Red Flag Warning....Here it comes, as predicted.

 Red flag warning. The housing market is changing more rapidly with rising supply and falling demand. While it remains far above normal for now, the Cromford® Market Index is dropping fast.

Here is an image extracted from the weekly CMI chart:

We can clearly see that the CMI is accelerating downwards. Although it remains above 400, representing a very hot market, the downward trend is so powerful it appears possible that it will drop below 300 within a matter of weeks/days rather than months. It is not possible to predict the CMI, as it is designed to be the very earliest indicator of market changes. We do not know when this decline will bottom out.

Last year we saw a similar but less intense fall during June. However, investors and iBuyers filled the gap left by the fading owner-occupier demand and kept inventory at low levels. The CMI bottomed out well above 340 and staged a second rally.

April is supposed to be one of the best months for the market, but new contract signings are significantly lower than last year. This means active listings are staying active longer and inventory is starting to build in most (but not all) segments. At the moment the number of homes for sale remains very far below normal, but we have seen before how it can increase sharply if more sellers emerge just as demand is declining.

There are a sequence of market indicators that fall like dominoes when a major change occurs in the market. The CMI is specifically designed to be the first of those dominoes. We will be reporting on the state of those confirming indicators over the course of the next few weeks and we advise sellers and buyers to pay close attention. Do not pay attention to prices. They will continue to rise for many months, since they are trailing indicators of market conditions.

This is probably one of those important times when early action may be required. If you are over-extended in your real estate investments, I advise a large increase in caution right now.  The demand factor is a tough one and very anecdotal between agents and mortgage brokers.  Mortgage applications are no longer a great indicator of future demand as potential buyers find out after the application process they can not afford what they truly want due to interest rate jumps and price increases.  

How this plays out is a guessing game but all the smart money seems to only see one direction.  A massive slow down and much faster than anyone would have thought, including me.  You won't hear about this for another 6 weeks+ in the news but it is here, no doubt.

Here comes the slowing...

 Here is our latest table of Cromford® Market Index values for the single-family markets in the 17 largest cities.

Over the last month, 2 of the 17 cities have improved for sellers while 15 have deteriorated. The market strongly favors sellers, but the trend is now moving slowly towards a more balanced market. The average change in the CMI over the past month is -9.5% whereas it was -6.4% last week. The cooling of the market continues to accelerate, but it will take several months before reaching normal at the current rate of change.

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Those red down arrows are quite telling - month-over-month supply-demand ratio trend favoring buyers in most Valley cities, albeit still a long way to a Cromford Market Index closer to the 100 point of balance.

However, the devil's always in the details...

By Price Range: 

The overall picture shows an 18% year-over-year increase in active inventory:

However, if we break it out by price range we find that the real increase in available inventory is in the mid-range $500 - $1M - up 48%!:

By contrast we don't yet see a significant change in the low end... 

...or high end:

Location, location, location: 

As we would expect, the cities with higher average prices actually have less inventory at the moment, comparing year-over-year and competition remains fierce - note 30% less inventory in PV:

11% less inventory in Scottsdale:

However, more choice in the SE and West Valley cities:

Takeaways ~ Mid-range ($500-$1M) buyers have significantly more choices (*depending on where you look), while low and high end inventory is about the same year-over-year.

*By location: There are roughly 20% more mid-range choices in the SE and W Valley, while Scottsdale & Fountain Hills have about 10% more mid-range Actives. Cave Creek/Carefree are about the same (year-over-year mid-range).

Why? 

We can speculate these factors play large:

• Investor activity has slowed in the mid-range e.g. there are twice the SFD rentals today than last year.
• Higher interest rates - buyers w/ 20% down have lost at least 10% buying power in the last year.

Bottom line: Demand is in the normal range; lack of supply to meet demand continues to be the driver e.g. this Scottsdale Supply/Demand gauge is typical: 

Here comes the slow down...

Although supply remains very low by normal standards, demand has weakened enough to allow inventory to start trending upwards. This has been really noticeable only for the last 3 days and the number of active listings in Greater Phoenix (excluding UCB and CCBS) is 13.4% higher than this time last year. This is the highest year-over-year increase in supply we have seen for several years.

We have been focusing on supply for the slightest indication of a break in the market's fever, and this is the most significant sign we have found. As yet it is a minor change that will be barely perceptible in the real world. But the mathematics suggest we are entering a proper cooling phase and I would be surprised if this does not become more significant as the second quarter progresses.

The trend is most noticeable at the affordable end of the market, where buyers are heavily dependent on interest rates. Below 3,000 sq. ft. inventory is up almost 22% from a year ago. Above 3,000 sq. ft. inventory is down 11% from last year. Above 5,000 sq. ft. inventory is down 43% from last year at this time.

It is important to stress that we are NOT seeing more incoming new listings; in fact they are currently arriving slower than last year. But active listings are going under contract at a decreasing pace, which means we get more choice for any buyers looking for a home, at least for homes under 3,000 sq. ft..

This is not the end of bidding wars, but it might be the start of a long drawn-out peace process.

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Ebb & flow...yet, an important distinction. While we're seeing better days ahead for the average buyer, the luxury sector remains way out of kilter in terms of supply versus demand.

For the 'why' is this happening. For those needing financing there are two dynamics going on. First, the rush to get in the door before rising interest rates close the door to many. And then there's the impact of rising rates we may already be seeing. 

There's another factor at play, which is the institutional buyer - the Black Rocks of the world that would like all us common folks to be renters. Can't help editorializing, but it's true. As to the question of whether they're easing up on their purchasing, that's yet to be seen. Certainly Zillow has backed off - a different story of course. 

Talking Point: It's always a bifurcated market e.g. those who need financing versus those who don't. The lack of high-end inventory continues to be a record-breaking driver. The big question as to whether we'll see a shift in high-end demand involves dynamics all together different and remains an open one, with no apparent metrics that might predict. Our Collateral Analytics 5-year forecast suggests more of the same though does, in fact, reflect some 'cooling' as appreciation continues for the next 24 months. 

Note how the appreciation arc gradually flattens over the next 2 years.