Here are the basics - the ARMLS numbers for September 1, 2021 compared with September 1, 2020 for all areas & types:
Active Listings(excluding UCB & CCBS): 6,873 versus 8,028 last year - down 14.4% - and down 3.3% from 7,105 last month
Active Listings(including UCB & CCBS): 10,988 versus 13,178 last year - down 16.6% - but up 0.7% compared with 10,913 last month
Pending Listings: 7,917 versus 7,892 last year - up 0.3% - and up 9.4% from 7,236 last month
Under Contract Listings(including Pending, CCBS & UCB): 12,032 versus 13,042 last year - down 7.7% - but up 8.9% from 11,044 last month
Monthly Sales: 9,051 versus 9,213 last year - down 1.8% - and down 1.0% from 9,146 last month
Monthly Average Sales Price per Sq. Ft.: $249.31 versus $194.97 last year - up 27.9% - but down 0.5% from $250.66 last month
Monthly Median Sales Price: $401,000 versus $325,000 last year - up 23.4% - and up 0.3% from $400,000 last month
Many surprising changes have occurred in the market over the past month.
First we see fewer active listings (excluding UCB and CCBS) at the start of September than we had at the start of August. After a rise of almost 25% during July, this is quite a turn up for the books. The effect is exaggerated by the fact that Sep 1 falls on a Wednesday and Aug on a Sunday. Wednesdays are usually the lowest day of the week for active listings while Sundays are just shy of the peak on Saturdays.
This unexpected fall is mainly caused by two factors:
the rate of arrival of new listings has started to fall, especially over the last 2 weeks
the demand from iBuyers and investors has intensified, taking listings under contract more quickly than usual
Another surprise is the strength of the pending and under contract counts, also confirmation of the second bullet above.
Ordinary home buyers are losing some of their motivation, thanks to prices that are vastly higher than last year. Despite low interest rates, affordability has slipped below the normal range for Greater Phoenix.
Sales counts (closed listings) are still lower than last month and last year, but by much smaller margins than in July.
The monthly average $/SF dropped for the second straight month, but the fall was just 0.5% each month and we do not think this will be repeated in September based on the contracts that have been signed during August. However, it clear that the runaway appreciation we saw in Jan through May has been halted.
Other interesting indicators show mixed signals:
The contract ratio jumped from to 155.4 to 175.1, indicating that the market has heated up over the last month
The average closed $/SF was 0.68% higher than the list price, down from 1.47% last month - indicating that the market has cooled over the last month.
If it were not for the activity of investors and iBuyers, and particularly the latter, the market would have cooled during August. This would have been following the trend established since April. However iBuyers have purchased so many homes over the last month that they are significantly distorting the market dynamics. These homes are mostly going to be re-marketed shortly. So they will almost certainly increase supply over the coming weeks. To achieve these huge increases in purchase volumes, iBuyers have made offers well in excess of the pricing that we saw from them prior to 3Q 2021. Since appreciation has been much weaker during this same period, it remains to be seen how they will be priced for re-sale. It is possible that either gross margins will have to fall or time on market will have to rise. Normal buyers no longer have the appetite that we experienced during 1Q and early 2Q, so they are going to be more sensitive to pricing. Achieving sale prices well over cost could prove quite tricky.
Investors intending to rent out their properties are a different matter, and the rapid rise in rents over the past year has justified them splashing out. Indeed far more homes are going from iBuyers straight to the rental operators than we saw prior to July 2021. This takes homes off the re-sale market for a long time and reduces supply. Large scale investors with deep pockets are crowding out smaller investors.
We have seen larger buying sprees from investors before, notably between 2011 and 2013. However we have never seen iBuyers so determined to increase their top line. To put the situation into context, the iBuyers have purchased about 2,850 homes over the last 3 months.That represents almost 9% of re-sale purchases. Recorded iBuyer sales during the same time total less than 1,000, about 3% of re-sales. We can see that the iBuyers (particularly Opendoor and Zillow) have increased their inventory massively. If iBuyers had not done this, we estimate that supply would already be higher by some 1,800 listings, which would have caused the Cromford® Market Index to drop to a much lower value than today. We conclude that pricing would also be weaker without their intervention. This begs the question: what happens if they stop buying on this massive scale?
Investors, too, can decide to stop their buying spree at a moment's notice. The market is therefore more precarious than if demand were primarily growing through owner-occupiers.
