Wednesday, May 26, 2021

Market Update

 A graphical look at things as they stand at the cusp between spring and summer in the Valley...


The extremely anemic 'Active Listing' story continues...
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Days inventory is a consequence reflected here:
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Another consequence is average Sales Prices are now over asking price:
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And pretty much everything is selling:
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Pendings are of slightly month-over-month, but up year of year:
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Naturally, demand outpacing supply translates to higher prices - annual appreciation now approaching 20% - 
Keep in mind this is the broad brush:
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And there you have it.
We'll be paying special attention to the seasonal shift that we're just now seeing some evidence of in that slight month-over-month decrease in Pending Sales.

Thursday, May 20, 2021

Affordability Is Not What It Appears To Be

People look at home price appreciation and assume that if home prices rise by 20% and median earnings only rise by 5%, we have a big drop in affordability. However, this is an illusion. If your monthly mortgage payment is $1,000 then a 20% increase in home prices will push that payment up by $200. If your monthly income was $4,000, then a 5% increase in earnings is also $200. So your 5% increase in earnings is enough to cover the extra $200 mortgage payment.

Admittedly your mortgage payment used to be 25% of your budget and it is now 28.6%, but to most people, this will not put them off buying a home, especially when they foresee their home equity increasing, making them wealthier over time. In fact, many homeowners in Greater Phoenix have been earning more from their homeownership than from their employment over the last 12 months.

There will be an impact on the down payment too, which may be more of a disincentive. However, we are seeing a proposal for a $15,000 tax credit for first-time homebuyers, which could offset this. In fact, we are concerned that a $15,000 tax credit could increase demand when the market already has more demand than it can handle. There are no obvious plans to increase supply, so market balance still seems to be a distant spot well over the horizon.

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We hope that 'proposal for a $15,000 tax credit for first-time home buyers' becomes a reality. 

Meanwhile, the above Cromford Daily Observation on the 'illusion' on home price affordability is instructive and worth having in your repertoire of information.

I keep pushing my access to the statewide 'bank grade' charts and graphs I can pull from my Collateral Analytics account. In particular, beyond the AVM (automated valuation model) the Intelligence Reports and 5-year Forecast. They are so timely.

That 5-year Forecast is based on a top-tier, proven algorithm that weighs heavily on 'affordability'. Here's the explanation they give:

The Core Based Statistical Area (CBSA) and Zip Code Forecast chart shows the historical and forecast median single family prices for the user selected zip code and surrounding metro. The price forecasts are based on models developed by Collateral Analytics and are driven primarily by employment growth and home price affordability which are the two most important factors in housing markets.

Here are some sample 5-Year Forecasts for select markets across our fair State:

Note: In smaller markets like Sedona and Prescott the program says it doesn't have sufficient data for those Forecasts. However, I haven't found a market yet where you couldn't run an Intelligence Report - a great market snapshot, with a builtin 2-year look back - a terrific marketing piece that can be easily scaled down to postcard size. 

Flagstaff ~ 

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Phoenix ~ Note: In the greater Phoenix Metro you can generate 5-year Forecasts down to the zip code - including zips in Scottsdale (samples below), PV, Gilbert, Peoria, etc.
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Scottsdale ~ showing 85254, 85255 and 85257. 85262 added 2nd graph below:
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Scottsdale (85262) ~
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Tucson ~ Note: You can generate 5-year Forecasts in important sub markets like Oro Valley (85737 shown 2nd graph below):
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Oro Valley (85737) ~
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Tubac (Nogales 85646) ~ 
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I keep pointing to this reference because it is quasi-proprietary ie. no other agents in Arizona have it and or are using it.

And again, it's such a timely 'bank grade' resource for buyers concerned that they may be buying at the top of the market. An objective resource to mitigate this legitimate concern differentiates the RLSIR brand; and by extension, differentiates you!

Tuesday, May 18, 2021

Phoenix Breaks Avg Home Price Record of $500k!!

For the first time in history the monthly average price of a single-family home in Phoenix (the city - as defined by the USPS) has exceeded $509,000.

One year ago, the average was just over $390,000

The difference between these 2 numbers is over 30%.

To see how the other cities are doing by the same measurements (see MikeB Commentary below).

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The spread or appreciation between today and last year at this time is simply stunning. We're running out of adjectives to describe.

Ridiculous comes to mind when considering the average price in Phoenix is now just over 1/2 a million!

