Another Domino Starting

 The Greater Phoenix market continues to provide plenty of reasons to be worried. Another domino is wobbling and looks like it might be getting ready to fall - the listing success rate. Below is the weekly chart for all areas & types.

At the moment we are just under 90%, a very strong number. However, if we look at the last 5 weeks, a clear weakening trend has started. A similar trend developed in 2005 between June and July. By the end of 2005 we were down to just 63% - meaning that 1 in 3 homes listed failed to sell. We cannot say this will happen in 2022. But if it were going to happen, the first signs of the success rate problem would look like just the chart above.

A similar downward trend started during the summer last year, but frenetic buying by investors, particularly large investors, pulled the nose of the airplane back up and we ended 2021 with a strong success rate of just over 90%. This does not look as likely in 2022. It would be advisable to watch this chart like a hawk. 2005 was a year full of red flags waving. 2006 was a full scale bubble burst. People now talk of the 2008 crash, but that was only when Wall Street woke up and entered a full-on panic. The real estate market was in dire straits as early as the middle of 2006 and 2007 was truly dreadful.

The problem that we faced in 2006 was compounded by all the foreclosures that piled up in 2007. This was largely because so many homeowners had little or no equity in 2006 so by 2007 they had negative equity and no reason to avoid foreclosure. At the moment, we have a more positive situation with a much higher percentage of homeowners having significant equity. They should be motivated to protect rather than abandon that equity. That gives us a reason to be less worried, but extreme vigilance is the order of the day. Those who refinanced and took a little too much cash out over the last 2 years are more exposed than most.

1 month away from the media catching on to these changes...

 May 20 - Here is our latest table of Cromford® Market Index values for the single-family markets in the 17 largest cities:

Our primary leading indicator, the Cromford® Market Index, is telling us that the cooling trend is getting even more powerful. Every city has seen its CMI decline by at least 15% and the average for these 17 cities is a fall of 24%, compared with an average of 20.5% last week. At some point we would expect the nose-dive to decelerate and reach an equilibrium, but we seem to be a long way from that point at the moment. The first signal we are waiting for is for the average monthly change (-24%) to be lower than the prior week.

Worst affected are Queen Creek (-36%), Gilbert (-34%), Avondale (-30%) and Cave Creek (-30%).

It remains easy to sell a home at the moment but if this cooling trend stays in place, selling will start to get much more difficult by August.

Here comes supply....let's see where demand goes.

 Listing velocity on the rise. 

Below we see the 'big news' in the Valley showing the rapid increase in inventory in the last 2 months.

Looking at the available charts we have for the inventory trend statewide below don't quite capture the velocity of change at the street level. 

Why?

In most markets statewide we see the month-over-month increase in new listings April over March. However, we don't have a full month of May to compare and it's really been in the last 30 to 60 days that new listings have increased dramatically in most areas.

For example, in the last 30 days in the Valley we've seen Actives (not including UCB's) increase from 4807 to 7066 - a whopping increase of 32%.

Valley breakdown:

Supply continues to increase at a fast rate across most market segments. The effect is most noticeable in the price ranges from $500,000 to $2,000,000.

For Greater Phoenix, single-family detached non-distressed listings without a contract:

• Active listings priced between $500K and $600K have risen from 477 to 1,049 in the last 2 months (120%)
• Active listings priced between $600K and $800K have risen from 546 to 1,111 in the last 2 months (103%)
• Active listings priced between $800K and $1M have risen from 259 to 519 in the last 2 months (100%)
• Active listings priced between $1M and $1.5M have risen from 209 to 468 in the last 2 months (124%)
• Active listings priced between $1.5M and $2M have risen from 91 to 194 in the last 2 months (113%)

Supply is clearly on the rise in most sectors.

Continued Improvement For Buyers

 For years buyers have been crying out for more supply. Their wish is finally coming true. In the last 7 days we saw more than 3,000 listings added to the ARMLS residential database for the first time since 2010.

