Year End Real Estate Summary

It was a banner year for Russ Lyon Sotheby’s International Realty. In fact, best ever, pushing 2.5 billion in annual sales. We are indeed grateful for opportunity to assist so many in making their move, as we strive for continued confidence and trust from those we serve.

Factors and Trends that played out in 2013 and set the stage for the residential market in the New Year…

Distress Market Normalized

Looking at the broader Arizona housing market, as has been well documented, we are in full recovery mode. Most notable in 2013 using the greater Phoenix Metro as our reference:

• On average, single-family home prices appreciated 20%. This is the broad brush and varies by price range and location. More on this below. However, in this context the point is that many homes that were 'underwater' are now back in an equity position as prices have risen sharply the past 3 years.

• Generally speaking, home prices have recovered to about two-thirds of what they were at the market peak in mid-2007.

The distressed market segment is nearly back to its historic norms:

• Foreclosure notices are at the long-term norm of 4.5 percent delinquencies, with Arizona actually ranking 42nd in the nation!




Active Listings by Status:

• Short sales – 11% and trending down
• Bank owned (REO) – 9%
• Normal sales – 80% and trending up

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Supply & Demand Balance

We came into 2013 with a short fall of available inventory relative to demand. By the end of the year supply (listings) and demand (sales) came into balance. This is best shown using The Cromford Market Index.

 

Cromford Market Index™ is a value that provides a short term forecast for the balance of the market. It is derived from the trends in pending, active and sold listings compared with historical data over the previous four years. Values below 100 indicate a buyer's market, while values above 100 indicate a seller's market. A value of 100 indicates a balanced market.

The Trends – Inventory; Sales; Prices

In the 3 graphs below we see a pronounced inverse relationship – as inventory (actives) decline, demand (sales) and prices increase. Then, rather abruptly, as inventory increases, sales decrease and the price trend flattens.

 

The Wall Street Journal cites the rise in interest rates as the cause for the decline in sales, most pronounced in Q3 and Q4. This is also somewhat typical and seasonally in Arizona. The expectation is that sales will pick up in Q1 and Q2 of the New Year.

Technology Impacts

Technology continues to impact the home sale process. Most notably, in 2013, worldwide, there were more Internet searches on a mobile device than on a computer!

Interest Rates & The Feds

The government’s influence on the market weighs heavily. Interest rates, while on the rise, remain near historic lows. On the plus side, the fact that low rates are ‘artificially low’ - a product of the Feds policy of quantitative easing, continues to create a ‘window of opportunity’ for buyers who need financing.

The significance of this can’t be overemphasized. For example, if we can assume that as the printing presses slow down, rates will go up (as we see today).

The direct consequence of higher rates is two-fold. First, eroding buying power for buyers needing financing. Then, as homes become more expensive, both demand and upside appreciation are compromised for sellers.

To make it concrete: For every 1% rates go up on an 80% loan (20% down) the effective cost of the property goes up almost 10%. This is because of what the difference in payments would amortize.

Dodd-Frank Legislation: Another government influence that will be in force in 2014 as the Qualified Residential Mortgage (QRM) rules take effect in January. The QRM rules were passed in 2010 as part of the Dodd-Frank legislation. For typical borrowers this should not have that great of an impact.

In any case, Russ Lyon Sotheby’s International Realty clients will have a decided advantage. This is because of our affiliation with EverBank. EverBank has Portfolio Power – meaning they have their own funds, with the ability to make loans based on their own underwriting criteria when appropriate. They also have the ability to underwrite loans within 24 hours of application!

The Luxury Market

While Russ Lyon Sotheby’s International Realty serves all price points with the same 'white glove' standard of care, there is no doubt that we dominate the luxury sector, participating in about 1 out of every 4 transactions over $800K.

The luxury market has improved this past year as well, with generally about 10% year-over-year appreciation.

Below you see Annual Appreciation by List Price Range. These are year-over-year average $ / Sq Ft numbers.

A main take-away is again, how the different price ranges vary. Location, of course, would be another major variable.

Yes, the -4.7 Annual Appreciation for $1.5 - $2M is a stand-out. However, it should be noted that this is based on comparing $ / Sq Ft for closings in the most recent month versus the same period 1 year ago and not a rolling average. The smaller samples from higher price ranges can skew the numbers.

Another interesting and instructive metric when parsing the market by price range is the number of months supply.

Connecting the dots between the Months Supply chart above and two sample Paradise Valley charts below, we see that as the inventory increases, even though luxury sales continue at a fairly steady pace, market times are increasing rather dramatically over $2M e.g the 4 to 5-year supply over $2M shown above.