Whoever wished that we live in interesting times is getting their wish granted.
Supply Up 42% Since May, Price Reductions Up 131% Affordability Dips Below Normal to 56%
For Buyers: There is a little relief ahead for buyers in Greater Phoenix. Supply continues to rise in price points between $300K-$1.5M and buyer demand has settled into a normal seasonal cool down that is expected to last through the end of the year. What this means for buyers is the 2nd half of 2021 so far has more choice and less competition. There are two things going on right now in the market. The first is a non-seasonal increase in supply, fueled by a high number of new listings hitting the market every week. Typically, August is the low point of the summer season for supply. However, this year it is the high point and continuing to rise, up 42% since May. That’s good news for buyers as it provides more choice. The second is a seasonal decline in buyer activity. Typically, buyer demand shoots up in the first half of the year, peaking around May, then it gradually declines in the 2nd half of the year. Last year the market saw the opposite due to the pandemic, demand dropped when it was supposed to rise and rose when it was supposed to drop. The return to a normal seasonal rhythm in 2021 means that there may be slightly less competition from other buyers in the 3rd and 4th quarters. This doesn’t mean the housing market has gone cold; it has simply made it a little more tolerable to navigate. To put it in numbers, on April 8th, there were 12,862 listings under contract and only 4,177 active. Today on August 9th, there are 11,743 under contract and 7,166 active. Add a recent decline in interest rates keeping payments down and exhausted buyers have a little more room to breathe. For Sellers: The Home Opportunity Index (HOI), published by the National Association of Home Builders every quarter, measures housing affordability based on the median family income per metro area. Last quarter, the HOI for Greater Phoenix fell to 56 (we predicted it would be 57 based on preliminary MLS data). This is below the normal range for the Phoenix metro area of 60-75. What does this mean? This means that a household making the median family income of $79,000 per year could technically afford 56% of what sold in the 2nd Quarter of 2021. The last time the HOI dipped below 60 was in the 4th Quarter of 2018 when it hit 57. The market responded with a drop in annual appreciation from 10% to just 4% within 3 months. Since June of this year, annual appreciation of the monthly median sales price has declined from 32% to 28%. As affordability declines, it’s reasonable to expect the market will begin to resist the prices sellers initially ask for their homes. In other words, there will be fewer buyers able to bear dramatic monthly increases in home costs like those seen over the past year. Meanwhile, exuberant sellers continue to list their homes at prices that defy comparable sales. As these homes sit for an extra day or two on the market without an accepted contract, weekly price reductions have risen 131% since May with a median price drop of $14,000. Typically, the median price reduction is $5,000. Of course, there are still properties closing over asking price. However, those contracts were accepted approximately 1-1.5 months ago when the market was hotter than it is now. The percentage of sales over asking price has declined from 60% to 55% over the past two months, with the median amount over list price declining as well from $20,000 to $15,000. We expect this trend to continue.
Here are the basics - the ARMLS numbers for August 1, 2021 compared with August 1, 2020 for all areas & types:
Active Listings(excluding UCB & CCBS): 7,105 versus 8,477 last year - down 16.2% - but up 24.7% from 5,699 last month
Active Listings(including UCB & CCBS): 10,913 versus 13,259 last year - down 17.7% - but up 11.6% compared with 9,783 last month
Pending Listings: 7,236 versus 7,550 last year - down 4.2% - and down 0.8% from 7,294 last month
Under Contract Listings(including Pending, CCBS & UCB): 11,044 versus 12,332 last year - down 10.4% - and down 2.9% from 11,378 last month
Monthly Sales: 9,131 versus 10,544 last year - down 13.4% - and down 10.3% from 10,179 last month
Monthly Average Sales Price per Sq. Ft.: $250.93 versus $191.21 last year - up 31.2% - but down 0.5% from $252.15 last month
Monthly Median Sales Price: $400,000 versus $315,000 last year - up 27.0% - and up 0.8% from $397,000 last month
Supply continues to move higher. We would usually consider a 24.7% increase in one month to be an exceptional growth rate. However, we are rising from a very low point and the number of active listings without a contract is still down 75% from what would be considered normal. We are witnessing new listings arrive at a faster rate than we usually see at this time of year, especially those priced between $400,000 and $1 million. This is helping buyers, but there are still far more buyers than homes for sale.
