It was a banner year for Russ Lyon Sotheby’s International Realty. In fact, best ever, pushing 2.5 billion in annual sales. We are indeed grateful for opportunity to assist so many in making their move, as we strive for continued confidence and trust from those we serve.
Factors and Trends that played out in 2013 and set the stage for the residential market in the New Year…
Distress Market Normalized
Looking at the broader Arizona housing market, as has been well documented, we are in full recovery mode. Most notable in 2013 using the greater Phoenix Metro as our reference:
- On average, single-family home prices appreciated 20%. This is the broad brush and varies by price range and location. More on this below. However, in this context the point is that many homes that were 'underwater' are now back in an equity position as prices have risen sharply the past 3 years.
- Generally speaking, home prices have recovered to about two-thirds of what they were at the market peak in mid-2007.
The distressed market segment is nearly back to its historic norms:
- Foreclosure notices are at the long-term norm of 4.5 percent delinquencies, with Arizona actually ranking 42nd in the nation!
Active Listings by Status:
- Short sales – 11% and trending down
- Bank owned (REO) – 9%
- Normal sales – 80% and trending up
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Supply & Demand Balance
We came into 2013 with a short fall of available inventory relative to demand. By the end of the year supply (listings) and demand (sales) came into balance. This is best shown using The Cromford Market Index.
Cromford Market Index™ is a value that provides a short term forecast for the balance of the market. It is derived from the trends in pending, active and sold listings compared with historical data over the previous four years. Values below 100 indicate a buyer's market, while values above 100 indicate a seller's market. A value of 100 indicates a balanced market.
The Trends – Inventory; Sales; Prices
In the 3 graphs below we see a pronounced inverse relationship – as inventory (actives) decline, demand (sales) and prices increase. Then, rather abruptly, as inventory increases, sales decrease and the price trend flattens.
The Wall Street Journal cites the rise in interest rates as the cause for the decline in sales, most pronounced in Q3 and Q4. This is also somewhat typical and seasonally in Arizona. The expectation is that sales will pick up in Q1 and Q2 of the New Year.
Technology Impacts
Technology continues to impact the home sale process. Most notably, in 2013, worldwide, there were more Internet searches on a mobile device than on a computer!
Interest Rates & The Feds
The government’s influence on the market weighs heavily. Interest rates, while on the rise, remain near historic lows. On the plus side, the fact that low rates are ‘artificially low’ - a product of the Feds policy of quantitative easing, continues to create a ‘window of opportunity’ for buyers who need financing.
The significance of this can’t be overemphasized. For example, if we can assume that as the printing presses slow down, rates will go up (as we see today).
The direct consequence of higher rates is two-fold. First, eroding buying power for buyers needing financing. Then, as homes become more expensive, both demand and upside appreciation are compromised for sellers.
To make it concrete: For every 1% rates go up on an 80% loan (20% down) the effective cost of the property goes up almost 10%. This is because of what the difference in payments would amortize.
Dodd-Frank Legislation: Another government influence that will be in force in 2014 as the Qualified Residential Mortgage (QRM) rules take effect in January. The QRM rules were passed in 2010 as part of the Dodd-Frank legislation. For typical borrowers this should not have that great of an impact.
In any case, Russ Lyon Sotheby’s International Realty clients will have a decided advantage. This is because of our affiliation with EverBank. EverBank has Portfolio Power – meaning they have their own funds, with the ability to make loans based on their own underwriting criteria when appropriate. They also have the ability to underwrite loans within 24 hours of application!
The Luxury Market
While Russ Lyon Sotheby’s International Realty serves all price points with the same 'white glove' standard of care, there is no doubt that we dominate the luxury sector, participating in about 1 out of every 4 transactions over $800K.
The luxury market has improved this past year as well, with generally about 10% year-over-year appreciation.
Below you see Annual Appreciation by List Price Range. These are year-over-year average $ / Sq Ft numbers.
A main take-away is again, how the different price ranges vary. Location, of course, would be another major variable.
Yes, the -4.7 Annual Appreciation for $1.5 - $2M is a stand-out. However, it should be noted that this is based on comparing $ / Sq Ft for closings in the most recent month versus the same period 1 year ago and not a rolling average. The smaller samples from higher price ranges can skew the numbers.
Another interesting and instructive metric when parsing the market by price range is the number of months supply.
Connecting the dots between the Months Supply chart above and two sample Paradise Valley charts below, we see that as the inventory increases, even though luxury sales continue at a fairly steady pace, market times are increasing rather dramatically over $2M e.g the 4 to 5-year supply over $2M shown above.
Looking Forward
Well, the crystal ball is always a bit murky, but we can site trends…and we can borrow from those prognosticators who make it their business to look ahead. This from Brad Inman, publisher of the well-respected industry publication, Inman News:
- The private secondary mortgage market will be back in full force this coming year (though later in 2014), giving a fresh but sustainable lift to the housing market.
- Interest rates will be higher, but housing demand will be fierce, squeezing the inventory and driving up home prices.
…Begging the question…
Is there another Bubble on the Horizon? Talk of another bubble was in the news 6 months ago. However, it has been silenced as inventory increased and sales moderated over the past several months.
For those who still fear another bubble, local real estate guru Mike Orr, publisher of The Cromford Report, gives us the following 10 Reasons why this is extremely unlikely (some quotes; some paraphrasing to reflect current market conditions):
- The population of Maricopa and Pinal Counties is growing much faster than the housing stock - this is fundamental, yet is hardly ever mentioned. All across the nation there is a housing shortage. New home construction has not kept pace with population growth.
- In the first 6 months of this year prices were driven by a chronic lack of supply, not by excess demand. Demand is close to normal, albeit off some toward the e
nd of the year.
- As we pointed out above, prices are still well below the market peak, roughly the same level as 9 years ago.
- 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. It is an equity market.
- Lenders are still being ultra cautious. Demand could increase if they ease up.
- 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.
- 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.
- 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.
- We have a low vacancy rate both in homes for rent and for sale. Multiple generations and even multiple families are sharing single homes.
- No bubble has ever occurred in the same market twice in the same generation. However after a recent bubble everyone is hypersensitive to every price increase and numerous false cries of "bubble" are par for the course.
In Sum
A ‘balanced market’ can translate to a good time for buying or selling, with a slight bias to today's buyers (as current sales are down). In fact, with or without that crystal ball, given the fading window of opportunity with artificially low interest rates, potential homebuyers who need financing should not procrastinate.
Once again, this is the broad brush. For a more precise picture of what’s happening in your particular area and price point of interest you want to talk to your Russ Lyon Sotheby’s International Realty neighborhood specialist. As the saying goes, ‘mastery is the art of making distinctions’.
In this ‘Year in Review’ we’ve shown the key variables at play in today’s housing market, primarily through the lens of the Phoenix Metro market.
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