Market Update and "Let's Start High": Not a Great Idea

 December is a time of reflection and anticipation - digesting what has happened and accordingly what we might expect and need to plan for moving forward.

Relative to the residential market there's no question the unprecedented rise in interest rates in 2022, and continuing in 2023, albeit attenuating to around 7% will likely continue into 2024 to the extent current FED monetary policy continues. 

Yes, there's speculation they'll reverse course, but it would be a mistake to bank on that (pardon the pun).

• The consequences of higher rates have been dramatic in terms of unit sales (demand) in most market segments, though, from the industry's point-of-view there's the caveat that appreciation has mostly sustained our Sales Volume.
• The consequence to sellers in terms of prices is yet to be realized. Note: 
• Prices are a lagging indicator.
• This is what we need to prepare for...

Current Context getting our attention: 

• As prices have been mostly maintained for those properties that are selling, the percentage selling has dropped significantly (demand).
• This is evidenced in the dramatic downward trend in the Listing Success Rate or Ninja's Odds of Selling.
• The result is accruing inventory, as the number of Active Listings are generally on the rise (supply).

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The law of supply & demand: As demand drops relative to supply it eventually must show up in Sold Prices - 

This is my purpose today - making the case that if present trends continue we would do well to start thinking about strategies we'll need in 2024 to mitigate the shifting sands toward a market favoring buyers in many market segments, albeit while the uber high end is also shifting, it's doing so more slowly, as supply demand dynamics are demonstrably different eg. rate resilience.

• Keep in mind again, price consequences are delayed and also dependent on Price Range (affordability) factors.
• Keep in mind also, predicting is tricky business. 
• I don't know if prices will begin to moderate in Q1. 
• What I do know is if the current dynamics of increased supply relative to demand continues, more price adjustments are inevitable AND in any case, we want to avoid setting up our sellers for increased marketing times and the potential of chasing a shifting market.

The Metrics of Interest Rates and Supply vs Demand - preaching to the choir ~

Here's what the recent trend in interest rates looks like ~

This you know. 

But what I wanted to point out is just how direct a correlation there is between interest rates and demand.

As interest rates rose the Cromford Market Index anticipated a corresponding drop in Demand, which materialized very quickly evidenced in Listings Under Contract, which, of course, you experienced firsthand. ~

 

Even so, the low supply (relative to low demand) has sustained a Sellers Market AND Sales Prices, though the general movement since Q1 of 2023 toward a Balanced Market is now at hand, with a Buyers Market evidenced by an increase in price changes and marketing times in a growing number of locations and price ranges.

This CMI graph with year-end interest rate labels pretty much tells the story ~

Note: Yes, the graph below is sourced from the Valley-centric Cromford Market Index, but applicable statewide, as the dynamics of interest rates, inventory (supply) and unit sales (demand) are essentially the same.

Future Implications ~

All of the above suggests as Supply increases - in no small part from unsold properties accruing from fewer sales (most particularly under $1M), it's inevitable more future Sales Price 'corrections' are on the horizon.

Here's the strategy - beginning with what you need to know about Price Corrections:

1. On average properties that undergo price adjustments have triple the marketing time!
2. And if they do sell they often sell for less than had they accurately priced (competitively positioned) to begin with.
3. We have the metrics to prove this.

So if you're interested in getting the highest price in the shortest period of time (as all motivated sellers are), we would do well to brush off the tools that we've used successfully in the past to help our sellers do just that.

Our primary tool is competitive positioning - with renewed emphasis on the fact sellers can't afford to miss the early, motivated buyer activity.

 

When you miss that early, most motivated activity - from 'the hovers', as I call them, you've lost them. 

They don't come back - reason being they've figured out there's always competition for the best, so the action is with new, competitively priced homes.

This is a fundamental message!

Oue Challenge:

Communicating this message regarding the merits of competitive positioning is 'counter-intuitive' to sellers. 

• You think their home is special.
• You see no downside to testing the market.
• You posture that they can wait for the right buyer.
• Etc, etc.