I still read articles describing demand as exceptionally strong. This is absurd. Demand is only slightly above normal and has been getting weaker over the last several months. This is obvious both from the pending and under contract counts (down compared with last month and last year) and from the monthly sales counts (down compared with last month and last year). If demand were strong, then all these numbers should be responding to the increase in supply. They are not.
The large majority of market commentators have not grasped that demand is not the issue. Interest rates are not the issue either. Everything today is about supply. Even after a rise of almost 25% there is nowhere near enough supply to take the stress out of the market.
Demand has changed its make-up since the start of the year. Owner-occupiers are down, while second-home buyers are up, particularly those from out-of-state. Also more active are iBuyers and all types of investors, with fix and flip and buy-to-rent investors filling the gap left by owner occupiers. Many buy-to-rent operators are buying from each other, and a few are building neighborhoods entirely for rent. This practice started in Phoenix in 2012 and the original local company that built the first rental neighborhood in Gilbert has just sold it complete to one of the large institutions. The build-to-rent business does not affect our numbers since the entire neighborhood is owned by a single company and the homes are never listed for sale. It is similar to the multi-family apartment block market. The only difference is that the homes are physically more separated from one another, an attractive benefit during a pandemic.
Over the last year, prices have not been rising because of strong demand or low interest rate, as often stated by the media. They have been rising because of extremely poor supply. Buyers do not pay more for a home because they can. They pay more because they have to. Multiple bids make them pay more, unless they drop out. Low interest rates merely allow them to compete. If there were more homes for sale, they would get the home for less than the asking price. During July the average buyer had to pay 1.4% over the asking price.
New home builders currently experience elevated demand because so many buyers have given up on trying to find a re-sale property. But the demand they perceive is due to the low supply of re-sale homes, not some unusual build up of buyer demand. The new and re-sale markets are not really separate because almost every buyer can switch from one to the other based on personal decisions. Buyers are spilling over to the new home market that would normally have chosen a resale home.
The market remains hot but has been cooling for 4 months now and this is reflected in a large array of measurements. For example:
In June, buyers were paying 1.8% more than list price on average, well above the current 1.4%
The listing success rate is down to 89.3%, having peaked at 93.1% in May
The contract ratio is down to 155, having reached 332 in March
Prices have been leveling off over the past month. This is consistent with the seasonal trend that weakens prices during the third quarter in most years. It is caused by a slowdown in high end sales during the hottest months (May through September) We did not see that effect last year because of the lock-down, but this year we expect 3Q to be nothing like the explosive 2Q. There is still no long-term downward pressure on prices and this pressure is unlikely to emerge until supply rises much higher than current levels.
What’s Ahead for Sellers as Demand Weakens Median Sales Price Up 29%, Fewer Contracts
Buyers with budgets over $300,000 may be noticing that they have more listings to choose from compared to 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.
Here are the basics - the ARMLS numbers for July 1, 2021 compared with July 1, 2020 for all areas & types:
Active Listings(excluding UCB & CCBS): 5,699 versus 8,788 last year - down 35.2% - but up 15.9% from 4,917 last month
Active Listings(including UCB & CCBS): 9,783 versus 14,279 last year - down 31.5% - but up 4.5% compared with 9,361 last month
Pending Listings: 7,294 versus 7,993 last year - down 8.7% - and down 6.8% from 7,829 last month
Under Contract Listings (including Pending, CCBS & UCB): 11,378 versus 13,424 last year - down 15.2% - and down 7.6% from 12,317 last month
Monthly Sales: 10,204 versus 9,718 last year - up 5.0% - and up 5.6% from 9,665 last month
Monthly Average Sales Price per Sq. Ft.: $252.04 versus $182.73 last year - up 37.9% - and up 1.3% from $248.83 last month
Monthly Median Sales Price: $397,000 versus $305,000 last year - up 30.2% - and up 1.8% from $390,000 last month
Supply is now on a clear upward trend, growing almost 16% from last month, though it is still down over 35% from this time last year and a very long way below normal. This upward trend is thanks to a strong flow of new listings and a decline in the rate of listings going under contract.
Demand looks strong when we look at the closed sales numbers, up 5% from last year and 5.6% higher than last month. However June 2021 contained 22 working days, 10% more than May 2021, so the number of closings per day was actually down 4% compared with last month. Demand looks very weak when we look at the listings under contract, which is the forward-looking element of demand. This count is down over 15% compared with this time last year and down almost 8% from last month. This is a clear signal that the rapid rise in prices is having the expected dampening effect on demand.
