Monday, July 25, 2022

And the violins continue...

Available supply has grown dramatically in most segments of the market since March 16, this year's low point. We had 4,367 active listings without a contract on March 16 and have 17,509 today. This is an increase of 301% across all areas & types. Within Greater Phoenix the growth has been 318% from 3,884 to 16,235.

By dwelling type we have seen supply grow at the following rates:

  • Single-family Detached - up 344%
  • Townhouse - up 370%
  • Apartment-style - up 288%
  • Gemini / Twin - up 130%
  • Loft-style - up 240%
  • Patio Home - up 257%
  • Mobile Home - up 65%
  • Modular / Manufactured - up 20%

These figures are for Greater Phoenix locations only. Out of area supply has grown 164%. It is very noticeable that mobile and manufactured homes have seen supply grow much more slowly than the rest of the market.

Largely due to a change in the mix of homes available, with low growth at the high end luxury market compared with the mid-ranges, the average advertised price of a home in Greater Phoenix is down from a peak of $1,010,002 on March 24 to just $731,744 today. The average available home size is also down from 2,430 to 2,172 sq. ft.

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

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The average monthly change in CMI was -34%. This is the same as last week and the week before. The week before that it was -35%.

The deterioration in the market for sellers continues with almost as much speed as ever. There has been a slight reduction in the rate of arrival of new listings, but it is still much higher than last year at this time. Demand has not stopped falling and listings under contract are exceptionally low for the time of year. Even our best performing city, Paradise Valley, has slumped 11% over the last month, but it may yet overtake Fountain Hills and grab the top spot, since Fountain Hills fell 18%, the second best result. Cave Creek is third and fell "only" 21%, which looks good by comparison with the other 14 cities which range from -30% (Avondale) to -44% (Glendale).

Buckeye is now a buyer's market by a large margin and Queen Creek is almost as bad for sellers. Maricopa is not quite there yet but it will be a buyer's market in 2 or 3 days. Gilbert, Tempe, Peoria, Chandler and Surprise are all going to be balanced markets within a few days and on their current trajectory they could be buyer's market by mid August. The largest market by far, Phoenix, looks like it will be balanced before the end of July and a buyer's market before the beginning of September. Glendale and Mesa are just a week or so behind.

The high end market is still holding out much better than the mid-range.

Only 3 cities are now over 150. A month ago we had 14. The market has changed dramatically for the worse over the past 4 or 5 weeks.

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Picking up on the above 'The high end market is still holding out much better than the mid-range', the positive luxury sector story you can broadcast is the inverse relationship between higher price ranges and inventory (Supply); and following suit, in the higher price ranges we see a higher percentage of year-over-year sales (Demand - Listings Under Contract) ~

Supply ~

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Demand ~
 
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Takeaway ~ 
Using the broad brush, inventories are clearly on the rise and accelerating relative to demand. However, the luxury sector tells a much more resilient story.
Notable distinctions:
  • We see an inverse relationship between increasing inventory and prices (as prices go up the percentage of inventory increase goes down).
  • Following suit, Demand in the luxury sector (defined as $1M plus) is still at or above last year, with more relative demand as you go up in price range.

Friday, July 15, 2022

Hits keep coming...

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

cmi-2022-07-14.gif

The average monthly change in CMI was -34%. This is the same as last week. The rate of decline in the CMI readings over the past two months is easily the fastest we have ever witnessed.

The negative trend remains extremely powerful. Supply is still growing at roughly 1,000 listings a week while demand is still weakening despite some (possibly temporary) relief in the mortgage rates. We now have 1 city (Buckeye) which is a buyer's market and 2 cities (Maricopa and Queen Creek) that are in the balanced zone between 90 and 110. It is just a matter of days before Maricopa and Queen Creek become buyer's markets and their time in the balanced zone will have been very short indeed. Peoria, Tempe, Gilbert, Chandler, Surprise and Phoenix are all just a week or two away from a balanced market as they all dropped close to 40% in the last month. Based on current trends, these 6 cities will probably be buyer's markets before the end of August.

Things are different in Paradise Valley where there has been very little increase in supply and the 7% fall in its CMI is entirely due to a drop in demand. Fountain Hills and Cave Creek are also seeing declines in their CMI, but at roughly half the rate of the average city in the valley.

Only 5 cities are now over 150. A month ago we had 15.

Buyers are much more aware of the dramatic change in the market than are sellers. New sellers will need to take time to understand just how different market conditions are today compared with 3 months ago. They should not expect multiple bids. They should plan to market their property, not just sell it.

With the Federal Reserve considering a 1% rise in the federal funds rate in their July meeting, demand could drop even lower next month if mortgage rates move sharply higher again.

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Let's drill down on supply and demand, particularly the above-referenced rapid increase in accruing inventories.

Here's the percentage increase in inventory by price range ~

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You can't help but notice the inverse relationship - the dramatic increase in inventories stacking up as you go from the higher to lower price ranges.

This begs the question of what's happening on the demand side.

Our best demand indicator is Listing Under Contract.

What we find (once again) is that it's the $300K - to $400K market that is being savaged in terms of demand:

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All other price ranges are at or above last year. 

Here's the combination of price ranges $400K-plus just to broadly make the point ~

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Takeaway ~ Relative resilience

Supply: 

  • While inventories are increasing across the board, there's a clear inverse relationship ie. as you go down in price range you go up in the pace of accruing inventory.

