The Covid Turn Around

Another good historical 'lesson' we can take from the statistical market 'Extremes' we saw yesterday is how the Active Listings in Chart 1 exploded from a low in April of 2005 (8,342 active listings) to over 58,000 in October of 2007 - the consequence of the rise and fall in Demand from 2004 through 2007, shown in Chart 2. 

Chart 1: Active Listings Long Term

Charts 2 and 3 below are also instructive, showing in Chart 2 how even as Sales per Month were plummeting, reaching their low point in January of 2008 of 2,517, Chart 3 shows Sales Prices continuing to rise for 18 months (that red line in Chart 3 shows prices continuing rising for 18 months, even as sales numbers were falling, just before the dramatic, but inevitable collapse of prices). 

Historical 'lesson': Sales Prices are a lagging indicator. 

Chart 2: Sales per Month Long Term:

Chart 3: Average Sales Price Long Term:

To this day we continue to measure current market prices against 'the peak' back in 2007 as a barometer of recovery.

You can see in Chart 3 how we've exceeded 'the peak' Valley-wide in 2020. 

Actionable: It's an interesting exercise to see how your clients area of interest compares with the peak e.g. areas like Arcadia have far exceeded the peak, while other areas like North Scottsdale and Gilbert are riding at or just under the peak.

You can easily generate that data Statewide with your Collateral Analytics account - using the 5-year Forecast that not only shows today as compared with the historical trend, but gives us a 'bank grade' look ahead.

Discussion Point: These Long Term trend charts anchor us in the reality that in spite of the real estate crash in 2008, the consistent Demand evidenced in Sales relative to Supply of Actives continues to inform us of why we have AND WILL LIKELY CONTINUE TO HAVE steady, nation-leading appreciation.

This big picture helps provide a context for the current 'artificially induced pandemic pause' that ironically may produce an even greater surge of activity, as population preferences shift from density to our more horizontal spaces.

Money  Point: As has been focused on multiple occasions recently, the Under Contract stat is our best near term predictor. We see it as not only a welcome sign of recovery and market resilience, which, btw, is today off only 10% year-over-year.

What we've been living through these past 8 weeks may amount to a blip in the long term radar - to the extent the Long Term trend of Demand exceeding Supply in Arizona continues.

Price per sq/ft is good...sometimes.

Q: What do Paradise Valley, Rio Verde and Eloy have in common?

A: Not much, except for a 13% plus year-over-year increase in average Price per Square Foot ($/sq ft)!

Year-over-year Annual $/SF by 41 Valley cities: 

Historically, we see increases in Annual $/Sq Ft correlate more with price range - the lower price range cities, where so much of the competition is, rising more quickly. So the above chart is interesting in not following suit.

What's 'annoying' about $/sq ft generally is how frequently it's referenced, while being a very 'broad brush' in property evaluations - not parsing important distinctions in variables like, condition, age, style and location. This, of course, explains why AVM's (automated valuation models like Zillow) so often miss the mark, to the extent they put too much weight on $/Sq Ft.

Yet, $/Sq Ft is an important benchmark. For example, properties can be 'over-improved', taking them far above the justifiable average $/Sq Ft for that market segment.

RLSIR proprietary tool: Our Collateral Analytics account can give you a 'bank grade' AVM - a great differentiator for you and counter to the Zillow Zestimate you're confronted with online.

My advice: When you as a seller pulls out their Zillow Zestimate, rather than get on the defensive (since Zestimate tends to too high, setting a false expectation), a great strategy (and forgive me if you've heard this before - it's such a great strategy I bring it up often) is to say 'congratulations on doing your homework...you're using a consumer-grade tool, known to have accuracy issues. I have a 'bank-grade' tool that I'd love to share with you.' And that being said, always remember that no AVM can trump the street-level knowledge derived from a carefully crafted CMA. 

The power in a 'bank-grade' AVM is that when it agrees with your CMA assessment, it gives you more gravitas, so you can better influence a buyer when making offers on your home.

Covid Impact & the Turnaround

Although sales counts are still way below normal, we are seeing a strong recovery in the number of listings under contract this week.

Demand established a bottom over the past 4 weeks and is now rising again. A break of the 10,000 listing count is a clear positive signal that buyers are still very interested in Greater Phoenix housing.

_______________________________

Properties going 'Under Contract' is our best indication of the strength / pace of recovery. As the State 're-opens' it will be most interesting to monitor this metric. 

