Sunday, December 22, 2013

How many investors bought in your city???

To round out our little series (from Cromford Daily Observations) on how much, when, what and where investor residential purchases were made there is this somewhat interesting tally. Now when the trivia question is asked, 'what percentage of the total investor revenue went into Scottsdale home purchases this past year,' you can just say 10.5% and be brilliant:)

December 20 - Based on the Affidavits of Value filed in Maricopa County for 2013 up to the end of November, the percentage of home sales revenue that was fuel by investor purchases were as follows:
  1. Youngtown 44.8%
  2. El Mirage 35.7%
  3. Avondale 30.0%
  4. Laveen 28.1%
  5. Glendale 22.9%
  6. Tempe 21.6%
  7. Tolleson 21.1%
  8. Phoenix 20.0%
  9. Apache Junction 18.7%
  10. Surprise 17.4%
  11. Mesa 14.9%
  12. Chandler 13.5%
  13. Gilbert 13.3%
  14. Peoria 12.9%
  15. Litchfield Park 12.6%
  16. Gila Bend 10.7%
  17. Sun City 10.7%
  18. Scottsdale 10.5%
  19. Buckeye 10.5%
  20. Goodyear 10.3%
  21. Paradise Valley 9.8%
  22. Carefree 8.9%
  23. Fountain Hills 7.6%
  24. Tonopah 7.3%
  25. Wickenburg 7.3%
  26. Cave Creek 6.4%
  27. Waddell 6.3%
  28. Queen Creek 6.3%
  29. Sun City West 5.3%
  30. New River 4.7%
  31. Rio Verde 4.5%
  32. Morristown 3.4%
  33. Wittmann 1.2%
Given that investors tend to focus on cheaper homes these percentages of revenue are lower than if we looked at the percentage of unit sales. A normal guideline would be about 10% so the top twenty cities in this list saw more revenue coming from investors than normal. The percentages in the top four cities were abnormally high. If we are to see investors reduce their inventory at some point these cities are where it will have the most effect. Institutional investors represent only about 5% of the rental inventory. Most of the investment properties belong to "mom & pop" small scale investors.

Friday, December 13, 2013

Quick Pre-Christmas Update...

December 12 - The overall Cromford® Market Index is not moving a great deal but is down slightly over the last week. When we look at individual cities and their single family markets, there is a wide range of changes from Avondale (most improved) to Surprise (most deteriorating).
  • Avondale has started recovery - up from 93.2 to 95.0 - 99.7 last month. Demand is stable but supply is falling.
  • Tempe is improving from a seller's point of view - up from 81.3 to 82.8 over the last week and is now well above the 75.2 we saw last month. Demand is stable and supply is falling.
  • Chandler is gaining ground from a seller's perspective - up from 105.6 to 106.8 over the last week - 105.8 last month. Demand has weakened a little, but supply is falling quite quickly now.
  • Scottsdale is up very slightly from 100.5 to 100.7 over the last week - 101.4 last month. Demand is flat and supply has declined very slightly.
  • Mesa is stable - up very slightly from 97.1 to 97.2 over the last week - 97.6 last month. Demand is flat and supply shows just a hint of falling.
  • Peoria has fallen back again - down slightly from 91.2 to 91.0 over the last week - 92.8 last month. Demand has weakened a little, and supply is slightly higher.
  • Glendale's is declining again - down from 107.2 to 106.4 over the last week - 106.2 last month. Demand has dropped while supply is stable.
  • Queen Creek is still deteriorating slowly - down from 58.8 to 57.6 over the last week - 63.9 last month. Demand has weakened slightly and supply is still growing.
  • Phoenix is weakening - down from 92.2 to 90.9 over the last week - 98.75last month. Demand has resumed falling but supply is stable.
  • Goodyear is weaker again - down from 82.6 to 81.1 over the last week - 92.7 last month. Demand is down and and supply is increasing.
  • Gilbert is a true buyer's market - down from 84.6 to 82.2 over the last week - 93.3 last month. Demand is still dropping and supply continues to grow slowly.
  • Surprise is deteriorating further - down from 73.3 to 70.8 over the last week - 83.9 last month. Demand is weaker and supply is still growing fast.
December 11 - Active luxury single family listings (over $500,000) are becoming far more numerous in a number of areas, but not all. Here are some areas with significant increases in actives (excluding UCB):
  • Anthem 85086 - 69 versus 34 last year
  • Mesa 85207 - 78 versus 38 last year
  • Sun Lakes 85248 - 39 versus 19 last year
  • Chandler 85249 - 50 versus 34 last year
  • Phoenix 85254 - 73 versus 32 last year
  • Scottsdale 85259 - 189 versus 138 last year
  • Scottsdale 85260 - 93 versus 64 last year
  • Fountain Hills - 144 versus 101 last year
  • Cave Creek 85331 - 148 versus 84 last year
  • Peoria 85383 - 81 versus 32 last year
These are the only areas with a fall:
  • Phoenix 85016 - 45 versus 56
  • Phoenix 85050 - 20 versus 21
  • Chandler 85226 - 5 versus 9
Although the luxury market has been helped by the advances in the stock market and greater availability of jumbo loans, the additional inventory is likely to limit appreciation over the coming months.

