Is it still a good time to buy? 100%

 For a 5-year 'bank grade' Forecast we have Collateral Analytics. 

For a more immediate short-term forecast, we have the Cromford Market Index (CMI).

To prove the efficacy of the CMI as an accurate short term predictor of the market, take a moment and look at the dark trend line in the long term graph below:

 

We see the CMI anticipates both the rise of the market from 2004 through mid 2005 and the crash. 

It's really rather remarkable when you see that what the CMI was saying about the market in April of 2005 (CMI=312) surprisingly dropped about 100 points by  August of 2005 (CMI=217) - at time when all the wall street smart guys were saying 'buy, buy, buy' and everyone who followed that advise lost big over the next year the market gave up all it's gains and continued into the negative territory through mid 2008. So, if you were armed with the CMI back then AND believed it, you would be way ahead of the game.

With this remarkable historical perspective, look at the CMI today. It's practically off the chart at around 490.

To translate what we're looking at:

• A Cromford Market Index (CMI) of 100 = a balanced market (between supply and demand).
• A CMI score below 100 favors buyers, with supply exceeding demand. 
• A CMI score over 100 favors sellers, with demand exceeding supply.

However, you could also say that a CMI score over 100 favors buyers to the extent they can capitalize on anticipated future appreciation.

That's the message to buyers today: 

Yes, it's tough to find what you're looking for. 

Yes, you're going to feel like you're paying too much.

However, if the history of the CMI can be relied upon, you can anticipate rapid appreciation, at least for the short term, until something gives!

How can inventory get worse?!

 Cromford Daily Observation ~

It can be hard to explain to people just how bad the supply of resale homes has become in Greater Phoenix. The reality is quite difficult to grasp unless you are trying to buy one. Many people mistakenly think demand must be exceptionally high, but that is not really the issue. It is above average but not unusual.

Not only is the supply extraordinarily low, it has dropped by a large percentage since the beginning of the year.

In a normal year we would expect to have more available supply in mid-February than we had at the start of the year. For example in 2015 active listings rose from 22,879 in week one to 24,041 by week 8. This excludes listings in UCB or CCBS status but includes all areas & types found in ARMLS. This is a 5% increase.

In 2021 we started the year at 6,113 and by week 8 we have dropped to 4,731, a decline of 23%. This is unprecedented.

You can compare the years easily using the chart here.

If active listings were a species of animal, they would have to go on the critically endangered list.

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The inverse graph is created when you look at Listing Under Contract for YTD:

A Key takeaway from the daily observation is demand is no greater than 2020, it's a supply side phenomenon. 

That leaves the 3rd element - appreciation. And we're getting what we would expect:

That last line from the Cromford Daily Observation above - 'if active listings were a species of animal, they would have to go on the critically endangered list' is the challenge.

Quick Market Update

 Median Sales Price Up 18%, Inventory Down 61%

Luxury Sales Over $3M up 140%

For Buyers:
Yes, it’s still a good time to buy.  Is it fun?  No. 

Inventory is down 61% from this time last year and competition among buyers is steep.  New listings are not keeping up with demand and the purchase experience can be stressful, disappointing, and heartbreaking; but it’s a good time to buy.

The median sales price has risen 18% to $339,000 and the median monthly rental rate through the Arizona Regional MLS has also risen 18%.  A 1,500-2,000 square foot home is roughly $1,600-$1,700 per month to purchase with 10% down while that same home rents at a median of $1,850 per month, up $250 over last year at this time.  For those who would like to reduce and stabilize their monthly housing expense with a historically low 30-year fixed mortgage rate, it’s a good time to buy.

According to the National Association of Home Builders, a family making the median annual income of $72,300 in Greater Phoenix could afford 60.6% of what sold in the 4th Quarter of 2020. That rate has been steadily declining, but it’s still within the normal range of 60-75% for now.  In San Francisco, the median sales price is $1,350,000 and a family making the median annual income of $130,900 can only afford 11% of what’s selling there.  For those who can work from home and no longer need to live in the same expensive city as their employer, it’s a good time to buy.

Finally, it’s a good time to buy because Greater Phoenix is experiencing a housing shortage. Over the past decade, a gap between the total number of housing units built and the total number of people to be housed has been growing wider and developers have not been able to bridge it.  This is not something that will be solved this year, and probably not next year either. As affordability wanes, it’s a good time to stake your claim on a home while it’s still an option.

For Sellers:
Brace yourself, the showings are coming.  It’s not uncommon these days to see a stampede of buyers through a home within the first day or so on the market.  It doesn’t matter the price range, all areas and types of homes are flying off the market and so far this month 37% of closings are over the asking price.

The most impressive development has been in the luxury market. After California announced it was considering raising income and other taxes last summer, contracts over $1M surged in Greater Phoenix. So far in 2021, sales between $1M-$3M are up 102% and sales over $3M are up 140% over last year and there is little sign of a slowdown. 

Appreciation rates based on annual sales between $1M-$2M range between 5%-6.5% and 2%-5% over $2M.  While the northeast cities of Paradise Valley and Scottsdale have long been associated with luxury real estate, Gilbert has emerged in the top 5 cities for sales over $1M in 2020.

Appreciation rates for homes sold below $600K range from 7%-11% annually and 5%-7% for sales between $600K-$1M.

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I might as well have highlighted the entire 'For Buyer / For Seller' analysis!

Takeaways worth noting: 

For Buyers:

• Buy versus Rent: You still get more for your money buying than renting
• Affordability: The median income in the Valley of $72K can still buy 60% of what sold in Q4 w/ 10% down -- bottom line: better to buy sooner than later
• New construction can't keep up with the demand

For Sellers:

• Homes in all prices ranges are 'flying off the shelves'; 37% being bid up over asking price
• Wealthy Californians wanting to escape higher State taxes are moving here and driving local luxury sales w/ a 100 to 140% increase in high end sales - $1M - $3M and $3M plus respectfully
• Gilbert now in top 5 Valley cities with sales over $1M
• Appreciation rates for homes sold below $600K range from 7%-11% annually and 5%-7% for sales between $600K-$1M
  

These are conversation-worthy take-aways, as they sum up the broader market with both metrics and a rationale that explains the trends. Being prepared to transition into how these macro Valley trends translate into your micro-market of specialization is where I bring value.

Appreciation...As Predicted

 Cromford Daily Observation ~ 

For many years the record monthly average sales price per sq. ft. across the entire ARMLS database was $190.61, set on May 5, 2006, almost 15 years ago.

We exceeded that level for the first time on August 1, 2020.

It only took until October 2, 2020, to exceed $200, and then $210 was passed on November 23, 2020.

February 9 saw us break over $220, so in the space of just over 6 months, we have seen $30 added to the average price per sq. ft. This is a rise of almost 16% in half a year.

Maybe you think this is unusual and will not last long. I would disagree with that opinion. With the Cromford® Market Index about to exceed 500 for the first time in the next few days, the speed of appreciation is about to step higher, not lower.

It will not take much for appreciation rates to exceed 30% and possibly 40% over the next few months. If appreciation is to slow down we need to see a clear sign of something that could cause that to occur. At the moment there is no such sign. We will let you know when we see such a sign, but right now, the market is primed for an explosive rise in house prices.

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MikeB Commentary ~

This is what the composite CMI referenced above looks like :

The 'bank grade' Collateral Analytics 5-year Forecast agrees for the next couple of years:

Note: The CA Forecast chart above you can re-publish without a copyright restriction.

And here's what the current relative breakdown across 17 cities in the Metro looks like:

Note: The Cromford Market Index has proven to be an accurate short term predictor of the market.

A CMI of 100 represents a balance between supply and demand.

A CMI over 100 represents the degree to which it's a sellers market - demand exceeding supply.

The green arrow (up) shows a month-over-month increase in the supply/demand imbalance favoring sellers.

The red arrow (down) shows a softening in the supply imbalance that may be a catch-22.

Catch-22 translated: A problematic situation (lack of inventory) for which the only solution is denied by a circumstance inherent in the problem (would-be sellers won't list for lack of a place to go).

So we're experiencing two seemingly contradictory dynamics simultaneously - some sectors experiencing a slow down in demand while anticipating a general 'explosion' in appreciation anticipated to be 30 to 40% for that very lack of supply that ironically attenuates more supply!

The picture improves somewhat i.e. at least a 1 month supply, as you go up in price to $600K, which favors RLSIR (with the 'Lyon's share' of the volume in the luxury sector). But since we, of course, serve everyone, we have great empathy for the majority looking in the under $500K market.

I can't remember a time when there was only a 6 month supply over $3M!

The divergence of increased Months Supply under $200K is presumably for utter lack of inventory.

And so it is on President's Day 2021...

AZ Inventory Update

 Let us take a deep dive into the active listings to see exactly how dire the supply situation is on February 10, 2021.

Across the ARMLS residential sales database, there are a total of 9,440 active listings. Among these we have 365 (4%) that have a contract contingent on buyer's sale (CCBS). We also have 4,515 in UCB status. This means they have a contract agreed and signed, but are (in theory) open to back-up offers. In most cases, this is a ruse to allow the listing to stay on external web sites like Zillow. If it changed to the more realistic pending status then it is no longer being marketed so it will disappear from external sites, reducing the agent's exposure. A small percentage is actively welcoming buyers to make an offer, but it is hard to tell how small that percentage really is.