We expect sales rates to slow in the second half of 2021.We forecast that prices will continue to rise but at a slower pace than during the first half. These means that dollar volume will remain very high compared with historical numbers.
The CMI looks likely to fall well below 400, but the rate of decline will depend very much on the rate of arrival of new listings. The first several days of July are of little use as a guide because of Independence Day, but we should have a clearer picture of supply patterns by the middle of July.
We anticipate a growing divergence between the supply patterns of 2021 and 2005, since there were many thousands of empty homes held by speculators in 2005 which were listing for sale during the third quarter of 2005. We see very few of these speculative empty homes in 2021. In July 2005, we got 12,580 new listings across Greater Phoenix, far above the monthly rate we are seeing in 2021. There have been 58,109 new listings across Greater Phoenix during the first 6 months of the year.
Should Buyers Wait to Buy? Median Sales Price $390K, up 32% from 2020
For Buyers: There’s a lot of conflicting advice for buyers online these days, and there’s no shortage of headlines advising them to wait. Many authors cite the unpleasantness of multiple competing offers and rising prices as the reason to wait out the market. This is despite their acknowledgment that home values are not expected to stop rising in the near future and that interest rates are expected to eventually rise.
It’s undeniably more pleasant to purchase a home when there’s a plethora to choose from and you’re the only game in town, however there’s a reason you may be the only buyer in that scenario. That’s the end of a Seller Market, and signifies the top of price.
The top of price is either the beginning of a Balanced Market or a Buyer Market, which either way means the end of exciting annual appreciation rates. There’s a misconception that waiting for a Buyer Market to buy a home is a good idea. This is not true. Home values decline in Buyer Markets because, by definition, there are more homes than buyers to buy them. While that sounds like a magical dream land these days, the reality is that no one likes to purchase a home and watch its value decline or go flat. Ironically, if you want your home to appreciate right after you buy it, then you want to buy in a Seller Market. Perhaps we should rename Seller Markets “Winner Markets”, because both buyers and sellers win in a sense.
Admittedly, the extreme Seller Market Greater Phoenix is experiencing doesn’t feel like “winning”, but there is some relief on the horizon. The market has been losing strength since mid-March, but it’s not plummeting. At its current rate of decline, the Greater Phoenix market is still projected to remain in a Seller Market for 16 months. That’s a target of October 2022 before prices stop rising. As the Seller Market weakens, appreciation rates will still be positive moving forward but there will be a little more supply to accommodate demand. My advice to buyers frustrated with the market, don’t wait for the market to balance out. Take a breath, take a vacation, but don’t give up. Change is subtle.
For Sellers: Typically this time of year we start talking about the imminent “Summer Slowdown” in contract activity as kids are out of school and people take vacations to escape the heat. Last year, the Greater Phoenix market didn’t experience this typical seasonal trend. As trips were cancelled and people stayed home, there was a large surge in purchase contract activity that continued through the end of the year. This year, as people are getting back to some form of normalcy, it looks like we will see a seasonal slowdown in buyer activity once again. If the trend continues and the market follows previous years, we should expect contract activity to slowly decline through the end of the year.
The seasonal slowdown is typically nothing to be concerned about, mainly because there tends to be a dip in new listings as well. However this year there’s an event coming up that could alter that scenario, that is the end of forbearance for many homeowners. While the vast majority of forbearances have ended with homeowners staying in their home, anywhere from 16%-20% have resorted to selling their home one way or another according to the Mortgage Bankers Association. This could result in an increase in supply over the next few months, adding extra days of marketing time to your listing and possibly a few price reductions. Stay tuned.