Thursday, November 7, 2013

The Demand Drop Off - Finally Time to Buy Again....

The change in market balance accelerated during October reaching a shocking pace we almost never see. Only in the second half of 2005 have we seen demand drop at this exceptional speed. Those who think this is just a seasonal effect are mistaken. Demand has been falling dramatically for the past 3 months and October saw that rate increase rather than moderate. The market is already in the balanced zone where the Cromford Market Index™ lies between 90 and 110. It is currently above 100 but the 90's are only about a week away. The pace may yet moderate but at the present rate of change we will be under 90 and in a true buyer's market by the time we reach December. The cooling market is turning positively chilly for sellers, many of whom will find it hard to believe.
When demand falls suddenly like this, active listings pile up because they are not going under contract as they normally would. On top of this, October was the busiest month for new listings since April 2011. Supply is therefore building fast, especially when expressed in months of supply, since the monthly sales rate is in steep decline.
Sellers no longer have any significant bargaining power and will soon be at a disadvantage in negotiations with buyers. Buyers will find themselves being treated with unusual respect and many will be able to negotiate concessions. Sellers who list homes priced well over market value are increasingly unlikely to get showings, never mind offers. This is an amazingly swift turn round in a market that heavily favored sellers as recently as July.
The reasons we are seeing such a steep fall in demand are not clear. Yes interest rates went up at the end of spring, but they have since moved lower again and are not far above the lowest we have seen over the last 40 years. After all, the long term 40-year average rate for a 30-year fixed loan is 8.6%, about twice the current interest rate. Sales prices are some 19% higher than they were last year, but only moderately higher than last spring when the market was doing fine. They are still below the long term trend line, though not far below it. Buyers just seem to be seriously rattled, and the government shutdown and threat of default have unsettled them even more. However the slowdown started long before the government shutdown, so this cannot take all the blame. The national media has been generally unkind to housing in the last few months, covering groundless stories of "zombie homes" fuelled by patently incorrect data from RealtyTrac and dramatically overstating the impact of institutional investors. Anyone reading these stories without easy access to the facts is likely to be scared into staying on the sidelines. Ill-judged comments about housing bubbles by Karl Case caused widespread concern, despite his comrade Robert Shiller's stated opinion that we unlikely to see another housing bubble "in our lifetime". Clearly the average consumer's confidence is fragile. Making a big decision like buying a home requires a reasonable foundation of confidence.
General austerity is another possible reason. The sequester is impacting certain industries more than others, causing job loss and financial hardship. The number of people who are in a financially sound situation and can qualify for a home loan is clearly limited. Over the last ten years a greater percentage of the middle class has slipped into near-poverty instead of becoming wealthier. Loss of ownership of their residence and failure to benefit from the increase in asset values in the last two years has contributed to that effect. Many of the wealthy now own multiple houses, either as vacation homes or as investment properties. But the working poor are less able to achieve home ownership now that lending rules have been toughened up. Cut backs in welfare programs like SNAP mean they will have even less disposable income. Certainly we are seeing little to no evidence of a corresponding change in the rental market. There we find supply and demand are in balance and have been for some considerable time. Rental inventory stands at 2.4 months on ARMLS, exactly the same as this time last year. Since population growth, though modest, is still positive, we can probably expect any lack of demand in re-sale homes to be beneficial to the rental market.
Here are the basic ARMLS numbers for November 1, 2013 relative to November 1, 2012 for all areas & types:
  • Active Listings (excluding UCB): 23,330 versus 16,939 last year - up 37.7% - and up 15.4% from 20,215 last month
  • Active Listings (including UCB): 26,123 versus 22,399 last year - up 16.6% - and up 12.8% compared with 23,151 last month
  • Pending Listings: 6,047 versus 9,714 last year - down 38.2% - and down 8.0% from 6,576 last month
  • Under Contract Listings (including Pending & UCB): 8,840 versus 15,245 last year - down 42.0% - and down 7.1% from 9,512 last month
  • Monthly Sales: 5,992 versus 7,155 last year - down 16.3% - and down 6.7% from 6,420 last month
  • Monthly Average Sales Price per Sq. Ft.: $124.09 versus $104.10 last year - up 19.2% - and up 3.1% from $120.31 last month
  • Monthly Median Sales Price: $184,938 versus $151,000 last year - up 22.5% - and up a negligible amount from $184,850 last month
Pending listing counts are still falling, though not quite as fast as last month. However falling pending listings are a harbinger of falling sales counts. These are now dropping fast.
The average price per square foot is still increasing and probably has some further to go before momentum runs out. However there is now little fuel left in the price rocket. We expect prices to stabilize in the area between $125 and $130 per square foot.
We saw a significant jump in cancelled listings during October - the highest since August 2011. However expired listings remain at a subdued level, well below average, though up 18% from this time last year when they were even scarcer.
There is currently little sign of a change in the cooling trend. The first sign should appear in the Cromford Market Index™. This should stop falling so fast and eventually turn round. The second sign will be an increase in pending listing counts.
We will report these in the Daily Observations as soon as they occur.

