The trend is proving consistent....

The weakening in demand that we have been reporting for several months is now showing up in the monthly sales numbers:

The monthly sales rate is now just over 9,000, well below last year when it was over 10,000.

Although the monthly sales rate has only declined for the last 5 weeks, our Cromford® Demand Index has been anticipating this since the end of the first quarter. This is because the CDI uses data from listings under contract to compute demand, not just closed listings.

Currently demand appears to be stable and still above normal, but nowhere near as impressive as it was during the second half of 2020. If demand had stayed as strong as last year, I have little doubt that supply would not be rising as it is now. Having said that, supply is only rising at a modest rate and nothing like as fast as it did back in the summer of 2005.

The summer of 2005 looked exactly like a bubble bursting with prices continuing to rise even as demand plummeted and supply soared. In those days the bubble was primed by rampant, mindless speculation and the widespread belief that prices only ever went up. In 2021 we have a very different situation with widespread caution, largely because so many people vividly remember the lessons of 2005. This caution will keep the rate of price increases lower than 2005 and we are already seeing a significant slowdown in appreciation. This is a healthy sign and a per-requisite to avoiding a painful period of declining prices. The latter still looks unlikely based on the current market readings.

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The thing we have to keep reminding ourselves in comparing this year with last year is the aberration caused by the spring lockdown (April -May) followed by the summer recovery from pent-up demand that was sustained throughout the balance of the year.

This is not to contradict the Cromford Daily Observation, just to add (again) that today's sales numbers (9,137) are almost identical to this time in 2019 (9,140) - a very strong year.

Talking Point: To the extent demand is moderating some and prices stabilizing it's a good thing.  We are NOT mirroring 2005 (as pointed out in the last paragraph in the above Daily Observation) and potential buyers should NOT anticipate price reversals. It's steady as she goes...

Still cooling...is it seasonal...or a trend?

 When 'they' say the market is 'mostly cooler' it is a very relative thing. The best evidence of this is another Cromford Report tool, the Cromford Market Index.

We share these charts with you on a pretty regular basis, but for the uninitiated, when a market is balanced (supply of inventory and respective buyer demand) the CMI score is 100.

The degree above 100 gives you the 'temperature' of a hot market.

Conversely, the degree below 100 gives the degree of 'cooling'.

With that in mind see the latest CMI chart below for 17 of the Valley's cities with the month-over-month change:

Cromford interpretation of the chart above ~

Most cities are seeing their CMI drop quickly now as inventory rises. Because supply has been so low recently, the increases are large in percentage terms. For example, Chandler has 150 active single-family listings (excluding UCB and CCBS) which is double the 75 it had at the beginning of April. However, the long-term average count for Chandler is 940 and the maximum we have measured was 2,481. So 150 would seem very low if we had not seen 75 three months earlier.

Paradise Valley is not seeing much of an increase in supply so far, but its demand has been falling from unusually high levels.

Cave Creek is unusual in that its supply is at a similar level to April. It has been zooming up the chart and looks likely to reach the number two spot soon.

With more supply to choose from, and list prices increasing more slowly, some buyers are being attracted back into the market. We are seeing a slight rise in demand in several cities. These include Glendale, Maricopa and Queen Creek. When supply increases and demand falls, the CMI heads down very quickly, but if demand starts to rise at the same time as supply increases, the CMI's rate of decline could well moderate.

An interesting time to be watching the market.

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This is a lot of statistical jargon to absorb if you're not familiar or so inclined. That being said, the effort to parse shifting sands is no small part of our job and the value I can bring to my client's decision-making process. 

As I'm fond of saying, we don't have a crystal ball but we can cite trends and avoid the broad brush that paints the market monotone.

Takeaway: The payoff comes from paying special attention to your market segment of interest and observing/sharing how it contrasts with adjacent markets, both in terms of location and price range e.g. Scottsdale is slightly 'cooler' in terms of the CMI, while down the road in Cave Creek it's heating up by that same CMI measure. Both cities have significant luxury sectors (over $800K), though notice how Cave Creek is significantly more 'affordable' and seemingly trending more so, even as it's CMI is on the rise:

Much needed inventory increase trend...

 For Buyers:

Buyers with budgets over $300,000 may notice that they have more listings to choose from than a few months ago. This is especially true in the price points between $400,000 and $800,000 where inventory has grown 92% since February. When a buyer has, for example, 4 or 5 homes available that meet their criteria instead of just one, they are less inclined to throw all of their ammunition into one home in order to win it. They may still offer full price or more, but may not be under as much pressure to waive contingencies and shorten inspection periods.

As this subtle change proliferates with more inventory, the buyer experience will become less stressful. As the median sale price continues to rise, affordability is something to pay attention to. Not what’s affordable to you necessarily, especially if you’re out of state, but what percentage of the local population can afford your home if you need to sell right away or sometime in the future. A family making the median income in Greater Phoenix could afford 63% of what sold in the 1st quarter of 2021. That was within the normal range of 60-75%, indicating a good time to buy or sell. While we wait until August for the 2nd quarter measures to be released, we expect the new measure to land around 57%, slightly below normal.  This does not indicate that the market will plunge into a buyer market causing prices to decline, but it does indicate a reason to expect prices to rise much slower going forward.