Commentary written by Tina Tamboer, Senior Housing Analyst with The Cromford Report
Here are the basics - the ARMLS numbers for June 1, 2021 compared with June 1, 2020 for all areas & types:
Active Listings(excluding UCB & CCBS): 4,917 versus 11,917 last year - down 68.7% - and down 3.2% from 5,080 last month
Active Listings(including UCB & CCBS): 9,361 versus 17,171 last year - down 45.5% - and down 0.8% compared with 9,439 last month
Pending Listings: 7,873 versus 7,224 last year - up 9.0% - and up 0.6% from 7,829 last month
Under Contract Listings(including Pending, CCBS & UCB): 12,317 versus 12,478 last year - down 1.3% - but up 1.1% from 12,187 last month
Monthly Sales: 9,692 versus 7,045 last year - up 37.6% - but down 5.0% from 10,204 last month
Monthly Average Sales Priceper Sq. Ft.: $248.37 versus $179.79 last year - up 38.1% - and up 2.0% from $243.39 last month
Monthly Median Sales Price: $390,000 versus $293,000 last year - up 33.1% - and up 4.6% from $373,000 last month
We note that the number of active listings is slightly higher than last month. That is entirely because June 1 fell on a Tuesday while May 1 fell on a Saturday. Saturdays tends to have much higher counts because of all the new listings activated on Thursday and Friday. In contrast, Tuesdays and Wednesdays have the lowest counts every week. If we compare the same day of the week, the number of active listings is up from last month by about 7%. When supply is this low, the signal to noise ratio is poor, so we have to look more closely to get a correct impression. Supply is definitely rising, but not at a rate to help buyers very much, or to raise an alarm. It is rising because new listings are coming along at a faster rate than normal. However most of them are getting offers in the first week and they do not last very long. The market remains very hot even though it has cooled since March.
The demand numbers are moderating, with monthly sales down 5% compared with last month. However listings under contract are up slightly which means the downward trend in demand has stalled for now.
The rate of change in both supply and demand are both now moderate, but the rate of change for prices remains very high. We are seeing appreciation rates of 38% if you use price per sq. ft. or 33% if you use monthly medians. Both of these are flattering because part of the rise is due to high end homes taking a larger share of the market than normal for June. But however you measure them, home prices are at nose-bleed levels and will continue to rise while supply remains dramatically below normal. It is 76% below normal at the moment.
The period since June 2020 has been a painful 12 months for buyers and many are likely to be feeling bruised and beaten up. It would not be surprising if demand weakened further because of this, but withdrawing from the market is unlikely to be wise from a financial perspective. Prices still have a quite a lot of upward momentum and mortgage rates could easily move higher than today. Local buyers need to remember that to a buyer from California or Washington, Phoenix still looks like amazingly good value for money, even after another 20% price hike.
And what is your alternative - rents continue to climb at a steep rate and are unlikely to stop rising. At least if you buy a pricey home today you will benefit from the price growth tomorrow in the form of home equity. None of your rent payment will do that.
62.8% of Homes Sold Considered Affordable Last Quarter Median Sales Price Up 27%, Incomes Up 26%
ForBuyers: Despite all the incredible news about rising real estate prices, a family making the median income of $79,000 in Greater Phoenix could still afford 62.8% of what sold in the first quarter of 2021. The National Association of Home Builders (NAHB.org) assumes that “a family can afford to spend 28% of its gross income on housing.” That means 62.8% of homes sold cost their new owners $1,843 per month or less assuming a 10% down payment and including principal, interest, taxes and insurance. According to HUD, $79,000 represents a 26% increase in the local median annual income over the past 5 years; up $16,500 from $62,500 in 2016.
While reassuring, it doesn’t remove the frustrations of competing for homes in this marketplace. Last month, 56% of all sales closed over asking price and half of them went $15,000 over or more to win.For the last 7 weeks, half of all listings that went under contract in the MLS were active for just 6 days or less.
However, the last few months have shown a glimmer of relief for buyers as supply counts actually stopped declining; and in price ranges between $500K-$800K they have noticeably increased 40% since February. Supply is still 69% lower than last year at this time so there’s a long way to go before it’s considered normal, but it’s something.
For Sellers: You’re not going to notice this, but the housing market has begun to cool down. It’s still hot however, like 400 degrees is still hot despite being cooler than 500 degrees. Sellers can still expect multiple offers and closings over asking price; however it’s important to note that supply has stopped dropping and has been rising in certain price points over $500K. Seasonally speaking, Greater Phoenix supply should be dropping at this time of year, not going flat or rising. When measures go against the season, it can be the beginning of a shift.
The reason this shift will not be noticed is because supply is still much lower than demand, so any slight increase in competition is inconsequential to a seller’s ability to secure a buyer, even one willing to pay over asking price. One of the early indicators that a market is shifting, however, is the number of list price reductions. For example, supply between $600K-$800K has risen 45% since late February; in the same time frame, the number of weekly price reductions increased 223% and hit the highest count taken in nearly 6 months. That’s notable. However in other price points where supply has flattened out, price reductions have remained low and stable.