Tuesday, October 29, 2013

Real Estate Market Finally Turned...Normal is BACK!!!

October 27 - Today is the day the market returned to the balanced zone. The Cromford Market Index™ stands at 109.5. A balanced market occurs when the Cromford Market Index™ lies between 90 and 110. The months of supply for all areas and types stands at 4.5 months. A balanced figure is between 4.5 and 6.0 months. March 2, 2011 was the last time we saw the Cromford Market Index™ below 110. March 31, 2011 was the last time we saw a months of supply reading above 4.4. Those who have got used to a seller's market over the last two and a half years now have a new type of market to get used to. Greater Phoenix has not spent much time in the balanced zone in the past ten years.
October 26 - Time to study the market by price range - here are some significant indicators for the single family market:
Price RangeAnnual Change in Active Listings (excluding UCB)Annual Change in Pending ListingsAnnual Change in Days InventoryAnnual Change in Contract RatioAnnual Change in Months of SupplyAnnual Change in Sales per MonthAnnual Change in Monthly Average $/SF
$0 - $99,999-26.3%-66.7%+7.6%-62.8%+30.1%-67.9%+6.7%
$100,000 to $199,999+35.8%-39.3%+2.4%-59.2%+34.2%-22.5%+11.6%
$200,000 to $399,999+64.2%-20.1%+6.6%-51.0%+25.6%+17.8%+9.2%
$400,000 to $799,999+50.6%-6.5%+2.9%-36.2%+22.8%+17.7%+5.4%
$800,000 and above+30.7%+38.3%-1.8%-6.1%+9.3%+18.0%+7.0%
For the range under $100,000 we see the supply of active listings dropping, but sales dropping much faster. So although inventory is not building, the market is very much cooler than this time last year. This has a lot to do with the lower buying interest from investors.
From $100,000 to $199,999 supply is up while sales per month and pending sales are well down. Prices have moved the most in this sector inhibiting buyer interest from both investors and first time buyers. This sector is much cooler than last year.
Between $200,000 and $399,999, we have seen a large increase in active listings and a modest increase in sales. However pending sales are down more than 20% and volume is trending down.
From $400,000 to $799,999 supply is also up sharply from last year but pending sales have not dropped as precipitously as for the sectors under $400,000. Pricing has increased the least in this sector
From $800,000 up is the healthiest sector with more supply but more sales and, unlike the other sectors, far more pending sales. The contract ratio is down only slightly and days of inventory is actually lower. This sector has been helped by the improved availability of jumbo loans. A bull market in stocks has also helped keep demand high in this price range.
October 25 - The following cities have moved from a seller's market into the balanced market zone based on having a Cromford Market Index™ for single family homes between 90 and 110.
  • Phoenix (108.8)
  • Mesa (108.0)
  • Peoria (108.2)
It looks like the following will enter a balanced market within the next ten days:
  • Scottsdale (116.1)
  • Chandler (110.5)
  • Glendale (116.0)
  • Goodyear (111.7)
  • Paradise Valley (118.8)
The following have moved from a balanced market into a buyer's market:
  • Gold Canyon (88.6)
The following are already in buyer's markets and are tending to get more favorable for the buyer and difficult for sellers:
  • Queen Creek & San Tan Valley (75.5)
  • Tempe (81.2)
  • Maricopa (59.8)
  • Buckeye (87.1)
  • Casa Grande (74.9)
  • Tolleson (85.8)
October 24 - As expected, sales prices are moving ahead quite briskly now that temperatures are below 100. The average price per sq. ft. for monthly sales (all areas & types) is up to $122.58. This is the highest level since August 8, 2008. It is also 2.5% higher than last month. This must be dismaying to buyers who are waiting to see if prices will come down. If they refuse to buy until prices come down and enough buyers have the same idea, then eventually demand may fall enough for it to exceed supply and price will have to decline to rekindle demand. The big question is whether enough buyers will think like this. Sales price per square foot is very much a trailing indicator and it is likely to take several more months before it stops rising. Also possible is for demand to pick back up again now that interest rates have fallen and the government is reopen. A change in the trend line for the Cromford Market Index™, days inventory and pending listings are the indicators that will quickly tell us if the market is warming up again. At present the cooling trend remains in force.
October 23 - Good news for buyers is that the overall months of supply for all areas and types is up to 4.3 months, the highest reading since March 2011. It is still below average however. The long term average since January 2001 is 5.4 and I would describe anywhere between 4.5 and 6.0 months as normal. Since we have already seen months of supply rise from 2.5 to 4.3 in just 3 months, it looks almost certain that we will be in the normal range within a couple of weeks. Sellers will then have no excess bargaining power as they have enjoyed for the past 2 years.
October 22 - The number of listings under contract, which includes those in pending status plus active listings marked UCB (under contract accepting backup offers), is currently 9.633. We have been around this figure since October 1, varying between 9,455 (on Oct 19) and 9,860 (Oct 15). This is the lowest level we have recorded since February 2009. The peak level was 23,348 reached on April 2010 at the height of the sales activity spurred by the government tax credit.
Today's number is 40.2% below last year on the same date. Last month the year to year comparison yielded a drop of 38.6%, so the lack of demand has got slightly more severe over the last month.
~ Cromford Daily Observations

Friday, August 23, 2013

Market Update - Been Awhile So Went In Depth....