What we might expect is that pent-up demand will cause that 2020 trend line to bypass 2019 going into the summer months. In other words, hopefully we'll see the strongest sales in the upcoming summer months ever. 

For reference, the chart below shows ARMLS sales by month over the last 10 years. Keep in mind closings represent properties that went under contract 30-45 days earlier. 

We see historically how the Phoenix Metro isn't as 'seasonal' as some might expect. For example, November closings (written in the heat of September / October) are off about 30% from the height of closing in May (written in the Valley 'high season' of March / April). Yet, it's very much a year-round market.

The point is this year, assuming pent-up demand, we might speculate this differential could be all but erased. 

We'll see.

Mortgage Crisis and Fed Unintended Consequences - Why Dropping Interest Rates Hurts Real Estate

March 26, 2020 Mortgage Crisis and Fed Unintended Consequences Article Provided By MBS Highway/Barry Habib

The Coronavirus Meltdown The current Coronavirus crisis is having a critical impact on the Mortgage Industry, which could potentially make the 2008 financial crisis pale in comparison. The pressing issue centers around capital that’s required by Mortgage Lenders to be able to function and meet covenants that are required for them to continue to lend.

Here’s How The Mortgage Market Works Let’s begin with the mortgage process. A borrower goes to a Mortgage Originator to obtain a mortgage. Once closed, the loan is handled by a Servicer, which may or may not be the same company that originated the loan. The borrower submits payments to the Servicer, however, the Servicer does not own the loan, they are simply maintaining the loan. This means collecting payments and forwarding them to the investor, paying taxes and insurance, answering questions, etc. While they maintain or “service” the loan, the asset itself is sold to an aggregator or directly to a government agency like Fannie Mae (FNMA), Freddie Mac (FHLMC), or Ginnie Mae (GNMA). The loan then gets placed inside a large bundle, which is put in the hands of an Investment Banker. That Investment Banker converts those loans into a Mortgage Backed Security (MBS) that can be sold to the public. This shows up in different investments like Mutual Funds, Insurance Plans, and Retirement Accounts. The Servicer’s role is very critical. In order to obtain the right to service loans, the Servicer will typically pay 1% of the loan amount up front. The Servicer then receives a monthly payment or “strip” equal to about 30 basis points (bp) per year. Because they paid about 1% to obtain the servicing rights and receive roughly 30bp in annual income, the breakeven period is approximately 3 years. The longer that loan remains on the books, the more money that Servicer makes. In many cases, the Servicer might want to use leverage to increase their level of income. Therefore, they may often finance half of the cost of acquiring the loan and pay the rest in cash.

Servicer Dilemma As you can imagine, when interest rates drop dramatically, there is an increased incentive for many people to refinance their loans more rapidly. This causes the loans that a Servicer had on their books to pay off sooner… often before that 3-year breakeven period. This servicing runoff creates losses for that Mortgage Lender who is servicing the loan. The more loans in a Mortgage Lender’s portfolio, the greater the loss. Servicing runoff, or even the anticipation of it, can adversely impact the market valuation of a servicing portfolio. But at the same time, Lenders typically experience an increase in new loan activity because of the decline in interest rates. This gives them additional income to help overcome the losses in their servicing portfolio. But the Coronavirus has caused a virtual shutdown of the US economy, which has created an unprecedented amount of job losses. This adds a new risk to the servicer because borrowers may have difficulty paying their mortgage in a timely manner. And although the Servicer does not own the asset, they have the responsibility to make the payment to the investor, even if they have not yet received it from the borrower. Under normal circumstances, the Servicer has plenty of cushion to account for this. But an extreme level of delinquency puts the Servicer in an unmanageable position.

“I’m From The Government And I’m Here To Help" In the Government’s effort to help those who have lost their jobs because of the Coronavirus shutdown, they have granted forbearance of mortgage payments for affected individuals. This presents an enormous obstacle for Servicers who are obligated to forward the mortgage payment to the investor, even though they have not yet received it. Fortunately, there is a new facility set up to help Mortgage Servicers bridge the gap to the investor. However, it is unclear as to how long it will take for Servicers to access this facility. But what has not been yet contemplated is the fact that a borrower who does not make their very first mortgage payment causes that loan to be ineligible to be sold to an investor. This means that the Servicer must hold onto the asset itself, which ties up their available credit. And with so many new loans being originated of late, the amount of transactions that will not qualify for sale is significant. This restricts the Lender’s ability to clear their pipeline and get reimbursed with cash so they can now fund new transactions

Mark To Market This week—Due to accelerated prepayments and the uncertainty of repayment, the value of servicing was slashed in half from 1% to 0.5%. This drastic decrease in value prompted margin calls for the many Servicers who financed their acquisition of servicing. Additionally, the decreased value of a Lender’s servicing portfolio reduces the Lender’s overall net worth. Since the amount a lender can lend is based on a multiple of their net worth, the decrease in value of their servicing portfolio asset, along with the cash paid for margin calls, reduces their capacity to lend.

