Monday, November 29, 2021

Here comes the cooling, right on schedule...as predicted.

 On November 11, the average closed price per square foot across all areas & types slipped below 100% of the average list price per square foot for the first time since March 18. We waited a while to report in order to ensure this was not a blip. The percentage on November 11 was 99.99% and it has now dropped to 99.92%. Not a blip.


This signals that the market is cooling slightly. However, the long-term average is 97.25% and prices still tend to rise when the percentage is above 97%. So this should not be taken as a sign that sales prices may reverse direction any time soon. If it were to drop below the long-term average then we would have good reason to become more pessimistic about prices.
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'The market is cooling slightly' based on the 'new' list-to-sales-price trend that sellers, on average, are taking a slight discount, which equals fewer bidding wars.
This graph clearly shows the trend since Q2, using Scottsdale as our example:
100 = full price on the horizontal access / List Price / Sold Price Ratio
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Takeaway: 
Sellers are still getting the better part of their appreciated prices.
Buyers should be finding more choices.
All good.

Friday, November 19, 2021

Market Update

Although prices have risen dramatically over the last year, the situation is very different from 2005. Let us examine the number of active listings across all areas and types in the ARMLS database, using the monthly active listings chart:

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We have selected 2005, 2020 and 2021 and in 2005 we can see that March and April counts were extremely low that year. However, the rapid increases in price and massive building programs for new homes turned the situation around in just 6 months. Demand dropped because of the high pricing and supply increased because builders opened new subdivisions as if there were no limit to the market, causing supply to jump. The market stalled as supply trebled in just 9 months.

This was the popping of the bubble, which was clearly audible even before Michael Burry figured it out. Unfortunately few people took any notice because they had somehow come to believe that house prices never go down. House prices are a trailing indicator and it was mid-2006 before they started to go down across Greater Phoenix. The first signs of this cropped up in the City of Maricopa which saw prices weaken during the fourth quarter of 2005. The San Tan Valley area was also an early downward mover.

In 2021, supply has increased during the last 7 months, but not by very much, and has even declined since October. It remains lower than it was in 2020. Prices are very unlikely to go down while supply remains this low.

The idea that supply will increase dramatically because of people coming out of forbearance is unsound. The volume of borrowers in such difficulties is too low to make much of a difference to the market as a whole.

So how could the situation change?

Well, a lot of the current demand is coming from large-scale investors buying both new and re-sale homes to rent to tenants. If this demand were to suddenly evaporate, then we could see demand drop by between 500 and 1,000 homes per month. This would cause supply to grow and it could even double after 12 months. However, there is almost no sign of these investors losing steam right now. If anything they are getting more motivated. But one day they will ease up and when they do, this will cause a significant softening of demand. What could cause them to ease up? Finding it hard to lease their homes to tenants is a likely cause. At the moment, there is no shortage of tenants, but if they keep adding to the pool of rented single-family homes, they will one day run short of prospective tenants. They will start to lower rents in an attempt to attract tenants from other properties.

In this scenario, the first sign of a problem for home price appreciation would be a fall in rental prices. My advice would be to keep an eye on the rental price chart.

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1. There's never been more than one crash in a generation (not that it can't happen. but just a historical fact).
2. The crash was based in no small part on easy money/ no equity. Today the liar loans are gone - it's an equity market where buyers must have skin in the game.
3. During the crash there weren't a lot of new homes being built creating a housing shortage today, which would be more acute were it not for an economy where the next generation of new buyers (Millennials) have been slow to come to market. That has now changed. The American Dream of homeownership is still alive and well, albeit buying patterns are changing (a whole other subject). It could take a decade for new builds to meet demand. Recent reports tell us the inventory situation for builders is being exasperated by labor and supply chain issues being seen worldwide. 
4. Boomerang buyers (buyers who lost their homes during the crash) have been returning to the market. An NAR survey found 7 out of 10 people who lost their home and are now renting want to buy as soon as they can re-qualify.
5. People are moving to Arizona from other States in record numbers - a long-term trend that has accelerated since 2019's pandemic. Az is in the top 3 inbound moving locations nationally.


The caveat we could add today is the dramatic situation evolving geopolitically. Case in point, so far, the consequences of the pandemic have actually made Arizona more attractive. The Arizona residential industry has benefited mightily.

That being said, related global events, like the supply chain problems, sudden, rapid inflation and general supply shortages on the increase, together with global instability e.g. the potential collapse of Evergrande, remind us of how a chain-reaction in bank and financial issue insolvencies can quickly change the landscape.