Looking Forward

Well, the crystal ball is always a bit murky, but we can site trends…and we can borrow from those prognosticators who make it their business to look ahead. This from Brad Inman, publisher of the well-respected industry publication, Inman News:

• The private secondary mortgage market will be back in full force this coming year (though later in 2014), giving a fresh but sustainable lift to the housing market.

• Interest rates will be higher, but housing demand will be fierce, squeezing the inventory and driving up home prices.

…Begging the question…

Is there another Bubble on the Horizon? Talk of another bubble was in the news 6 months ago. However, it has been silenced as inventory increased and sales moderated over the past several months.

For those who still fear another bubble, local real estate guru Mike Orr, publisher of The Cromford Report, gives us the following 10 Reasons why this is extremely unlikely (some quotes; some paraphrasing to reflect current market conditions):

1. The population of Maricopa and Pinal Counties is growing much faster than the housing stock - this is fundamental, yet is hardly ever mentioned. All across the nation there is a housing shortage. New home construction has not kept pace with population growth.
2. In the first 6 months of this year prices were driven by a chronic lack of supply, not by excess demand. Demand is close to normal, albeit off some toward the end of the year.
3. As we pointed out above, prices are still well below the market peak, roughly the same level as 9 years ago.
4. Most buyers are putting their own money in with cash or large deposits, not borrowing it all from foolish lenders as in 2004 and 2005. It is an equity market.
5. Lenders are still being ultra cautious. Demand could increase if they ease up.
6. Investors are mostly buying to rent and filling their homes quickly with tenants - if and when these landlords sell it is a neutral event for the market - one extra home becomes available and one extra family needs a home to live in.
7. If investors started to sell off the small number of empty rentals it would slightly improve our market balance, not create a glut of supply.
8. There are several major long-term obstacles for developers trying to increase the supply of new homes. Shortage of labor and affordable, accessible land are just the first two.
9. We have a low vacancy rate both in homes for rent and for sale. Multiple generations and even multiple families are sharing single homes.
10. No bubble has ever occurred in the same market twice in the same generation. However after a recent bubble everyone is hypersensitive to every price increase and numerous false cries of "bubble" are par for the course.

In Sum

A ‘balanced market’ can translate to a good time for buying or selling, with a slight bias to today's buyers (as current sales are down). In fact, with or without that crystal ball, given the fading window of opportunity with artificially low interest rates, potential homebuyers who need financing should not procrastinate.

Once again, this is the broad brush. For a more precise picture of what’s happening in your particular area and price point of interest you want to talk to your Russ Lyon Sotheby’s International Realty neighborhood specialist. As the saying goes, ‘mastery is the art of making distinctions’.

In this ‘Year in Review’ we’ve shown the key variables at play in today’s housing market, primarily through the lens of the Phoenix Metro market.

How many investors bought in your city???

To round out our little series (from Cromford Daily Observations) on how much, when, what and where investor residential purchases were made there is this somewhat interesting tally. Now when the trivia question is asked, 'what percentage of the total investor revenue went into Scottsdale home purchases this past year,' you can just say 10.5% and be brilliant:)

December 20 - Based on the Affidavits of Value filed in Maricopa County for 2013 up to the end of November, the percentage of home sales revenue that was fuel by investor purchases were as follows:

1. Youngtown 44.8%
2. El Mirage 35.7%
3. Avondale 30.0%
4. Laveen 28.1%
5. Glendale 22.9%
6. Tempe 21.6%
7. Tolleson 21.1%
8. Phoenix 20.0%
9. Apache Junction 18.7%
10. Surprise 17.4%
11. Mesa 14.9%
12. Chandler 13.5%
13. Gilbert 13.3%
14. Peoria 12.9%
15. Litchfield Park 12.6%
16. Gila Bend 10.7%
17. Sun City 10.7%
18. Scottsdale 10.5%
19. Buckeye 10.5%
20. Goodyear 10.3%
21. Paradise Valley 9.8%
22. Carefree 8.9%
23. Fountain Hills 7.6%
24. Tonopah 7.3%
25. Wickenburg 7.3%
26. Cave Creek 6.4%
27. Waddell 6.3%
28. Queen Creek 6.3%
29. Sun City West 5.3%
30. New River 4.7%
31. Rio Verde 4.5%
32. Morristown 3.4%
33. Wittmann 1.2%

Given that investors tend to focus on cheaper homes these percentages of revenue are lower than if we looked at the percentage of unit sales. A normal guideline would be about 10% so the top twenty cities in this list saw more revenue coming from investors than normal. The percentages in the top four cities were abnormally high. If we are to see investors reduce their inventory at some point these cities are where it will have the most effect. Institutional investors represent only about 5% of the rental inventory. Most of the investment properties belong to "mom & pop" small scale investors.