Unintended Consequences The Fed’s desire to bring mortgage rates down isn’t just damaging servicing portfolios because of prepayments, it’s also wreaking chaos in Lenders’ ability to hedge their risk. Let’s look at what happens when a borrower locks in their mortgage rate with a Mortgage Lender. Mortgage rates are based on the trading of Mortgage Backed Securities (MBS). As Mortgage Backed Securities rise in price, interest rates improve and move lower. A locked rate on a mortgage is nothing more than a Lender promising to hold an interest rate, for a period of time, or until the transaction closes. The Lender is at risk for any MBS price changes in the marketplace between the time they agreed to grant the lock and the time that the loan closes. If rates were to rise because MBS prices declined, the Lender would be obligated to buy down the borrower’s mortgage rate to the level they were promised. And since the Lender doesn’t want to be in a position of gambling, they hedge their locked loans by shorting Mortgage Backed Securities. Therefore, should MBS drop in price, causing rates to rise, the Lender’s cost to buy down the borrower’s rate is offset by the Lender’s gains of their short positions in MBS. Now think about what happens when MBS prices rise or improve, causing mortgage rates to decline. On paper the Lender should be able to close the mortgage loan at a better price than promised to the borrower, giving the Lender additional profits. However, the Lender’s losses on their short position negate any additional profits from the improvement in MBS pricing. This hedging system works well to deliver the borrower what was promised, while removing market risk from the Lender. But in an effort to reduce mortgage rates, the Fed has been purchasing an incredible amount of Mortgage Backed Securities, causing their price to rise dramatically and swiftly. This, in turn, causes the Lenders’ hedged short positions of MBS to show huge losses. These losses appear to be offset on paper by the potential market gains on the loans that the lender hopes to close in the future. But the Broker Dealer will not wait on the possibility of future loans closing and demands an immediate margin call. The recent amount that these Lenders are paying in margin calls are staggering. They run in the tens of millions of Dollars. All this on top of the aforementioned stresses that Lenders are having to endure. So, while the Fed believes they are stimulating lending, their actions are resulting in the exact opposite. The market for Government Loans, Jumbo Loans, and loans that don’t fit ideal parameters, have all but dried up. And many Lenders have no choice but to slow their intake of transactions by throttling mortgage rates higher and by reducing the term that they are willing to guarantee a rate lock. Furthering the Fed’s unintended consequences was the announcement to cut interest rates on the Fed Funds Rate by 1% to virtually zero. Because the Fed’s communication failed to educate the general public that the Fed Funds Rate is very different than mortgage rates, it prompted borrowers in process to break their locks and try to jump ship to a lower rate. This dramatically increased hedging losses from loans that didn’t end up closing

Even Stephen King Could Not Have Scripted This It’s been said that the Stock market will do the most damage, to the most people, at the worst time. And the current mortgage market is experiencing the most perfect storm. Just when volume levels were at the highest in history, servicing runoff at its peak, and pipelines hedged more than ever, the Coronavirus arrived. Lenders need to clear their pipelines, but social distancing is making it more difficult for transactions to be processed. And those loans that are about to close require that employment be verified. As you can imagine, with millions of individuals losing their jobs, those mortgages are unable to fund, leaving lenders with more hedging losses and no income to offset it.

What Needs To Be Done Now Fortunately, there are many smart people in the Mortgage Industry who are doing everything they can to navigate through these perilous times. But the Fed and our Government needs to stop making it more difficult. The Fed must temporarily slow MBS purchases to allow pipelines to clear. Lawmakers need to allow for first payment defaults, due to forbearance, to be saleable. And finally, the Fed must more clearly communicate that Mortgage Rates and the Fed Funds Rate are not the same.

Unreal demand in AZ markets...

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.

Here's what it looks like Valleywide in the most currently post Cromford Market Index chart:

The table below shows the Cromford® Market Index values for the single-family markets in the 17 largest cities:

In one way, this is more favorable to sellers than last week - there is only one city deteriorating for them. However the average CMI changed by +7.9% which is slightly below the +8.4% we saw seven days ago.