August 21 - Another "bubble" scare story was published yesterday which took particular aim at Arizona. This time it appeared in the usually sensible Bloomberg News. The author seems to rely heavily on a quote from Karl Case (yes he of the famous Index) in which he said "They're [Nevada and Arizona] clearly in bubbles...What can go up can go down - real quick".
I would like to point out that Karl Case was also 100% wrong last year in September 2012 when he said "Housing Prices are Unlikely to Come Roaring Back." Last year his coauthor Robert Shiller also said he wasn't ready to call a bottom and believed that homes prices would stay essentially flat for the next five years. You can hear in the following recent audio interview how Karl Case is clearly astonished about the Californian house price action and doesn't really know what is going to happen next.
From a long term perspective, annual median home prices in Central Arizona have appreciated at an annual rate of just 2.05% over the last 13 years. This is less than inflation. Sorry, I cannot accept that prices going up slower than inflation is compatible with a housing bubble. If they were to continue to rise at the 2012 and 2013 rate for 2 more years then the suggestion would clearly make more sense, because by then we would have appreciated faster than inflation. Right now the chances of significant price decline from the current level is small. Bubbles cannot be correctly termed bubbles unless they pop. It is much more likely that prices will continue to increase but at a more moderate rate. This is what was suggested by Dennis Smith, CEO of Home Builders Research when interviewed for the original article. What he had to say made a lot of sense.
August 22 - A very common error in analyzing the market is a person deciding what they believe to be true and then cherry picking the statistics that support that belief and ignoring or dismissing any evidence to the contrary. So someone who is convinced that a "bubble" exists in Phoenix will cherry-pick a property that sells twice, the second time for a much higher value. The Bloomberg News article cherry picked a property that sold this month for $600,000 having previously sold for $273,000 less. This appears to be parcel 168-81-029-E which is 8618 N Tatum Blvd Phoenix 85028.
This was a short sale that closed in March 2013 for $377,000. I am astonished that the lender agreed to this price because the assessed value implies it was worth a lot more than that even at the bottom of the market in 2011. Congratulations to the fix and flip investor who bought it (Ray Jussila). Based on the MLS listing pictures (before and after) he did a nice job renovating and presenting the home which sold on August 1 for $600,000 in a normal transaction. The $600,000 seems a fair price, and still a lot less than the $735,000 that was paid in 2004 for the same property. That was not at the height of the last bubble and shows that prices still have a long way to go before they reclaim the heights of 2006. This just proves that it was still possible to find extreme bargains in March 2013 among the short sales, especially at price points well in excess of the levels that buy-to-rent investors are interested in.
This pair of transactions is unusual. For ZIP code 85028 single family homes in general we see the annual average $/SF has increased from $115.13 to $145.33, which is 26.3% over the last year. The increase since March 2013 is a more modest 8.4%. This represents a strong recovery, not the attainment of bubble price levels. This ZIP code reached $223.64 for an annual average in November 2007. We still have an increase of 54% required to get us back to the peak.
It appears that some writers and observers are losing their grip on reality in the search for an interesting and controversial story.

Monday, July 29, 2013

Top 10 reasons why we are NOT in another housing bubble...

