Market Summary for the Beginning of December
Here are the basics - the ARMLS numbers for December 1, 2020 compared with December 1, 2019 for all areas & types:
- Active Listings (excluding UCB & CCBS): 7,388 versus 13,869 last year - down 46.7% - and down 14.9% from 8,682 last month
- Active Listings (including UCB & CCBS): 12,481 versus 18,322 last year - down 24.1% - and down 10.2% compared with 13,901 last month
- Pending Listings: 7,347 versus 5,864 last year - up 25.3% - but down 6.6% from 7,862 last month
- Under Contract Listings (including Pending, CCBS & UCB): 12,389 versus 9,572 last year - up 29.4% - but down 8.2% from 13,081 last month
- Monthly Sales: 9,205 versus 7,131 last year - up 29.1% - but down 3.6% from 10,024 last month
- Monthly Average Sales Price per Sq. Ft.: $207.71 versus $179.92 last year - up 15.4% - and up 0.2% from $207.71 last month
- Monthly Median Sales Price: $330,000 versus $281,000 last year - up 17.4% - but down 0.6% from $332,000 last month
The supply situation has gone from bad to worse with many areas hitting record lows for the number of homes available to buy. This is not because of a low number of new listings. The flow of new listings was respectable in November and exceeded the total for November 2019 and 2018. However, it increased by far less than the annual increase in demand and many of these new listings went under contract within days of listing. We exited November with 15% fewer homes for sale than we entered it. We have run out of adjectives to describe the weakness of the supply situation. It looks almost certain that supply will collapse further during December, so if we had a good adjective we would need a better one for January 3. Demand is extraordinarily strong for this late in the season, so we currently have a market that is more unbalanced (in favor of sellers) than we have ever seen before, even at the height of the 2005 bubble. But next month will be even more extreme.
You may wonder why average and median prices did not rise in November over October. This is because the sales mix shifted in favor of smaller homes - the average size dropped from 2,061 sq. ft. to 2,016. This is a 2.2% fall, an unusually large shift for a single month. There were more ordinary homes in the mix and fewer of the ultra-expensive luxury homes. The unit volume was huge however, especially considering the tight supply. November was a very short month with only 18 working days, so 9,205 is a very impressive number for closed listings, up almost 30% from last year, when we thought we had a very strong market.
There seems to be a certain amount of denial in some quarters. Concerns about delinquency rates and forbearance are being widely discussed. The idea is often expressed that this can reverse the current situation, as if this is a foregone conclusion. We do not think the level of delinquency is anything like high enough to seriously disrupt the housing market. For such drama you probably need to look to the commercial real estate market, particularly the retail, office and hotel sectors. Housing has been bolstered by the pandemic. This is a worldwide phenomenon, not confined to Arizona or even the USA. At times of medical emergency, people really value their homes across the globe.
We would agree that a market cannot keep getting hotter forever, but according to Black Knight Financial Services, the level of delinquency has fallen for the last 5 months. Prepayment activity is the highest since 2004. It is likely that we will see more distressed sales in 2021 than 2020, but 2020 was a record all-time low and reverting to normal would help a bit with the supply situation. In fact we would have to see a colossal increase in delinquency from current levels just to get back to normal supply conditions.
There is a widely held but mistaken belief that foreclosures cause price declines. It is the other way round. Price declines destroy owner equity which eliminates their incentive to avoid foreclosure. In fact in Arizona foreclosure becomes a preferred option when you have negative equity because it wipes out all the loan, not just the amount covered by the trustee sale proceeds. Many other states do not allow this. Short sales do a similar thing but require many parties to cooperate. Foreclosure is easy and quick and you walk away with your loan written off.
However when you have significant equity the situation is very different. The owner wants to release that equity for their own use. With the average appreciation over the last 12 months of 16%, most owners currently have a lot of equity. Smart people are not going to let their home go to foreclosure if they can help it; they will sell it and repay their loan with the proceeds, keeping the excess funds and their credit intact. This will continue unless prices decline significantly. Prices only decline when there is an excess of supply.
In 2006 average $/SF started to decline after June and established a strong downward trend in 2007 due to a huge excess of supply. This was BEFORE the foreclosure wave really got going, not after. The peak of foreclosures happened between 2008 and 2010, dumping unloved homes onto the market and accelerating the price decline, reaching the lowest point in 2011. Note that it was the excess supply of 2006 that triggered the price declines which then triggered the foreclosures. With excess supply in 2006 and 2007 it was very hard to sell your home to avoid foreclosure and few investors were interested in catching a falling knife.
I hope it is obvious how the current situation is different from 2005. The most significant factors are the very low vacancy rate (very high in 2005) and the very high rate of rent increases. Rising rental rates are a fundamental support for home prices because they represent a great return on investment for potential landlords. In 2005 rental rates were very low and declining, a very ominous sign that few people noticed at the time. Today, rents are increasing at a rate of 15% in just the last 6 months, which you can see here:
Predictions for December:
- closings will be higher than November
- average price per sq. ft. will rise from November
- dollar volume will set a new all-time record for December
- supply will decline further reaching a low point on January 1, 2021
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Year-over-year listing inventory off nearly 50%, with sales up almost 30% and you have the one-liner that pretty much says it all!
Add to that an average annual appreciation at about 16% on home sales; with 15% increase in rents just over just the last 6 months and you have the consequence of the supply / demand imbalance.
Building on a point we've recently made and Bill Gray reinforced yesterday - Arizona and Idaho are the top destination States by inbound moves (according to the moving industry), with relative 'affordability' when compared to other major metros.
Assuming record low interest rates remain as part of the Fed's plan to support the recovering economy, there's every reason to believe the dynamics will continue into 2021.
And finally, always wary of the broad brush, here are the Cromford Report's most recent appreciation figures by List Price Range:
