation is a bubble bursting is very much mistaken. It is merely the normal process of an over-heated market cooling down, something we expect to see several times a decade. True bubbles in housing tend to occur once or twice a century.

_____________________

Once again, I find myself essentially highlighting the entire Daily Observation. It's so important to be able to counter sensational headlines and exaggerated points of view.

For those who fear another bubble burst I would reinforce and add to what has been quoted above:

• The crash of 2005 - 2007 was driven by lier loans
• By contrast, today it's an 'equity' market
• 'True bubbles in housing tend to occur once or twice a century' - we had the 'great depression' and we had the crash of the last decade
• The next generation (millenials) are about 5 years behind their predecessors because of economic factors
• A Sothebys International Realty research add-on is that the millenials are about to be the beneficiaries of the larges transfer of wealth in the history of the world (Boston Consulting Group's piece for SIR called The New Affluent
• That being said there is a housing shortage, particularly in affordable housing

Again, as a talking point, I like the verbiage 'it is merely the normal process of an over-heated market cooling down'.

The evidence that we are still more in a sellers market is evidenced by the above Cromford Market Index. 

For the uninitiated, a 'balanced' market, in terms of supply and demand, is a CMI of around 100.

The degree over 100 represents more demand than supply - sellers market

The degree under 100 represents more supply than demand - buyers market

The CMI tends to be a good short term market predictor, hence a sellers market that's cooling down. 

Avg Price Will Jump...that doesn't mean anyone went up....

Cromford Daily Observation - There was a significant decline in the number of MLS listings going under contract in October. The total of accepted offers was 8,133 which was down 2% from September (a much shorter month with 17% fewer working days) and it was down 8% from October 2017.

However the decline was not universal across all price ranges. Almost all the decline occurred in the price range up to $225,000. This saw just 2,630 accepted contracts, down 28% from 3,651. Between $225,000 and $350,000 accepted contracts rose 5% to 3,226 while between $350,000 and $800,000 they grew 10% to 2,003. Between $800,000 and $2 million there was a slight decline of 1% to 240 while over $2 million we saw a 31% increase to 34.

Seeing the huge drop-off in contracts under $225,000 we expect to see a strong upward trend in average price per sq. ft. over the coming months, since the mix of homes closing will be skewed towards the higher end.

This is why having a solid real estate agent who understands trends and can read the market will save you time and money.  If you think because the overall average price went up without looking at the above you may be inclined to list your house to high.  This will cause you to become "market worn" and statistics show you will actually net less then had you priced it right to begin with.  This doesn't count the time, energy and expenses you lost by being on the market longer.

Imagine you sat on the market 2 months longer than you should have.  You've netted less money and you're frustrated with the process and your agent.  This is minor in comparison to the cost you incurred over the long term in a market with rising interest rates.  Let's say over that time you saw a modest increase in interest rates.  This will be an expense you have to live with for years!!  Simply because you didn't understand the stats.

Yes, data matters.  But understanding and interpretation of that data are even more important.