Ten reasons why there is NOT a bubble in Phoenix housing right now:
  1. The population of Maricopa and Pinal Counties is growing much faster than the housing stock - this is fundamental, yet is hardly ever mentioned.
  2. Prices are being driven up by a chronic lack of supply, not by excess demandDemand is close to normal. Bubbles always have excessive demand from foolish trend followers.
  3. Prices are still at the same level as 9 years ago (**see below). They still have a lot of room to increase yet.
  4. Most buyers are putting their own money in with cash or large deposits, not borrowing it all from foolish lenders as in 2004 and 2005.
  5. Lenders are still being ultra cautious. Demand could increase if they ease up.
  6. Investors are mostly buying to rent and filling their homes quickly with tenants - if and when these landlords sell it is a neutral event for the market - one extra home becomes available and one extra family needs a home to live in.
  7. If investors started to sell off the small number of empty rentals it would slightly improve our market balance, not create a glut of supply.
  8. There are several major long term obstacles for developers trying to increase the supply of new homes. Shortage of labor and affordable, accessible land are just the first two.
  9. We have a low vacancy rate both in homes for rent and for sale. Multiple generations and even multiple families are sharing single homes.
  10. No bubble has ever occurred in the same market twice in the same generation. However after a recent bubble everyone is hyper-sensitive to every price increase and numerous false cries of "bubble" are par for the course.
Given the unprecedented imbalance we now have between population growth and new home building, we have several years of rising prices in front of us. How fast and how high they rise I cannot tell, but the idea that prices could fall significantly in the near term because of excess supply is foolish. The only circumstance that could unravel things is a sudden collapse in demand caused by people leaving Central Arizona in droves. Far more likely is a surge in demand from both people and companies deciding to migrate from California. Compared to most of California, housing in Central Arizona is still ridiculously affordable even if interest rates were to double.
Nobody has a good track record of predicting mortgage interest rates, but in any case multiple studies have shown no significant statistical correlation between homes prices and interest rates. So when interest rates eventually rise, as they surely must one day, this is as likely to increase demand as it is to decrease it. This event would definitely decrease affordability, but we note that one of the times of highest demand (February 2005) was also a time of very low affordability. In fact large numbers of people signing up for mortgages they could not afford was the key characteristic of the February 2005 market. Cromford Report - Daily ObservationApril 11
Case in point, taking Mike Orr's comment today that the monthly average price per sq. ft. for all areas and types since 2001 is $119.79, that is NOT to say that today's average price per sq. ft is what it was 13 years ago, but rather, it's the average across those 13 years. He also points out in those 'Ten Reasons...' that today's prices are about where they where 9 years ago.


**The Tableau Chart below shows that todays average price per sq. ft. is about where it was in July of 2004.

Monday, July 22, 2013

Will Home Prices Keep Going Up??? And Why....

This is not a basic read in that it requires getting a bit of understanding of real estate trending. Having said that, this is the best and most succinct explanation I've seen for understanding the dynamics behind the housing market price trends over the last 10-years and perhaps most importantly, as a viable tool (Cromford Index) for projecting forward.
July 19 - Price is a trailing indicator, meaning that it is one of the last thing to respond to shifts in supply and demand. The first thing to respond will be the Cromford Market Index. As long as values are above 110, prices typically rise, below 90 prices typically fall and between 90 and 110 they typically stabilize.  Prices have peaked or bottomed out approximately 6 months after any major crossover of the 100 mark.  This is due to time delays between contract acceptance and actual closing, delays in reporting final sales prices by the Maricopa County Recorder’s Office and slow moving consumer reactions to market shifts, or any combination of these.
The overlay below proves this point. The Cromford Market Index (in blue) peaked in April 2005 and sharply dropped. However prices (red) continued to rise until peaking 6 months after crossing over into a Buyer’s Market. Sellers who saw this shift (which were few) had 7 months to sell their property while prices were still rising and demand still outweighed supply.  After crossing into a Buyer’s Market, prices started to gradually fall, but the sharp decline occurred just as lending froze. As foreclosure inventory rose exponentially, lending became so strict that few buyers could qualify to absorb it (especially those luxury buyers over $500K since Jumbo financing went away almost entirely). This sharp increase in inventory, followed by a sharp decrease in buyers, resulted in the price collapse of 2008. The first-time home buyer credit acted as a speed bump to this decline, but it had little influence for the end result overall.
Today, the Cromford Market Index has been solidly in a Seller’s Market for two years. As long as it’s above 110 we can expect prices to continue rising for 6 months after measurement.  Once it gets closer to 100, that will signify that the peak of price is near, but that day is not today.

Cromford Daily Observation

Friday, July 12, 2013

Why do you think home prices are going up?? Don't over think it, it's not that complicated.

July 12 - According to most of the media. the housing market in the USA is currently "dominated by institutional investors". The largest of these (by far) is Blackstone (BX) which has about $60B in real estate assets under management. It currently owns about 31,000 single family homes in the USA with a total book value of about $5 billion. $5 billion sounds like a lot of money, but everything is relative. The total value of all homes in the USA is roughly $20 trillion. So Blackstone's rental inventory represents approximately 0.03% of the housing stock value. Foreign buyers as a group are more than 13 times as significant as Blackstone. According to NAR's reports, for just the 12 months ended March 312013 foreigners spent $68.2 billion on US homes. The Chinese accounted for 18% of that number or $12.3 billion. Nobody (including me) is claiming that the Chinese are dominating the market, yet they spent more than twice as much as Blackstone's entire inventory. Blackstone represents about 30% of all the institutional ownership, so the total value of all the single family homes owned by institutions is roughly $17 billion. This is only 25% of the value of all homes bought by foreigners in the period April 2012 to March 2013.
Large numbers seem to cause some people to lose their sense of proportion and form completely false impressions of reality. Many of them write blogs on housing and articles for news outlets. Many of these are misrepresenting the state of the housing market right now. Their conclusions are bogus.
Home prices are NOT going up because of institutional investors. It is the other way around. Institutional investors are buying homes because their prices are going up. In other words - they are not stupid and can recognize an opportunity to own an appreciating asset and have their holding costs paid for by a third party - their tenants.
Home prices are going up because of chronic low supply. It is as simple as that.
Chris Tiller MBA
Russ Lyon Sotheby's International Realty
17207 N. Perimeter Dr. Suite 120
Scottsdale, AZ 85255
Office: 480.502.3500
Cell: 602.561.1346
Fax: 480.624.3795
chris.tiller@russlyon.com

Thursday, June 20, 2013

The New Market Talking Point.....(hint) This one is actually true.