The advantage in any market, not just housing, is being one of the first to know when things are shifting. Especially today, it’s a good idea to consult a Realtor® who can analyze your price point and area so you can make an informed decision regarding the sale of your home.
Here are the basics - the ARMLS numbers for May 1, 2021 compared with May 1, 2020 for all areas & types:
Active Listings (excluding UCB & CCBS): 5,080 versus 14,051 last year - down 63.8% - but up 24.2% from 4,089 last month
Active Listings (including UCB & CCBS): 9,438 versus 17,867 last year - down 47.2% - but up 8.5% compared with 8,699 last month
Pending Listings: 7,829 versus 5,676 last year - up 37.9% - but down 1.7% from 7,964 last month
Under Contract Listings (including Pending, CCBS & UCB): 12,187 versus 9,512 last year - up 28.1% - but down 3.1% from 12,575 last month
Monthly Sales: 10,172 versus 7,174 last year - up 41.8% - but down 2.2% from 10,396 last month
Monthly Average Sales Price per Sq. Ft.: $243.50 versus $183.96 last year - up 32.41% - and up 5.1% from $231.75 last month
Monthly Median Sales Price: $373,000 versus $299,999 last year - up 24.3% - and up 4.1% from $358,250 last month
These numbers are the most interesting we have seen for a long time. They show a very hot market with supply dramatically mismatched to demand. However they also confirm a cooling trend that has been developing over the last 7 weeks. This was first reported by the Cromford® Market Index, but is now being confirmed by a number of other metrics.
active listings are UP significantly from the beginning of April, though admittedly from a very tiny number
under contract counts are DOWN for the second month in a row
sales counts are down compared with March
Markets do not get hotter indefinitely. The primary mechanism by which they cool down is through prices. In hot markets pricing goes up which causes demand to weaken, which means the supply gets a chance to recover. When prices go up, some buyers can no longer afford to buy and drop out. The faster that pricing goes up, the more buyers tend to drop out, at least in a healthy market. If this is not happening then you probably have a bubble where pure speculation has taken over and demand grows when prices rise. We are not seeing this.
12 months ago we were in the early stages of adjusting to COVID-19 so the year over year comparisons are not very meaningful. Demand dropped sharply in April 2020 only to recover quickly by June.
All changes tend to start small and then grow. The current market cooling is like that. We now have supply increasing and demand falling. This will gradually release some of the steam from the over-heating engine and the market can trend back towards normality. In a normal market prices still tend to rise, but in our current market, prices are rising at an unsustainable pace - the monthly average $/SF soared by over 5% in a single month. If the next 8 months behaved like April 2021, we would see the median sale price rise to $514,000 by the end of the year. I doubt that will happen.
Even though we have entered a cooling phase, it will probably take several quarters (if not years) to cool down to normal and prices will continue to rise at a brisk pace for quite some time.
One Year After Start of Pandemic - Luxury has Exploded Homes Selling for 101% of List Price on Average
For Buyers: With 54% of all sales closed over asking price so far in April, the average sale price per square foot is now higher than the list price for every price range up to $1M. In a balanced market, homes typically sell within 97% of list price; that percentage is now 101%. This means that, for the past month or so, the majority of list prices have been the starting price for where negotiations begin instead of a top price to work down from. In past extreme seller markets, $5,000 over asking was typically enough to win a contract; that was true last year as well when the market took off. However, last January the median over ask was $6,000; by February it was 10,000; in March it was $11,000; and so far in April it’s $15,000. The highest was $905,000 over list price closed in March (It was an auction for a 10-acre property in Cave Creek that sold for $2,255,000). By price range, over 62% of homes listed between $250K-$400K closed over asking price; the percentage is 54% for sales between $400K-$600K; 47% between $600K-$900K; 30% between $900K-$2.5M; 9.5% over $2.5M. Putting an offer in over asking price may cause a buyer some anxiety, especially a first-time home buyer. The median sale price is now $360K. Since January, the sales price per square foot for a home between $300K-$400K has appreciated 6%. That’s approximately 2% per month and the current sale price to list price ratio within the price range is 102.4%. If this rate of appreciation continues in the short term, a buyer who paid 4% over asking price on a $360K home ($14,400 over) would recoup their investment through appreciation in approximately 2 months.