For Sellers:
The Greater Phoenix housing market continues to shift from an extreme seller market into a less extreme seller market. As prices continue to rise, more new sellers are motivated to put their home on the market and fewer buyers are able or willing to pay the higher price. Over the next 5 months, give or take, the market is expected to move into a weaker seller market, driven in part by dwindling affordability and buyer fatigue.

The first half of 2021 has been so insane with contingency waivers and exorbitant offers over asking price that many sellers may not know what a normal seller market looks like. Here are a few things to expect:

• Sales price appreciation will not average 3.1% per month. April 2021 saw prices appreciate 5.1% within 4 weeks. May was 2.3%. June was 1.1%. From 2015-2019, a long-term seller market but much weaker than today, prices appreciated at an average of 0.5% per month with a range between 0.3% and 0.8%.
• There will be more list price reductions. It’s important to remember that the sales price is the LAST thing to respond in a shifting market. One of the first things to respond is a list price, in the form of a price reduction. When a seller overshoots what the market can bear, they will get the silent treatment in the form of zero offers. That triggers a price reduction by the seller. Weekly price reductions have risen 112%   since mid-February from 317 in a week to 672. In a weaker seller market, expect between 1,500-2,000 price reductions every week.
• Sellers will get their price, but pay more in concessions. If a seller prices their home high in anticipation of excess demand but only gets one offer instead of multiple offers, they are more likely to accept home warranties, do repairs and offer concessions. Currently, the percentage of sales involving concessions is very low at 4%, up from 2.7% the week prior. In 2019, a good seller market, 25% of closed sales involved seller concessions.

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'Buyer fatigue'...more 'seller concessions'. Those phrases pop out in Tina's Commentary, albeit not suggesting it's still anything less than a frenetic seller's market. Just less frenetic.

There's also been noticeable press talk about how local buyers are being squeezed by outside forces - competing with equity-rich Californians at the higher end and massive corporate purchasing by corporate interests like Blackstone group (world's largest real estate investor) on the lower end. This is arguably not a happy place for the Arizona locals (buyers). 

On the glass-is-half-full side - those forces don't show any sign of abating any time soon, so local buyers who can navigate what's happening (qualify) would likely be better off making their move sooner than later.

To sellers - I'm a broken record: 'competitive positioning' is their pathway to the happiest outcome available...always!

Slowing Trend Continues...as predicted.

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

For the second week running, we have all 17 cities moving in the same direction over the last month - favorable to buyers. The cooling trend is becoming more apparent as inventory levels start to recover from the extreme lows reached 3 or 4 months ago. Sales counts remain very healthy but the number of listings under contract is in a falling trend meaning that demand is in decline, albeit a very mild decline.

Most areas are seeing higher active counts due to the fast arrival of new listings. Although many of these go under contract in a matter of days, if not hours, the number of listings available has grown by quite large percentages since February. Examples include:

• Phoenix - minimum was 530 on Feb 24 - now we have 809 - up 53%
• Mesa - minimum was 124 on Feb 17 - now we have 255 - up 106%
• Scottsdale - minimum was 377 on Mar 3 - now we have - up 32%

To put these into context, the long term averages are:

• Phoenix - 4,327
• Mesa - 1,536
• Scottsdale - 2,222

Normal levels of supply are still a long way over the horizon.

All 17 cities still have CMI readings over 300 which indicate there are plenty of price increases still to come. However, the pace of appreciation should start to fall off if the CMI continues to show a strong declining trend.

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When they say 'normal levels of supply are still a long way over the horizon', the long term view below dramatically illustrates just how far we currently are from relative balance between supply and demand:

Note: You have to go back about 7 years to 2014 to find that 'balance'.

Interesting how the past 'market peak' rather pales to what we're experiencing today.

Keep in mind that it's easy to be misled ie. We see the pattern of the rapid rise, followed by the rapid fall folks are concerned about being repeated.

Two words should mitigate that concern: Housing shortage: 

Again, the dynamics of that 2004-2006 rise and fall are completely different than what we're experiencing. 

Most notably, while there is plenty of speculation and institutional buying today (Blackrock et al), it's not being fueled by 'liar loans'. First and foremost, we have a housing shortage - it's local, national and international. 

Message to buyers: 

To the extent there are more choices out there, jump on the opportunity. It appears there is still plenty of upside potential.

Message to sellers: 

'Competitive positioning' - pricing your home as 'the next best value all things considered' is always the strategy that delivers the highest price. And that's because 'it's competition for the best home in any given market segment that drives the price (and shortens the marketing time). The operative word is 'competition'.

Here comes the slow down : ) Not much, but buyers will take anything...

 New listings continue to arrive at a strong pace and supply is growing at the fastest rate we have seen since April 2020. Those who did not believe us when we said the market had started to cool in the second half of March must surely believe us now. This is cooling akin to an Arizona Summer when 110 degrees feels quite a bit less toasty than 117 degrees. But still hot.

Here is the weekly chart showing active listings excluding active listings in UCB and CCBS status.