What we can see is that 48% of active listings are in UCB status and if we add the CCBS listings, more than half (52%) already have a contract agreed and signed. Whether you consider them part of the active inventory is up to you. This is why we have some charts that include them and other charts that do not.

We are left with 4,560 listings that have no signed contract - 48% of the total).

How do these 4,560 listings break down by segment:

Segment	Count	Percentage	Days Inventory
Out of Area	533	12%	40.3
Within Greater Phoenix	4,027	88%	14.4
For Homes Within Greater Phoenix:
Greater Phoenix - New Build	576	14%	46.0
Greater Phoenix - Built Before 2020	3,451	86%	13.0
For Homes Built Before 2020 Within Greater Phoenix:
List Price Under $300,000	1,113	32%	9.5
List Price Between $300,000 and $500,000	926	27%	9.2
List Price Between $500,000 and $1,000,000	709	21%	18.1
List Price over $1,000,000	703	20%	74.9

We can conclude:

• out of area listings are 12% of what is available (normally this is less than 2 or 3%)
• new home listings are 14% of what is available in Greater Phoenix (normally less than 5%)
• Below $500,000 there is less than 10 days of inventory. Normal inventory is 120 to 150 days.
• Over $1 million there is over 2 months of inventory, but we would expect to see 10 to 12 months in a normal market

The resale supply is not only the scarcest we have ever seen, it is a lot worse than it looks at first sight. On top of that, the trend is currently headed further down.

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The data above says we currently have about 1/2 the last inventory low point in 4/'05 of 8,342. Today's 4,560 leaves me gobsmacked! 10-day supply under $500K you'd expect, but a 2 months supply over $1M!!!

I worry it's a self-perpetuating situation, as would-be sellers resist selling (if they have a choice) for fear they can't find something to buy (assuming they're staying local).

No new inventory projected from delinquent loans...'Food - Shelter'

Core Logic published their Loan Performance Insights report for November 2020 today. 5.9% of mortgages were delinquent by 30 or more days in November, which is up from 3.9% in November 2019, before the COVID-19 pandemic hit. Serious delinquent loans plus loans in foreclosure are at 3.9%, which is the lowest rate reported since June 2020.

The declining level of delinquency suggests increasing stabilization and reinforces our view that we are unlikely to see a large amount of distressed inventory coming to market over the next 12 months.

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I've heard it through the grapevine that some of our clients are thinking there may be a glut of new properties coming to the market because of forbearance loans coming due, or foreclosures in general. And the logic that follows is that it may mitigate the current supply/demand imbalance. 

We've commented on this in the recent past, but the above update from Core Logic gives you the most recent commentary to point to when it comes up in my client interactions.

Note: The bottom line difference between today's defaults and those that we witnessed in the 2007-8 crash is the equity position owners have, as the market has broadly recovered beyond the 2006 market peak in most locations e.g. there was a time when over half of Arizonans were under water (owed more than there home was worth). Today, of course, things are much different. 

One other interesting related side note is how our market is sustained in no small part by record low-interest rates. We've been worried about the consequence of what seems like the inevitability of an increase in interest rates - we've been saying that for years. What I've come to understand is how low rates - at least for the foreseeable future - are here to stay because the Feds need low rates to service the national debt! A time bomb to be sure. However, even as that potential crisis threatens future stability, we have this eery reality that like precious metals, our industry is anchored in something as real as it gets - real-estate - the land; and of course the 'shelter' we represent - as basic a need as 'food'!

We really are in the right industry; in the right place; at the right time; and with the right company. 

Color me grateful!

Unreal Appreciation

 Cromford Daily Observation - The appreciation rate for all areas & types, measured by the annual change in the monthly average closing price per square foot, exceeded 20% this week. The last time appreciation was over 20% was in August 2013.

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The line chart below plots average annual appreciation (based on monthly average sales price per square foot) on a weekly basis for the period 2002 onwards. This is the visual for the Daily Observation above.

The line chart below shows the annual appreciation based on the annual average sales price per square foot for single-family detached homes in the 17 largest cities by dollar volume.

The chart above is necessarily messy, to give you a rank-ordered city summary view for Annual Appreciation, based on Annual Average Sales Price per Sq / Ft - versus the first chart by tracking on a weekly basis gives us that alarming surge of 20% in the first chart.

Price range matters of course. So, here's a look at that breakdown:

A major takeaway here, besides the obvious 'surge' in appreciation, is how you can't broad brush, which is to say, this only reinforces the importance of your expert analysis of the comps to support the price of your subject property.

Looking forward, the question is, of course, sustainability. 

We'll see, but no question that as long as the scale is tipped so heavily to demand over supply we can only expect more of same.