Talking Point: These are uncharted waters, though the Arizona lifestyle may continue to have its safe haven attractor-factor, as evidenced in triple the units and nearly triple the volume in the uber luxury sector looking back year-over-year!

This is rather stunning: 45 sales $3M plus 2019 - 2020 (November 2019 to November 2020)...

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...vs. 126 sales $3M plus 2020 - 2021 (November 2020  to current)

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Money is moving here with all the respective trickle-down benefits to the local economy. 
May the trend continue...

Friday, November 5, 2021

Market Update and Forecast

 Looking at short and long term local market predictions...

  • What you're looking at below is the most current Cromford Market Index.
    • Looking at the dials, a balanced market is a score of 100. Supply is 'short' at 35 and demand is 'strong' at 121.9. The algorithm that blends the 2 gives us a continued strong sellers market at a CMI score of 348.7.
  • What's noteworthy is that the index is as high as it's been for this time of year in the last 15 years - see Market Index Trend below.
  • What it suggests, as a proven short term market indicator, is continued appreciation for at least the next few months.
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  • What you're looking at below is the 5-year Forecast for the Phoenix Metro.
  • What's noteworthy is that the upward trend continues for at least the next 2 years.
  • What it suggests is continued appreciation.
    • Keep in mind you can use your Collateral Analytics account to run your specific zip code of interest.
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  • With inventory hovering near historic lows coupled with continued strong demand, price appreciation will continue...at least for the short term.
  • When we couple the above with our 'bank grade' Collateral Analytics 5-year Forecast trend, these dynamics don't change for the next couple of years, assuming no major change in overall market dynamics e.g. geopolitical events that have been uniquely favorable to Arizona and the Arizona lifestyle.

Thursday, November 4, 2021

November 1st Update

 The Census Bureau has provided the single-family permit counts for September and they are showing a new downward trend. Only 2,325 permits were issued in Maricopa and Pinal counties during September, which is the lowest monthly total since May 2020.

It is also down 25% from September last year.

It would appear that the home builders are unable to meet demand because of shortages of component products and labor. This partly explains why they have been so reluctant to take orders. If they take orders for homes they are unable to build they are in danger of setting prices far too low as well as disappointing their customers.

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Cue the violins Zillow has announced that it has terminated its Zillow Offers iBuying business.

It turns out that buying houses at a high price and selling them for less money is not such a great business model.

Above sourced from the Cromford Daily Observation.

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Supply chain issues are hitting everyone and every industry. We see the consequences in higher prices at the grocery store and more broadly, the availability of everything from new cars to home building and home improvement components. And no relief on sight. As an affirmative aside, my eldest son works for a company that manages major ports around the world, including Long Beach. His team is in the middle of it trying to figure out ways to improve the tangle of logistical bottlenecks. He says it is going to get much worse before it gets better. He would know. 

There's a buy now message!

Ironically, once again, the consequences of pandemic and geopolitical events have graced our local resale housing industry. 

Talking points: 

Supply: We've reported it was going to take a decade for new home construction to pick up the residential home supply gap. That was earlier this year. 

Now the implications of the above suggest a continued squeeze on the supply side.

Demand: Arizona will likely continue to see population gains, as a prime relocation option, with the attractor-factor of the sunny Arizona lifestyle and more horizontal than vertical growth e.g. more space in golf-centric communities.

Here is the 'bank grade' 5-year Forecast from my personal Collateral Analytics account, where you can generate projections down to the zip code:

Samples from select cities: Note the vertical red line is 'today'. To the right of the vertical red line along the horizontal axis are the projections for the next 5-years. It's not a crystal ball, but you do have the bragging rights to 'bank grade' information:

Phoenix:

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Paradise Valley:
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Scottsdale:
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Gilbert: 
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Glendale:

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Tucson:

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Sedona: (note - sorry, no data available for Prescott)
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Flagstaff:
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See a pattern here? 

Main takeaway - more of the same in most markets for at least the next 2 years.  Up north the less population-dense markets project astronomical growth out for at least the next 5 years!

To explain the genesis of this information - 

When we say 'bank grade' it's because Collateral Analytics is a preferred tool Wall Street banks use for risk management - specifically, to assess the viability of Real Estate portfolios being sold in the secondary mortgage market. 

Collateral Analytics is considered 'top-of-class', hence 'bank grade', as compared to say a 'consumer grade' tool like the Zillow Zestimate! 

My response to the Zestimate 'congratulations on doing your homework. You're using a consumer grade tool, with a lot of disqualifiers when you read the small print. We have a bank grade valuation tool to assist in our analysis I'm happy to share with you.'

Boom!

To explain the term CBSA (you see in the title of each report) and the rationale for the forecast:

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.