For some time we have been hearing some really goofy ideas about what is happening in the housing market, such as these old chestnuts:
  1. Banks are holding onto their foreclosed REOs and only releasing them slowly (Shadow Inventory).
  2. Institutional investors are dominating the market (REIT's, Mutual Funds).
  3. First time home buyers are not participating in the market.
All of these are widely reported in the media but in Greater Phoenix they are certainly fabrications and can easily be proven untrue
But now we are hearing another idea that sounds goofy but may very well be true:.
  • Builders are deliberately slowing production to capitalize on rising prices.
The housing starts released this morning from the Commerce Department came in at an annualized rate of only 914,000 versus expectations of 950,000. Most of the increase of 6.8% was attributable to multi-family starts. Even 950,000 would be a low number by historic standards. If we have such a low supply of homes for sale, why are so few homes getting started? There are lots of reasons:
  1. There is not enough skilled labor to build at a much higher rate
  2. The supply chain is not geared up to deliver at a much higher rate
  3. Some builders are short of land to build on
  4. The price of desirable land is rising to unaffordable levels relative to today's home prices.
  5. New land deals will only pencil out if you allow for a substantial rise in home prices
  6. If you build a lot of additional homes the price of materials sky rockets and trims builders' gross margins
  7. Builders are applying the brakes to production to sustain the low inventory and capitalize on rising prices
Some people would question the last point as merely silly; why would a developer prefer two birds in the bush to one in the hand? I think the idea deserves more than a second thought. Demand is really not a problem for builders in most of their subdivisions. Why sell out now for today's prices when you can sell much more slowly and keep raising prices by 1% to 2% each month. Gross margins are going to be much better in the latter case. What would you do if you were the CEO of a large developer?
This strategy would not work if we had a lot of builders competing for business. But remember it is very much a seller's market and developers like it that way. Why would they want to see the market return to balance?
Some people have said this undermines the robustness of the recovery. On the contrary, it will tend to make prices rise faster.
Most people have not got their head around the fact that there is a chronic lack of supply. They keep thinking it must be artificial in some way. No it is real, and unless the developers start to ramp up faster the shortage is likely to last a very long time. The prospect of exceeding the pricing highs of 2006 start to become credible in this scenario. Not in the immediate future, but much sooner than we thought two years ago.

Chris Tiller MBA
Russ Lyon Sotheby's International Realty
17207 N. Perimeter Dr. Suite 120
Scottsdale, AZ 85255
Office: 480.502.3500
Cell: 602.561.1346
Fax: 480.624.3795
chris.tiller@russlyon.com

Thursday, June 13, 2013

Do Rising Interest Rates Cause Home Prices to Decline?? Yes or No?

NO!!!

This is a timely message, as it speaks to what many may be concerned about in the current housing market atmosphere of generally rising prices, high demand, low supply, but new (albeit inevitable) evidence of a rising trend in interest rates.

While the sample data I gathered is from Maricopa County, the fundamentals of this message apply statewide. 