Below are the current market Monthly Average Sales Price snapshots of 11 select Valley cities:

Phoenix and the NE Valley:

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The SE Valley:

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The West Valley:
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This is the period of the lock-down last year when we took a steep dive you also see reflected in the graphs above. 

Comparing last year's rapid recovery in June forward (an inversion of the seasonal norm) to what happens for the rest of this year will be most interesting.

Friday, May 14, 2021

The Cooling Off Is Here...You Just Won't Feel It Yet.

 For Buyers:

Despite all the incredible news about rising real estate prices, a family making the median income of $79,000 in Greater Phoenix could still afford 62.8% of what sold in the first quarter of 2021. The National Association of Home Builders (NAHB.org) assumes that “a family can afford to spend 28% of its gross income on housing.” That means 62.8% of homes sold cost their new owners $1,843 per month or less assuming a 10% down payment and including principal, interest, taxes, and insurance. According to HUD, $79,000 represents a 26% increase in the local median annual income over the past 5 years; up to $16,500 from $62,500 in 2016.

While reassuring, it doesn’t remove the frustrations of competing for homes in this marketplace. Last month, 56% of all sales closed over the asking price, and half of them went $15,000 over or more to win. For the last 7 weeks, half of all listings that went under contract in the MLS were active for just 6 days or less.

However, the last few months have shown a glimmer of relief for buyers as supply counts actually stopped declining; and in price ranges between $500K-$800K they have noticeably increased 40% since February. Supply is still 69% lower than last year at this time so there’s a long way to go before it’s considered normal, but it’s something.

For Sellers:
You’re not going to notice this, but the housing market has begun to cool down.  It’s still hot however like 400 degrees is still hot despite being cooler than 500 degrees. Sellers can still expect multiple offers and closings over the asking price; however, it’s important to note that supply has stopped dropping and has been rising in certain price points over $500K.  Seasonally speaking, Greater Phoenix supply should be dropping at this time of year, not going flat or rising.  When measures go against the season, it can be the beginning of a shift. 

The reason this shift will not be noticed is that supply is still much lower than demand, so any slight increase in competition is inconsequential to a seller’s ability to secure a buyer, even one willing to pay over the asking price. One of the early indicators that a market is shifting, however, is the number of list price reductions. For example, supply between $600K-$800K has risen 45% since late February; in the same time frame, the number of weekly price reductions increased 223% and hit the highest count taken in nearly 6 months. That’s notable.  However, in other price points where supply has flattened out, price reductions have remained low and stable.

The advantage in any market, not just housing, is being one of the first to know when things are shifting. Especially today, it’s a good idea to consult a Realtor® who can analyze your price point and area so you can make an informed decision regarding the sale of your home.

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Connecting some dots. In yesterday's' News...' there was a piece on using Collateral Analytics 5-Year Forecast to help with buyer jitters - concerned they're potentially buying at the top of the market that may not be sustainable. 

You'll remember (actually here it is again below) that the CA Forecast is based on a well-vetted algorithm, where one of the weighted factors is affordability. 

So here again is the Scottsdale 5-Year Forecast sample from yesterday's 'News...' 

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The Core Based Statistical Area (CBSA) and Zip Code Forecast chart shows the historical and forecast median single family prices for the user selected zip code and surrounding metro. The price forecasts are based on models developed by Collateral Analytics and are driven primarily by employment growth and home price affordability which are the two most important factors in housing markets.

Back to 'connecting some dots' - the Infographic above, with it's message to buyers makes note of 'affordability' - in spite of the helter-skelter of bidding up offers because of low inventory, for a major Metro in an expanding market, we're still, relatively speaking, 'affordable'. 
For now...

Monday, May 3, 2021

Could we finally see the cooling off?!

The Cromford® Market Index hit its recent peak for all areas & types on March 11. This peak value was 514.9, the highest ever recorded. Since then it has fallen back to 474. The CMI is mathematically designed to be a leading indicator of changes in the market balance between buyers and sellers. It is doing exactly what it was designed to do, calling out cooling in the market before it is detectable by any other means. It informed us that it could detect a slight reduction in demand, so slight that it was invisible to nearly 100% of active agents, buyers, and sellers. As time passes this reduction has become more obvious, but it is also leveling out. Demand is definitely lower than it was in mid-March, but the downward trend has lost momentum. However, the CMI is still moving lower because supply has recently started to creep higher. This effect is also pretty small, almost too small for many people to notice, but it is definitely visible if you study the numbers carefully enough.