With demand dropping below normal, this torrent of new listings is growing our active inventory at the fastest rate since 2005. If you can afford the new interest rates (or are buying with cash), there are suddenly a lot more homes to choose from.

Look out for a list price cuts as sellers start to realize they have to be more realistic if they wish to compete. Asking for concessions is no longer a joke.

Sales price weakness is still a few months away, but asking prices are starting to look a little wobbly.

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Points in fact: 

• In every market there are always price cuts ~
• Here we compare price cuts year-over-year:

What's noteworthy and in support of today's Cromford Daily Observation is nearly triple the number of price changes year-over-year.

• In every market there are properties that don't sell ~
•  The graph below is interesting in this regard, as we see evidence of the massive increase in the $1M plus market by the increase in the percentage of successful sales during the contractual listing period (Listing Success Rate):

Notice how historically, on average, roughly half of the high end listings didn't sell in their initial listing period. 

Times have changed. 

Money continues to move to the Valley.

Market Shift Confirmed

 For Buyers:

It’s the moment you’ve been waiting for, less competition and more supply in Greater Phoenix! Active supply is up 40% from this time last year, but all that gain has been achieved over the last 6 weeks with an increase of 45%. This is an enormous change from April’s report where supply was only up 16% over last year and still below the count reported on January 1st. As of this report, the supply count is 7,157, still 72% below normal for this time of year but rising quickly.

The annual change in inventory is impressive, but it’s the short-term growth that is sending shock waves throughout the market. Inventory listed between $400K-$500K is up 35% in just 3 weeks. Counts in all segments between $500K-$1M are up 99% in 6 weeks and the count from $1M-$1.5M is up 54%, also within 6 weeks. Not all price ranges are rising in inventory. Properties listed below $400K are still flying off the shelves and declining in supply.

The increase in inventory may seem like an early Christmas miracle, but it’s not coming from a massive flood of new listings hitting the market. Visualize supply counts as the level of water in a bathtub, with new listings coming through the faucet and accepted contracts going down the drain. The water level can rise if there are more new listings coming through the faucet, or if there are fewer accepted contracts flowing down the drain. In this case, new listings are at normal levels and not excessive, but fast rising mortgage rates have reduced the number of accepted contracts and closed the drain. This is what is causing inventory in the “bathtub” to increase dramatically.

While recent interest rates are disappointing for many buyers, causing some to drop out and wait, history has shown us that they rarely stay high, or low, forever. While it’s near impossible to predict when interest rates may begin to decline, if we look over the last decade when interest rates have risen by 1% or more within a year, it has taken anywhere from 1 to 3 years for them to return to their original starting point. Even when rates increased by a whopping 5% over 14 months from 1980-1981, it only took 1.5yrs to drop back to where they started. Future expected interest rate drops over the next few years along with moderate home price appreciation and monthly principal reductions may provide today’s buyers the opportunity to lower their payments by hundreds of dollars down the road.

For Sellers:
The market is in the early stage of shifting out of an insane seller market and into a mere frenzy seller market. Before we know it, it could be a regular old hot seller market where properties still appreciate but take multiple weeks to sell, buyers don’t waive their appraisal contingency, and sellers happily pay for home warranties. But before all of that happens, it starts with one simple act from a seller, a list price reduction.

As inventory has risen at a fast pace over the past 6 weeks, so have the number of weekly price reductions as sellers compete for fewer buyers. Listings between $400K-$500K have seen a 103% increase, with the median price drop at $13,000. Price drops in $500K-$800K range increased 157%, with median drops between $16,000 and $20,000. Drops in the $800K-1.5M range increased 125%, with a median drop between $25,000 to $50,000.

So far, price reductions have proven effective in keeping the median days prior to contract around 7 days. However, as inventory continues to rise in the coming weeks, price reductions may not be enough to keep some properties from lingering longer in active status, creating more choice for buyers and strengthening their bargaining power.

While the market is still strongly in favor of sellers, it is changing rapidly. For those sellers waiting to sell close to the peak of price, this may be the time to list. Prices are still projected to continue rising, but at a slower pace over the next few months.