There is no inverse correlation between interest rates and home prices. In the past, home prices have often gone up when interest rates went up and they have also gone up when interest rates went down. Home prices only go down in unusual situations when supply is well in excess of demand. Prices have fallen like this in the Phoenix area between 1989 and 1991 and between 2006 and 2011. Between mid 1989 and mid 1991, the fall in prices was about 9 to 10%. During this time 30-year fixed mortgage interest rates fell from around 10% to around 8.5%. No inverse correlation there.
Between June 2006 and August 2011 prices were also in a strong downward trend, though most of that decline happened between 3Q 2007 and 1Q 2009. Between 2006 and 2011 mortgage interest rates dropped from around 6.75% to around 4.5%. No inverse correlation there.
Interest rates went up sharply during 1994, during 1996, between 1998 and 1999 and between 2003 and 2006. Did prices go down during these time. No they did not, they went up just like the interest rates. No inverse correlation there.
During all these times the direction of home prices and the direction of mortgage interest rates were the same. At other times they can move in opposite directions. There is no clear correlation either negative or positive. The fact that the majority of people believe there is a correlation, does not change the reality.
Prices have moved strongly upward between August 2011 and June 2013. During that time interest rates drifted down from 4.5% to around 3.5% and very recently have moved back up to around 4%. There is little evidence that low interest rates had any major influence on the market pricing. Demand has been only slightly above normal during this time despite the very attractive interest rates. It was lack of supply that drove these huge price increases.
So now that interest rate have finally started to rise from a ridiculously low level, some people have said this is going to cause home prices to fall. There is no logical basis for this assertion at all.
When interest rates rise, this causes affordability to fall. However affordability does not equate to demand. Demand is one of the two key factors that influence prices, affordability is not. The highest demand we have seen in the past 30 years was in 2004 and early 2005 when affordability was extremely low.
In fact increases in mortgage interest rates often cause an increase in demand in spite of falling affordability. That is because many people expect the upward trend to continue, so they want to lock in the current rate by getting a mortgage now before it rises higher. This "sense of urgency" phenomenon is very real and has been observed many times in the last 60 years and confirmed by many experienced Realtors®.
Now if interest rates were to increase dramatically and suddenly, this could destroy the "sense of urgency" because people would immediately feel they were too late to make the move. I am talking of a jump from 4% to 9% or something of that nature. But is that really likely? I doubt it. The government likes to interfere with interest rates and they are unlikely to let that happen.
Gentle and predictable rises in interest rates will actually be good for the housing market because the rising gap between low and high rates will probably encourage lenders to be a little more flexible with their underwriting practices. Opening up the market to more people will have a much larger effect than the increase in their monthly payments. It's no good being able to afford a mortgage payment if you can't get approved for it.
Of course demand is not sufficient to determine prices. Supply is the other key factor. The foreclosure crisis has caused us to under-build new homes by a huge amount for over 5 years. This is still creating a supply hole that has been largely unrecognized by the general public. This effect is likely to dominate the market for a very long time, except in areas where the population is shrinking. Only the builders can create significantly more supply. It is not coming from lenders, it is not coming from landlord investors and it is not coming from ordinary homeowners. Ordinary homeowners and landlord investors usually involve homes that are occupied. So when they sell they do not create net new supply. The families or individuals living there move into a new home, often not too far away. This means they add 1 to supply and 1 to demand. The net effect is zero. Only when that home is somewhere other than Greater Phoenix do we see an increase in our supply. For the foreseeable future those people are likely to be outnumbered by the people who are moving here from somewhere else, who add 1 to demand and 0 to supply.
This housing cycle still has a very long way to run before it turns down again. None of the negative factors mentioned by observers recently have enough market power to overcome the dominant effect of the chronic supply shortage.

Chris Tiller MBA
Russ Lyon Sotheby's International Realty
17207 N. Perimeter Dr. Suite 120
Scottsdale, AZ 85255
Office: 480.502.3500
Cell: 602.561.1346
Fax: 480.624.3795
chris.tiller@russlyon.com

Tuesday, May 28, 2013

What you need before you buy or sell a home...

I always get asked "What should I know about the market".  This is a compilation of everything that an informed buyer and seller need to know before they can make an educated decision on accepting or making offers.  Most Realtor's don't do this and many don't even understand.  If you need help please let me know.  This is what I explain to all of my clients. So here it goes....

Every seller wants the same thing—the highest price in the shortest amount of time. But what is the relationship between getting the highest price obtainable and the market time necessary to achieve it?
The short answer: 

In any market segment, it’s competition for the next best property (all things considered) that drives the price and shortens the marketing time.

However, the relationship between time and money is a complicated subject. The devil is in the details for many reasons we’ll review below. To really understand this relationship, we need to start simple with a working definition of market value.

MARKET VALUE is what a buyer will pay in an arms length transaction. Put another way, people buy by comparison–cars, toasters, houses, spouses!
MARKET VALUE IS NOT INTRINSIC:  

In other words, it has little to do with inherent cost, or what a seller paid originally—the premium they may have paid for the lot, or what improvements they may have made on a cost basis. In the world of residential resale, that premium lot will frequently not have the same ‘market value’ as what it cost; and the cost of improvements rarely translate to a dollar-for-dollar return on investment.

MARKET DYNAMICS (COMPETITION): At any given moment in time, in any given market segment there is a group of ready, willing and able buyers looking for the best value.
To the extent that there is competition for the best properties, the greatest activity is most often the early activity.  

TIME AND ACTIVITY — THE HOVERERS: In residential real estate we hear the old adage ‘time is of the essence.’  However, in truth, time is the enemy. We see this in the Activity Graph (right), where the activity is heavily skewed to when a property first comes to market. These buyers are ‘the hoverers’—buyers who have come to understand there is always competition for the best. When sellers miss those ‘hovering’ present-time buyers (through over-pricing), they miss the best opportunity to get the highest price through ‘competitive positioning.’
At the other end of this Activity versus Time spectrum there is the phenomenon we call ‘market worn’ (the perception that a property has been on the market ‘too long’). Properties that are perceived as market worn are deemed to have something wrong with them, begging for low offers.

MARKET WORN: We can refine our working definition of market worn by saying any time a property gets much beyond the average days on market for that market segment it may be fairly perceived as market worn.

It is in the sellers best interest to ‘competitively position’ their property to avoid becoming market worn.

However, becoming market worn is relative. $200 homes have a larger pool of ready, willing and able buyers than $2,000,000 homes. Average market time is affected accordingly showing up in what we call the # of month supply.