Quick Pre-Christmas Update...

December 12 - The overall Cromford® Market Index is not moving a great deal but is down slightly over the last week. When we look at individual cities and their single family markets, there is a wide range of changes from Avondale (most improved) to Surprise (most deteriorating).

• Avondale has started recovery - up from 93.2 to 95.0 - 99.7 last month. Demand is stable but supply is falling.
• Tempe is improving from a seller's point of view - up from 81.3 to 82.8 over the last week and is now well above the 75.2 we saw last month. Demand is stable and supply is falling.
• Chandler is gaining ground from a seller's perspective - up from 105.6 to 106.8 over the last week - 105.8 last month. Demand has weakened a little, but supply is falling quite quickly now.
• Scottsdale is up very slightly from 100.5 to 100.7 over the last week - 101.4 last month. Demand is flat and supply has declined very slightly.
• Mesa is stable - up very slightly from 97.1 to 97.2 over the last week - 97.6 last month. Demand is flat and supply shows just a hint of falling.
• Peoria has fallen back again - down slightly from 91.2 to 91.0 over the last week - 92.8 last month. Demand has weakened a little, and supply is slightly higher.
• Glendale's is declining again - down from 107.2 to 106.4 over the last week - 106.2 last month. Demand has dropped while supply is stable.
• Queen Creek is still deteriorating slowly - down from 58.8 to 57.6 over the last week - 63.9 last month. Demand has weakened slightly and supply is still growing.
• Phoenix is weakening - down from 92.2 to 90.9 over the last week - 98.75last month. Demand has resumed falling but supply is stable.
• Goodyear is weaker again - down from 82.6 to 81.1 over the last week - 92.7 last month. Demand is down and and supply is increasing.
• Gilbert is a true buyer's market - down from 84.6 to 82.2 over the last week - 93.3 last month. Demand is still dropping and supply continues to grow slowly.
• Surprise is deteriorating further - down from 73.3 to 70.8 over the last week - 83.9 last month. Demand is weaker and supply is still growing fast.

December 11 - Active luxury single family listings (over $500,000) are becoming far more numerous in a number of areas, but not all. Here are some areas with significant increases in actives (excluding UCB):

• Anthem 85086 - 69 versus 34 last year
• Mesa 85207 - 78 versus 38 last year
• Sun Lakes 85248 - 39 versus 19 last year
• Chandler 85249 - 50 versus 34 last year
• Phoenix 85254 - 73 versus 32 last year
• Scottsdale 85259 - 189 versus 138 last year
• Scottsdale 85260 - 93 versus 64 last year
• Fountain Hills - 144 versus 101 last year
• Cave Creek 85331 - 148 versus 84 last year
• Peoria 85383 - 81 versus 32 last year

These are the only areas with a fall:

• Phoenix 85016 - 45 versus 56
• Phoenix 85050 - 20 versus 21
• Chandler 85226 - 5 versus 9

Although the luxury market has been helped by the advances in the stock market and greater availability of jumbo loans, the additional inventory is likely to limit appreciation over the coming months.

The Demand Drop Off - Finally Time to Buy Again....

The change in market balance accelerated during October reaching a shocking pace we almost never see. Only in the second half of 2005 have we seen demand drop at this exceptional speed. Those who think this is just a seasonal effect are mistaken. Demand has been falling dramatically for the past 3 months and October saw that rate increase rather than moderate. The market is already in the balanced zone where the Cromford Market Index™ lies between 90 and 110. It is currently above 100 but the 90's are only about a week away. The pace may yet moderate but at the present rate of change we will be under 90 and in a true buyer's market by the time we reach December. The cooling market is turning positively chilly for sellers, many of whom will find it hard to believe.

When demand falls suddenly like this, active listings pile up because they are not going under contract as they normally would. On top of this, October was the busiest month for new listings since April 2011. Supply is therefore building fast, especially when expressed in months of supply, since the monthly sales rate is in steep decline.

Sellers no longer have any significant bargaining power and will soon be at a disadvantage in negotiations with buyers. Buyers will find themselves being treated with unusual respect and many will be able to negotiate concessions. Sellers who list homes priced well over market value are increasingly unlikely to get showings, never mind offers. This is an amazingly swift turn round in a market that heavily favored sellers as recently as July.