Active counts are leading indicators and it is tricky to predict where they will go, but the last 2 weeks suggest that more people are getting tempted by the high prices.

If you (at the above) chart you can check out 2005 and see how active listings grew massively from around 9,000 to almost 24,000 between June and December. The key question is whether our counts in 2021 will follow a similar trajectory or increase at a more moderate pace. It looks unlikely that the current upward trend will be reversed, but you never know for sure.

Nobody can accuse this market of being boring.

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The Cromford Observation above parses an interesting point we've highlighted - that more sellers may be getting tempted by the high prices'. 

We normally associate the 2006 - 2008 rapid increase in inventory relating to the crash in market demand. But today's Cromford Observation rightly points out that just after the inventory bottomed out and sales were peaking, there was this ramp-up in inventory shown in the graph above. 

The point is, if we do continue to see an increase in inventory, beyond seasonal expectations, as the Daily Observation suggests, it will likely be driven by sellers wanting to cash-in on some of that equity and not a predictor of a reduction in demand (other than seasonal).

We don't see anything in the immediate future that would shake our confidence in things continuing to continue, as our 'bank-grade' Forecasts suggest.

And Collateral Analytics 5-year Forecast for the Phoenix Metro (grey line) and select Scottsdale zip codes:

Also, keep in mind that if we going to be ground in the fundamentals of supply and demand dynamics there's this: The latest Top Inbound / Outbound report from North American Moving Services:

Interesting times to say the least!

Market Update

 A graphical look at things as they stand at the cusp between spring and summer in the Valley...

The extremely anemic 'Active Listing' story continues...

Days inventory is a consequence reflected here:

Another consequence is average Sales Prices are now over asking price:

And pretty much everything is selling:

Pendings are of slightly month-over-month, but up year of year:

Naturally, demand outpacing supply translates to higher prices - annual appreciation now approaching 20% - 

Keep in mind this is the broad brush:

And there you have it.

We'll be paying special attention to the seasonal shift that we're just now seeing some evidence of in that slight month-over-month decrease in Pending Sales.

Affordability Is Not What It Appears To Be

People look at home price appreciation and assume that if home prices rise by 20% and median earnings only rise by 5%, we have a big drop in affordability. However, this is an illusion. If your monthly mortgage payment is $1,000 then a 20% increase in home prices will push that payment up by $200. If your monthly income was $4,000, then a 5% increase in earnings is also $200. So your 5% increase in earnings is enough to cover the extra $200 mortgage payment.

Admittedly your mortgage payment used to be 25% of your budget and it is now 28.6%, but to most people, this will not put them off buying a home, especially when they foresee their home equity increasing, making them wealthier over time. In fact, many homeowners in Greater Phoenix have been earning more from their homeownership than from their employment over the last 12 months.

There will be an impact on the down payment too, which may be more of a disincentive. However, we are seeing a proposal for a $15,000 tax credit for first-time homebuyers, which could offset this. In fact, we are concerned that a $15,000 tax credit could increase demand when the market already has more demand than it can handle. There are no obvious plans to increase supply, so market balance still seems to be a distant spot well over the horizon.

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We hope that 'proposal for a $15,000 tax credit for first-time home buyers' becomes a reality. 

Meanwhile, the above Cromford Daily Observation on the 'illusion' on home price affordability is instructive and worth having in your repertoire of information.

I keep pushing my access to the statewide 'bank grade' charts and graphs I can pull from my Collateral Analytics account. In particular, beyond the AVM (automated valuation model) the Intelligence Reports and 5-year Forecast. They are so timely.

That 5-year Forecast is based on a top-tier, proven algorithm that weighs heavily on 'affordability'. Here's the explanation they give:

The Core Based Statistical Area (CBSA) and Zip Code Forecast chart shows the historical and forecast median single family prices for the user selected zip code and surrounding metro. The price forecasts are based on models developed by Collateral Analytics and are driven primarily by employment growth and home price affordability which are the two most important factors in housing markets.

Here are some sample 5-Year Forecasts for select markets across our fair State:

Note: In smaller markets like Sedona and Prescott the program says it doesn't have sufficient data for those Forecasts. However, I haven't found a market yet where you couldn't run an Intelligence Report - a great market snapshot, with a builtin 2-year look back - a terrific marketing piece that can be easily scaled down to postcard size. 

Flagstaff ~ 

Phoenix ~ Note: In the greater Phoenix Metro you can generate 5-year Forecasts down to the zip code - including zips in Scottsdale (samples below), PV, Gilbert, Peoria, etc.

Scottsdale ~ showing 85254, 85255 and 85257. 85262 added 2nd graph below:

Scottsdale (85262) ~

Tucson ~ Note: You can generate 5-year Forecasts in important sub markets like Oro Valley (85737 shown 2nd graph below):

Oro Valley (85737) ~

Tubac (Nogales 85646) ~ 

I keep pointing to this reference because it is quasi-proprietary ie. no other agents in Arizona have it and or are using it.

And again, it's such a timely 'bank grade' resource for buyers concerned that they may be buying at the top of the market. An objective resource to mitigate this legitimate concern differentiates the RLSIR brand; and by extension, differentiates you!