# OF MONTH SUPPLY: The number of months of available inventory that can be projected based on the current pace of sales (absorption rate). The current # of available listed properties divided by the pace of sales (average # of sales per month) equals the # of month supply e.g. 25 available (and comparable) homes selling at a pace of 5 per month equals a 5-month supply.
Today there is only a 1 to 2-month supply of $100K to $300K homes in the Valley. By contrast there is a 6-month supply of $800K to $1M homes (6-months is considered a balanced market). But it’s a different story in the $2M-plus market, where there is a 20-month supply; and over a 3-year supply when we look at the luxury market over $3M.

There can be no doubt that price range and # of month supply are generally correlated—the higher the price the longer the marketing time (and visa versa). Having said that we find that even new-to-market $2M homes can generate multiple offers when competitively positioned!
Clearly establishing the relationship between price and market time is complicated by a host of factors.

OTHER FACTORS: For example, just as there are fewer qualified buyers for more expensive homes, there are fewer buyers for homes in any price range where there are factors that shrink the pool of otherwise qualified buyers—issues of condition, location, architecture, floor plan, busy street, over-improvement, largest home in the neighborhood and the list goes on.

REALTY REALITY: As the ‘target market’ (of qualified buyers) shrinks, the market time lengthens.
With all deficiencies or factors that limit demand there is always one remedy…price. Lowering the price expands demand, shortening the marketing time.

SUCCESS RATE: Not every seller is willing or able to price to sell. In today’s market, for example, over 75% of properties listed under $2M sell. Over $2M it drops to about 50%. In the luxury sector the resistance to pricing at market value is painfully obvious. Even so, sales prices in upscale communities like Paradise Valley are off about 45% from their peak.

TRADING RANGE: Yet another factor not fully understood or appreciated is the efficiency of the real estate market. Homes ‘trade’ within a narrow range. The industry calls it the list-to-sales-price ratio—meaning the average percent sellers negotiate down from the listing price at time of sale. We can call it the trading range—the identifiable range in which properties in any given market segment sell.
What’s not fully appreciated about the trading range is that it is narrow—generally in the 2 to 5% range. This is true good market or bad and generally across all price ranges, though the higher price ranges will frequently have a wider trading range of 8 to 12%.

TYPICAL SCENARIO: The marketing process often goes like this: A property is listed for sale. It doesn’t get a lot of attention evidencing it is priced too high. Over time the seller reduces the price and reduces the price until the property falls within the sweet spot of the trading range. In that sweet spot buyers are attracted and offers are generated. The trading range can be identified for any home in any market segment.

Most professional REALTORS know how to identify the trading range. Most sellers resist.
The irony is that when properties are priced within the trading range from the beginning they sell for a higher price as they avoid becoming market worn. Clearly, there is less incentive for sellers to reduce their price early on and again, it’s competition for the next best house in any given market segment that drives the price and shortens the market time.

STRATEGY: Since there is the fear of ‘leaving money on the table,’ a common alternative strategy for getting top dollar without becoming market worn is to ‘test’ the market above the known trading range with a set plan to reduce the price within a short time period if the property doesn’t get activity. This strategy can be effective in avoiding becoming market worn while satisfying the seller they’ve tested the limits of demand.
This is an especially common and perhaps justifiable strategy with luxury custom homes. Their higher price-point means a reduced pool of qualified buyers, making initial market time less of a factor when the average days on market is often more than a year. Then there is the fact that by definition custom homes may be difficult to find comparable sales or active competition. Those ‘special’ properties require finding that ‘special’ buyer who appreciates the value AND can afford it. Of course what every REALTOR will tell you is that pretty much all sellers at all price points feel their home is ‘special!’ Home is where the heart is.

MARKET TRENDS: Then there is the variable of market direction or trend. Are prices trending up or down? This is something that is frequently misinterpreted with the broad brush of statistics. For example, today we find the lower-end (under $400K) on fire (trending up). Mid-range home prices are recovering. High-end home prices are still soft.  The broad brush is misleading.

SUPPLY AND DEMAND: Embedded in the trend are the dynamics of supply and demand. For example, the explanation for the low-end on fire is simply too many buyers (demand) chasing too few available properties (supply). Investors with cash have fueled 25% of the lower-end activity. In the luxury sector, the supply has been trending down as well, but with more tepid demand.

INVENTORY CRISIS: An interesting consequence of the limited and shrinking supply of homes for sale is that year-over-year sales are off 20% in the Valley—not because of lack of demand, but lack of supply. Paradise Valley’s inventory is off a third from 2-years ago. Valley-wide inventory is down by half from 2-years ago.

IN SUM to our original query, is there a correlation between price and marketing time? Absolutely. Time is the enemy. As we have shown however, there are a host of factors to consider and manage in the quest for getting top dollar in the shortest amount of time. One clear take-away for would-be sellers:

It takes a market specialist to decode and navigate the ebb and flow of Price versus Marketing Time distinctions.

Chris Tiller
Russ Lyon Sotheby's International Realty
17207 N. Perimeter Dr. Suite 120
Scottsdale, AZ 85255
Office: 480.502.3500
Cell: 602.561.1346
Fax: 480.624.3795
chris.tiller@russlyon.com