Demand: 

  • Looking at the demand side, it's the lower end market (under $400K) that's being crushed, in no small part by our oft mentioned 55% year-over-year effective cost increase - when you factor in the double punch of 25% appreciation plus 30% effective loss of buying power resulting from nearly a 3% YTD increase in 30 year fixed interest rates.
  • Demand (by contrast) in the mid and upper ranges, while trending down (somewhat seasonally) is still tracking at or above this time last year.

So, as we quickly move toward a more balanced market we would be remiss at this moment not to note the relative resilience of the mid and upper range markets in the Valley. 

Monday, July 11, 2022

Its a DRAMATIC change in the South East Valley...

This is substantial.  These are not cracks anymore.  Demand has fallen off a cliff.  The Fed has hinted at another 75 basis point hike in rates.  If that's the case I'm predicting a decrease in values.  If they flattened out and stayed at 6% we can survive that with no major decline 5-10% in values max.  If we get interest rates over 7-7.5% it could be rough.  The panic and emotion would have more of an impact than the rate, but it would happen, the why really won't matter at that point. 

Certain cities (obviously Phoenix) will be impacted most.  Real estate drives huge numbers of jobs, businesses, goods, and services.  If we go into a recession the snowball if we see increases in unemployment gets ugly quick.   

Couple of things to mention different than the last crash...

1) Equity - a huge number of people put down large down payments, paid cash, etc.  Those that didn't lock in ridiculous interest rates and have large amounts of equity.  It would be crazy to foreclose on a house you have equity in only to go rent an apartment at a higher payment.  

2) Investor Demand - The current crashing of demand is related to rates, not employment.  Because of this people still, qualify for a place to live.  This means they can't purchase but can afford rent.  This will hold rent prices stable and elevated.  When you have a stable elevated rental price the values for houses will have a floor value.  Once this is reached investors will scoop these up and bottom out the market naturally.  

3) Safety Net:  If you bought 18 + months ago you have more than enough equity to weather 3-4 years of a market downturn.  Even if you lost a job you could tap some of that equity to float your monthly expenses for a while.  

Buckle up...we are 2-3 months from finding out if this will have soft landing or a difficult few years.

  

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.

Using this measure today's Cromford Daily Observation gives us the following 29 largest cities in the Valley, ranking from least to most affected by the downturn in the market:
RankCityContract Ratio 4/7/22Contract Ratio 7/7/22Change %
1Paradise Valley8242-49%
2Arizona City509188-63%
3Fountain Hills18859-69%
4Casa Grande31594-70%
5Apache Junction21960-73%
6Gold Canyon22359-74%
7Tolleson35991-74%
8Cave Creek19850-75%
9Maricopa26166-75%
10Buckeye23257-75%
11Sun City24859-76%
12Scottsdale18243-77%
13Goodyear32174-77%
14El Mirage33374-78%
15Tempe20846-78%
16Peoria24652-79%
17Surprise27358-79%
18Sun City West28661-79%
19Mesa29457-81%
20Laveen35669-81%
21Litchfield Park23144-81%
22Phoenix27248-82%
23Glendale30350-84%
24Chandler29348-84%
25Avondale34054-84%
26Queen Creek33450-85%
27Gilbert35451-86%
28Anthem28139-86%
29Sun Lakes27635-87%

All 29 cities have seen their single-family markets cool down, but Paradise Valley has cooled much less than the others.

Casa Grande and Arizona City have also done better than average, perhaps supported by the new industry that has been established in their local area.

The Southeast Valley has fared particularly poorly, as has Phoenix, Glendale and Anthem.

We normally classify readings under 60 as corresponding to a balanced market. By this definition, 19 of the 29 cities are already in a balanced market while Sun Lakes and Anthem are most in danger of slipping into a buyer's market.

Thursday, July 7, 2022

$500-$600k a buyers market...we're here.

 As we look at different price ranges, we can see that all of them have cooled significantly in the three months since April. The least affected is the range over $3 million, where the contract ratio has declined 43% from 67 to 38. In expensive locations like Paradise Valley and Carefree, the supply of active listings remains low by long-term standards and the market is relatively resilient.

Below $3 million contract ratios have declined by at least 74%, a colossal drop in just 3 months and easily the fastest and most significant cooling that has been seen in the Greater Phoenix housing market since we started studying it in 2001.

Hardest hit is the single-family detached price range between $500,000 and $600,000 where the contract ratio has dropped 84% from 296 to below 49. This price range is no longer a seller's market and there are plenty of listings for each buyer to choose from. Bidding wars are almost over. There were 2,434 active listings as of July 1, with 358 of these in UCB or CCBS status leaving 2,076 available for buyers. Is this a lot? It certainly is. It is up 236% from April 1 and up 341% from July 1, 2021. It is also the highest total we have recorded for this price range since June 2008. We must consider it in context. Last month 1,079 homes sold in the price range, so in this light, 2,076 does not seem so high. But most of those sales were contracted well before the latest round of interest rate rises, so we would expect sales rates to drop in July, while the active listing count looks like it is headed considerably higher.

If you have a home in the price range $500,000 to $600,000, our advice is to accept that you have a lot of competition from other sellers and the market trend is not moving in your favor. Be realistic in your expectations and you will probably be fine. But price too high and you could be left chasing a falling market with price cuts that may come too late.