Either way, life got even more difficult for buyers and the negotiation advantage favors sellers to an extreme degree.

It is notable that Buckeye and Maricopa saw the largest increases, both of which have a relatively large supply of homes for sale. However their supplies are dropping at an alarming rate, probably fueled by very low interest rates which makes home more affordable even at higher purchase prices..

The stock market is having a dreadful time with the the S&P 500 entering a bear market this week. This kind of event usually means the top end of the housing market loses a lot of demand. 178.8 is still a very high CMI for Paradise Valley but it would not be a surprise if this fell further over the next few weeks. In PV supply is well below the seasonal norm, but it can hardly be described as scarce and the Cromford® Demand Index shows a clear declining trend.

Elsewhere supply is very tight and demand is holding up with sellers in Tempe, Avondale, Glendale, Phoenix and Scottsdale seeing double digit percentage rises in their CMI.

Updated Appreciation Numbers AZ #1!!

Cromford Daily Observation- We have posted the latest Case-Shiller® numbers to our long term chart here.

The latest series relates to sales between October and December 2019. Compared with the previous month's series we see the following changes:

1. Phoenix +0.59%
2. Seattle +0.21%
3. Washington +0.16%
4. Portland +0.15%
5. Tampa +0.14%
6. San Diego +0.09%
7. Boston +0.09%
8. Las Vegas +0.09%
9. New York +0.08%
10. Miami +0.07%
11. Charlotte +0.05%
12. Los Angeles +0.04%
13. San Francisco +0.04%
14. Atlanta -0.08%
15. Detroit -0.10%
16. Chicago -0.10%
17. Denver -0.11%
18. Dallas -0.21%
19. Minneapolis -0.61%
20. Cleveland -0.71%

Phoenix jumped from fifth to first place. The national average was +0.08% so Phoenix increased at seven times the national average and almost three times as fast as the number 2 city.

The year over year comparisons are below:

1. Phoenix 6.5%
2. Charlotte 5.3%
3. Tempe 5.2%
4. San Diego 4.7%
5. Boston 4.5%
6. Atlanta 4.1%
7. Seattle 4.1%
8. Denver 3.7%
9. Portland 3.7%
10. Minneapolis 3.7%
11. Cleveland 3.6%
12. Washington 3.4%
13. Detroit 3.4%
14. Miami 3.2%
15. Los Angeles 2.7%
16. Las Vegas 2.6%
17. Dallas 2.6%
18. San Francisco 2.1%
19. Chicago 1.0%
20. New York 1.0%

The national average was 3.8%. Phoenix remained in the top spot and opened up a gap of 1.2% over the number 2 city.

We knew supply was low....now demand has also increased!!

When supply is very low, an ordinary level of demand feels like very strong demand because there are so many buyers chasing each available home for sale. However, there are some indications that the level of demand is starting to increase beyond ordinary. One of these is at the national level where the Mortgage Banker's Association has reported a massive jump in loan applications. The 3-week moving average has risen 20% since December to a new high point for the cycle. This is probably for a number of reasons:

• low interest rates
• confidence in the strength of the economy
• loosening lending standards
• buyers wanting to avoid missing out as prices start to accelerate upwards again

Whatever the reasons, a surge in demand in January, before the spring buying season has properly got underway, suggests we are going to have an extremely unbalanced situation with demand rising and supply falling even further.

If you are looking to buy and fall into the category of "I'll wait this out" it could be very expensive.

The scenario is obviously specific to the individual and would be based on your price range, location etc.  The most obvious, and most common circumstance, would be a sale and "upgrade" in either size or location.  If this is the case you more than likely would be hit with 2 factors making a "hold" scenario not financially beneficial.  Appreciation is often % based so less expensive homes appreciate at a slower rate meaning you are losing purchasing power as the more expensive home you're looking to purchase in the future will go up in value faster than the one you currently own.  The second factor is interest rates.  With no end in sight on the economy increasing you will lose buying power with any rate increase.  

This is only exponential if you are currently renting.

Now, if you know me at all you know that I will try everything in my power to convince you to not sell and move.  It's just to expensive most of the time.  However, given the circumstance above it would make much more sense to do this asap.

As an offset, a great example of who should stay put would be someone looking to downsize.  Again, price and location-specific however your increases over time in a fast appreciating market pay off in larger chunks.  

If you want to chat through your circumstance I dork out on this stuff.  Please don't hesitiate to reach out.