What you fail to understand without education is the irony that accurate pricing avoids price changes, while dramatically shortening their marketing time and most often increasing your net. 

It's a no-brainer! Yet, it's not understood, even by many agents!

In our morning Agent Training this week I will demonstrate -

1. Specifically how to competitively position a listing in any market segment using simple formulas and built-in FlexMLS tools and

2. Share the metrics that prove that avoiding price changes cuts the marketing time by 2/3rds and generally increases the sellers net!

Here's a sample:

Scottsdale Sales over the past 12 months; between $1M and $2M ~

Note that of the 1,489 properties that sold in Scottsdale in the past year between $1M and $2M, the 839 with No Price Changes (competitively positioned) on average sold in 37 days with an average of a 2.7% discount at time of sale off their original price.

By contrast, the 650 sold properties that had 1+ Price Changes took an average of 116 days to sell - TRIPLE the marketing time; took a 12.7% discount off their original list price only to net less than those priced accurately to begin with!

• This is your proof of the efficacy of competitive positioning. 
• This is powerful in terms of seller education - influencing them to do what's in their best interest, though often counter-intuitive. 
• This is differentiating, as most agents are ill-prepared to make the case that will deliver the most successful seller outcome, as they simply don't have the rationale or the metrics to make the case. 

Wealth Gap Getting Worst Between You and Friends

 The Wealth Gap: How Homebuying Timing Can Impact Your Financial Future

Introduction:

The decision to buy a home is one of the most significant financial choices most people will make in their lifetime. But what happens when two individuals make that decision at different times, under varying economic conditions? In this blog post, we will explore the wealth differences that can emerge over a span of 30 years between someone who purchased a home in 2020 at a 3% interest rate (Homebuyer A) and another who decided to buy a home in 2025 at a 7% interest rate (Homebuyer B). These choices may seem small, but they can have a substantial impact on your long-term financial well-being.

Setting the Stage:

Let's reintroduce our two hypothetical homeowners:

Homebuyer A: Purchased a house for $400,000 in 2020 at a 3% interest rate.

Homebuyer B: Decided to buy a home in 2025 still at $400,000 but at a 7% interest rate.

Initial Investment:

Homebuyer A bought their home for $400,000 with a 3% interest rate, resulting in a monthly mortgage payment of approximately $1,686.

Homebuyer B is priced out of the market due to a 7% interest rate and no major price declines. They can not afford, or qualify for a $2,654 mortgage payment. They are forced to rent instead.

Monthly Payments and Rental Costs:

For Homebuyer B, who decided to rent instead of buying, let's factor in their monthly rental cost:

• Homebuyer A (2020-2050): Mortgage paid off, no monthly housing costs.
• Homebuyer B (2025-2050): Monthly rent of $2,000. (at 3% increases it would be over $4,500k in 30 years)

Monthly Savings and Investment:

Homebuyer A, having no housing costs, decides to invest $1,000 per month into a retirement account due to the savings between renting and mortgage savings.

• Homebuyer A (2025-2050): Invests $1,000 per month into a retirement account.

Total Payments Made After 30 Years:

• Homebuyer A: Total housing cost of $606,000.
• Homebuyer B: Total rental payments of $720,000.

House Value Appreciation:

Let's consider that the value of the houses appreciates annually at a rate of 3% compounded.

• Homebuyer A's home value at the end of 30 years (2050): Approximately $623,250
• Homebuyer B's rental property: No property ownership

Investment Value After 30 Years:

Homebuyer A, who invested $1,000 per month into a retirement account, would have accumulated substantial wealth in their retirement account. Assuming a modest 5% annual return on investment, here's what they would have saved:

• Homebuyer A: Approximately $844,000

The Wealth Gap Widens:

At the end of 30 years:

• Homebuyer A: Owns a home with a value of approximately $623,250, has approximately $844,000 in their retirement account, and no housing costs.
• Homebuyer B: Has no home equity, no retirement savings, and paid a total of $720,000 in rental costs.