The reasons we are seeing such a steep fall in demand are not clear. Yes interest rates went up at the end of spring, but they have since moved lower again and are not far above the lowest we have seen over the last 40 years. After all, the long term 40-year average rate for a 30-year fixed loan is 8.6%, about twice the current interest rate. Sales prices are some 19% higher than they were last year, but only moderately higher than last spring when the market was doing fine. They are still below the long term trend line, though not far below it. Buyers just seem to be seriously rattled, and the government shutdown and threat of default have unsettled them even more. However the slowdown started long before the government shutdown, so this cannot take all the blame. The national media has been generally unkind to housing in the last few months, covering groundless stories of "zombie homes" fuelled by patently incorrect data from RealtyTrac and dramatically overstating the impact of institutional investors. Anyone reading these stories without easy access to the facts is likely to be scared into staying on the sidelines. Ill-judged comments about housing bubbles by Karl Case caused widespread concern, despite his comrade Robert Shiller's stated opinion that we unlikely to see another housing bubble "in our lifetime". Clearly the average consumer's confidence is fragile. Making a big decision like buying a home requires a reasonable foundation of confidence.

General austerity is another possible reason. The sequester is impacting certain industries more than others, causing job loss and financial hardship. The number of people who are in a financially sound situation and can qualify for a home loan is clearly limited. Over the last ten years a greater percentage of the middle class has slipped into near-poverty instead of becoming wealthier. Loss of ownership of their residence and failure to benefit from the increase in asset values in the last two years has contributed to that effect. Many of the wealthy now own multiple houses, either as vacation homes or as investment properties. But the working poor are less able to achieve home ownership now that lending rules have been toughened up. Cut backs in welfare programs like SNAP mean they will have even less disposable income. Certainly we are seeing little to no evidence of a corresponding change in the rental market. There we find supply and demand are in balance and have been for some considerable time. Rental inventory stands at 2.4 months on ARMLS, exactly the same as this time last year. Since population growth, though modest, is still positive, we can probably expect any lack of demand in re-sale homes to be beneficial to the rental market.

Here are the basic ARMLS numbers for November 1, 2013 relative to November 1, 2012 for all areas & types:

• Active Listings (excluding UCB): 23,330 versus 16,939 last year - up 37.7% - and up 15.4% from 20,215 last month
• Active Listings (including UCB): 26,123 versus 22,399 last year - up 16.6% - and up 12.8% compared with 23,151 last month
• Pending Listings: 6,047 versus 9,714 last year - down 38.2% - and down 8.0% from 6,576 last month
• Under Contract Listings (including Pending & UCB): 8,840 versus 15,245 last year - down 42.0% - and down 7.1% from 9,512 last month
• Monthly Sales: 5,992 versus 7,155 last year - down 16.3% - and down 6.7% from 6,420 last month
• Monthly Average Sales Price per Sq. Ft.: $124.09 versus $104.10 last year - up 19.2% - and up 3.1% from $120.31 last month
• Monthly Median Sales Price: $184,938 versus $151,000 last year - up 22.5% - and up a negligible amount from $184,850 last month

Pending listing counts are still falling, though not quite as fast as last month. However falling pending listings are a harbinger of falling sales counts. These are now dropping fast.

The average price per square foot is still increasing and probably has some further to go before momentum runs out. However there is now little fuel left in the price rocket. We expect prices to stabilize in the area between $125 and $130 per square foot.

We saw a significant jump in cancelled listings during October - the highest since August 2011. However expired listings remain at a subdued level, well below average, though up 18% from this time last year when they were even scarcer.

There is currently little sign of a change in the cooling trend. The first sign should appear in the Cromford Market Index™. This should stop falling so fast and eventually turn round. The second sign will be an increase in pending listing counts.

We will report these in the Daily Observations as soon as they occur.

Real Estate Market Finally Turned...Normal is BACK!!!

October 27 - Today is the day the market returned to the balanced zone. The Cromford Market Index™ stands at 109.5. A balanced market occurs when the Cromford Market Index™ lies between 90 and 110. The months of supply for all areas and types stands at 4.5 months. A balanced figure is between 4.5 and 6.0 months. March 2, 2011 was the last time we saw the Cromford Market Index™ below 110. March 31, 2011 was the last time we saw a months of supply reading above 4.4. Those who have got used to a seller's market over the last two and a half years now have a new type of market to get used to. Greater Phoenix has not spent much time in the balanced zone in the past ten years.