I have received several emails questioning whether there could be something wrong with the mathematics because many agents believe the market is still getting hotter. There is nothing wrong with the math. The market is indeed on a cooling trend and when the CMI changes direction, we wait for other market measurements to confirm that trend. In fact, the current situation is very instructive because it shows us which measures are the most sensitive to change.

Obviously, the most useful measurements are those that report the news the earliest. However, we also need to see corroborating evidence before we pay too much attention to a single measurement. The Cromford® Market Index has now been joined by the Contract Ratio (see definition in MikeB Commentary) confirming that the balance between buyers and sellers is moving in the buyer's favor. On April 1, the contract ratio for all areas and types was 307.6 - a high we have never even approached at the start of any prior month. However, on May 1, the contract ratio is down to 239.9. This is still a market in a buying frenzy, but it is significantly lower than the April 1 reading and confirms what the CMI has been telling us since mid March. The frenzy is not as crazy as it once was.

If this still seems unclear, imagine that a shop sells candy bars that are very popular. It only has 5 candy bars but 50 people come to the store to buy them. They are sold out almost at once. The shopkeeper describes the demand as insatiable, but he is wrong - he should have ordered more candy bars. If he had stocked up with 100, he would still have plenty to sell. He has a supply problem. Next week he gets another 6 candy bars and marks them at a price 50% higher than the week before. 30 people come to buy them so he is still quickly sold out and everyone in the shop thinks there is overwhelming demand. Nope. There is an underwhelming supply. However, we do know the market has cooled since the first week. We used to have a 10 to 1 ratio between demand and supply, but now we only have a 5 to 1 ratio. Perhaps the price rise put some buyers off. Only if we do the math can we be sure the market has cooled. The shopkeeper still thinks demand is insatiable and most of the buyers are still unable to get what they want.

We have a similar situation in the Greater Phoenix housing market. Demand is slightly down and supply is slightly up, compared with March. It is probably extremely difficult to detect with the usual human senses, surrounded by listings selling well above list and many buyers frustrated by the number of offers they have made without success. But the numbers do not lie. Mathematics is a useful tool when used correctly.

It is unfortunate for home buyers that more homes cannot be ordered as easily as candy bars. Developers have many constraints which push lead times well into the future. But supply will improve gradually over time and demand will fall as prices rise, as long as buyers behave logically. Most home buyers have not taken leave of their senses and will pull out of the market once it becomes unaffordable for them. I cannot say the same about some stock market or cryptocurrency speculators.

The current market signals are the same ones that called a top in April 2005. If we follow the same pattern as May to December 2005 we could be in for big trouble. However, I do not think that is very likely. Between May and December 2005, the supply exploded from 30 days to around 90 days of inventory, a massive increase in supply. It is theoretically possible for that to occur in 2021, but looks unlikely given the tiny increase we have seen in supply so far.

The key issue is what happens to supply over the next 6 months - I recommend you keep a close watch on the Cromford® Supply Index here:

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and here:

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And to all our active listing and inventory charts.

We must remember that math is fairly easy and we usually get the right answer. Forecasting is very difficult and we all get it wrong more often than not.

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Above they use the term Contract Ratio. What it means:

Contract Ratio indicates how "hot" a market is. It specifically measures the number of completed sales contracts relative to the supply of active listings. It is defined as 100 x (Pending Listings + UCB Listings) / Active Listings Excluding UCB. The higher the number the greater the buying activity relative to supply. If this number rises then it is a sign of growing contract activity and a positive signal for sellers. Conversely a falling number is a sign of a weakening market - either supply of active listings is increasing or contract activity is slowing, or both. In a balanced market for normal market segments, the value of the Contract Ratio is usually between 30 and 60. When it lies below 20 the market can be considered "slow" or a "cold market". Above 60 can be considered a "hot market" and when it moves above 100 we regard this as evidence of a "buying frenzy". In high-end luxury market segments the normal level is lower, usually lying between 15 and 25.

Today's Cromford Daily Observation had more editorializing than we typically get. Not quite sure why they threw in the ringer on how we're mirroring 2006 - given all they've written on how our market is driven by entirely different dynamics. But then no housing analyst could have ever predicted the current state of affairs.

The takeaway is the Cromford Report bragging rights to an accurate short-term market predictor - the CMI (Cromford Market Index) and indices like the Contract Ratio.

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I'll continue to provide these short-term forecasts for you, even as we also continue to monitor Collateral Analytics 5-year forecasts.

As I'm fond of saying, 'we may not have a crystal ball, but we can cite trends' - and that would be down to the subdivision level, where decisions are made e.g. Grayhawk:

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