Conclusion:

The decision of when to buy a home and at what interest rate can significantly impact your financial future. In our hypothetical scenario, Homebuyer A, who purchased their home in 2020 at a lower interest rate, ended up with a fully paid-off home, substantial home equity, a well-funded retirement account, and no housing costs. Homebuyer B, who decided to buy in 2025 at a higher interest rate but then chose to rent, missed out on building home equity and was unable to accumulate retirement savings.

Furthermore, the appreciation of Homebuyer A's home value over 30 years added another layer of wealth to their financial portfolio. It's essential to consider not only the immediate financial implications of your homebuying decisions but also the long-term consequences and opportunities for wealth accumulation. When making such an important choice, it's wise to consult with financial advisors, consider the prevailing market conditions, and weigh the potential consequences on your wealth accumulation over time. By doing so, you can make a more informed decision that aligns with your long-term financial goals and secures your financial future.

 

Housing is Stable.

Yes, we have more demand than we have supply. Yes, prices are going up. And no, this is not a hot market, a hot market has those and high velocity. Today’s market is low velocity. We have below normal buyer demand and far lower seller interest. The few buyers we have are easily outpacing the even fewer sellers we have.
 

New contracts are significantly outpacing new listings on a weekly basis. New listing levels are at the lowest in 23 years (back when we had a million fewer people). And the gray area in the back shows the overall listing count decline through week 14. It is too early to tell if last week’s overall supply increase is the start of a trend or an anomaly. Q2 is the time when listings usually increase but so far there is not a lot of indication of that happening. The low mortgage rate lock-in effect continues unabated. We are seeing stability come into the market and demand recovered faster and has stayed consistent for longer than expected. With inventory as low as it is, interest rate fluctuations are not impacting sales prices, which have not only stabilized but are increasing.
 

The laws of supply and demand do not change. Affordability is challenged and interest rate increases only further challenge it and yet demand continues to increase while supply continues to decrease. Under those conditions, prices will only go up.
 

Now is not the time to overprice a listing. Now is the time to price it as close to the market as possible. Buyers are well-educated and with the few new listings coming each week, they are watching daily. When something comes up that presents well and is priced right, it is gone in less than a day.
 

We continue to move through uncharted territory. The uncertainty of the 2020s continues which has been leaking fear into not only housing but the entire economy. Remember, people need real information about what is actually happening to make good choices. The real estate market is stable. Sellers have an advantage and prices are increasing.

Quite the turn around...

 

I mentioned last week that Fountain Hills was beginning to weaken. It is now lower than last month by 1%, but this did not stop it reclaiming the top spot. This is because Paradise Valley has also weakened over the past in the last week and by a larger amount. The high-end of the market is not participating very strongly in the increased demand that we are seeing for the mid-range and low-end. Cave Creek has also retreated in the past week. Scottsdale continues to increase but at a reduced speed.

The Southeast Valley is having a spectacular CMI recovery with Chandler up 43%, Mesa up 38%, Tempe up 25%, Queen Creek up 24% and Gilbert up 19%. Phoenix is also strong at 26% and the inner West Valley too, with Glendale up 25%, Avondale up 42%, Peoria up 20% and Surprise up 21%. Outer areas such as Buckeye and Maricopa are still improving for sellers, but more slowly.

The average change in the CMI over the past month is 20%, lower than the 22%that we saw last week.

Among the 17 largest cities we see 4 currently in a buyer's market below 90, 3 balanced between 90 and 110, and 10 in a seller's market over 110.

Among the secondary cities, Sun Lakes looks very weak with unusually low demand, and Apache Junction and Arizona City have lost momentum.

Overall the market is more favorable to sellers than we expected in December and downward pressure on pricing has been largely eliminated, except in a few market segments.

The more favorable situation has started to bring more sellers into the market and new listings have been more plentiful over the last week. Overall supply remains well below normal and so does demand. Volume is low but it is increasing and market health is improving, not deteriorating as it was for much of 2022.