October 26 - Time to study the market by price range - here are some significant indicators for the single family market:

Price Range	Annual Change in Active Listings (excluding UCB)	Annual Change in Pending Listings	Annual Change in Days Inventory	Annual Change in Contract Ratio	Annual Change in Months of Supply	Annual Change in Sales per Month	Annual Change in Monthly Average $/SF
$0 - $99,999	-26.3%	-66.7%	+7.6%	-62.8%	+30.1%	-67.9%	+6.7%
$100,000 to $199,999	+35.8%	-39.3%	+2.4%	-59.2%	+34.2%	-22.5%	+11.6%
$200,000 to $399,999	+64.2%	-20.1%	+6.6%	-51.0%	+25.6%	+17.8%	+9.2%
$400,000 to $799,999	+50.6%	-6.5%	+2.9%	-36.2%	+22.8%	+17.7%	+5.4%
$800,000 and above	+30.7%	+38.3%	-1.8%	-6.1%	+9.3%	+18.0%	+7.0%

For the range under $100,000 we see the supply of active listings dropping, but sales dropping much faster. So although inventory is not building, the market is very much cooler than this time last year. This has a lot to do with the lower buying interest from investors.

From $100,000 to $199,999 supply is up while sales per month and pending sales are well down. Prices have moved the most in this sector inhibiting buyer interest from both investors and first time buyers. This sector is much cooler than last year.

Between $200,000 and $399,999, we have seen a large increase in active listings and a modest increase in sales. However pending sales are down more than 20% and volume is trending down.

From $400,000 to $799,999 supply is also up sharply from last year but pending sales have not dropped as precipitously as for the sectors under $400,000. Pricing has increased the least in this sector

From $800,000 up is the healthiest sector with more supply but more sales and, unlike the other sectors, far more pending sales. The contract ratio is down only slightly and days of inventory is actually lower. This sector has been helped by the improved availability of jumbo loans. A bull market in stocks has also helped keep demand high in this price range.

October 25 - The following cities have moved from a seller's market into the balanced market zone based on having a Cromford Market Index™ for single family homes between 90 and 110.

• Phoenix (108.8)
• Mesa (108.0)
• Peoria (108.2)

It looks like the following will enter a balanced market within the next ten days:

• Scottsdale (116.1)
• Chandler (110.5)
• Glendale (116.0)
• Goodyear (111.7)
• Paradise Valley (118.8)

The following have moved from a balanced market into a buyer's market:

• Gold Canyon (88.6)

The following are already in buyer's markets and are tending to get more favorable for the buyer and difficult for sellers:

• Queen Creek & San Tan Valley (75.5)
• Tempe (81.2)
• Maricopa (59.8)
• Buckeye (87.1)
• Casa Grande (74.9)
• Tolleson (85.8)

October 24 - As expected, sales prices are moving ahead quite briskly now that temperatures are below 100. The average price per sq. ft. for monthly sales (all areas & types) is up to $122.58. This is the highest level since August 8, 2008. It is also 2.5% higher than last month. This must be dismaying to buyers who are waiting to see if prices will come down. If they refuse to buy until prices come down and enough buyers have the same idea, then eventually demand may fall enough for it to exceed supply and price will have to decline to rekindle demand. The big question is whether enough buyers will think like this. Sales price per square foot is very much a trailing indicator and it is likely to take several more months before it stops rising. Also possible is for demand to pick back up again now that interest rates have fallen and the government is reopen. A change in the trend line for the Cromford Market Index™, days inventory and pending listings are the indicators that will quickly tell us if the market is warming up again. At present the cooling trend remains in force.

October 23 - Good news for buyers is that the overall months of supply for all areas and types is up to 4.3 months, the highest reading since March 2011. It is still below average however. The long term average since January 2001 is 5.4 and I would describe anywhere between 4.5 and 6.0 months as normal. Since we have already seen months of supply rise from 2.5 to 4.3 in just 3 months, it looks almost certain that we will be in the normal range within a couple of weeks. Sellers will then have no excess bargaining power as they have enjoyed for the past 2 years.

October 22 - The number of listings under contract, which includes those in pending status plus active listings marked UCB (under contract accepting backup offers), is currently 9.633. We have been around this figure since October 1, varying between 9,455 (on Oct 19) and 9,860 (Oct 15). This is the lowest level we have recorded since February 2009. The peak level was 23,348 reached on April 2010 at the height of the sales activity spurred by the government tax credit.

Today's number is 40.2% below last year on the same date. Last month the year to year comparison yielded a drop of 38.6%, so the lack of demand has got slightly more severe over the last month.

~ Cromford Daily Observations