For Sellers: The luxury market has been exploding since last summer and continues to be at the strongest level ever seen in Greater Phoenix. The number of listings under contract over $1M is up 156% over last year; but the number under contract between $2M-$3M is up 296% and over $3M is up 212%. In a typical market, sales prices in this range would be landing around 93% of list price. However in the 2021 market, the sales price ratio is averaging 98% of list. The luxury market is also keeping up with the rest of the market in terms of marketing time. Prior to contract, half of the contracts accepted valley wide in the last week were on the market 6 days or less. Over $1M, the median was 12 days prior to contract. Over $2M, the median is 67 days. The market over $1M is outperforming in terms of annual appreciation in sales price per square foot. The median price for a 4,000-5,000 square foot home is running at $1.1M with an appreciation rate of 31%. The median price for a 5,000-10,000 square foot home is $2.3M with an appreciation rate of 35%. For perspective, the median price of a 1,500-2,000 square foot home is $365K with an appreciation rate of 25%.
Here are the basics - the ARMLS numbers for April 1, 2021 compared with April 1, 2020 for all areas & types:
Active Listings (excluding UCB & CCBS): 4,088 versus 13,211 last year - down 69.1% - and down 9.0% from 4,491 last month
Active Listings (including UCB & CCBS): 8,699 versus 17,238 last year - down 49.5% - and down 4.3% compared with 9,094 last month
Pending Listings: 7,964 versus 6,125 last year - up 30.0% - but down 0.8% from 8,027 last month
Under Contract Listings (including Pending, CCBS & UCB): 10,152 versus 11,988 last year - up 23.9% - but down 0.4% from 12,630 last month
Monthly Sales: 10,385 versus 8,076 last year - up 28.6% - and up 29.2% from 8,039 last month
Monthly Average Sales Price per Sq. Ft.: $231.61 versus $186.61 last year - up 24.1% - and up 1.7% from $227.68 last month
Monthly Median Sales Price: $358,250 versus $301,000 last year - up 19.0% - and up 2.7% from $349,000 last month
The active listing counts are now so small that it makes a huge difference which day of the week you measure. Over the last week the maximum count (on Saturday) is 16% higher than the minimum (on Wednesday). In some locations there can be twice as many homes listed on Saturday as the following Wednesday. This means that comparisons of April 1 with March 1 can be misleading because it depends on the day of the week they happen to fall on.
What we can tell you for certain is that the active listing count was painfully small last month and this month it is no better. We would need to add about 24,000 active listings to get back to a normal level. Many of the younger agents working in Phoenix have never experienced a normal level of supply.
The monthly sales count for March 2020 was strong but the annual comparison with March 2020 is affected by the COVID-19 measures that started to bite in March last year. Between March and June last year the pending listing counts and under contract counts were dramatically lower than normal, which tends to obscure the fact that these counts in 2021 are also somewhat lower than we would normally expect. This is one of several signs that demand is starting to fall from the heights achieved in 4Q 2020.
Once borrowers start emerging from forbearance, we may see some degree of improvement to the abysmal supply shortage. However, indications from the lending industry suggest that any increase in supply will be tiny compared with the flood of distressed homes that hit the market between 2007 and 2013. We expect to see price rises slowing a little after June 2021, but there are currently no indications that a change in the direction of those prices is likely.
For Buyers: 44% of sales through the Arizona Regional MLS have closed over asking price in the last 30 days. The median amount over asking price for all price ranges combined is $10,000 with a range between $1 to $310,000. (I know what you’re thinking, “$1 over? What is this, ‘The Price is Right’?” In some cases, yes.) While 56% of all homes still sell for at or below list price, if you have a budget between $250K-$400K, the percentage selling over list is highest at 52% with the median amount over asking at $10,000. However even if your budget is over $400K, a significant percentage is closing over asking price. Up to $800K, 42% have sold over list with a median escalation of $12,000-$15,000. From $800K-$1M, 30% sold over list with a median escalation of $17,000-$20,000. From $1M-$2.5M, 20% sold over list with a median escalation of $30,000-$50,000. Over $2.5M, only 2 sold over asking price with a median escalation of $150,000. Over the past 6 weeks, REALTORS® have added an average of 2,059 new listings per week to the Arizona Regional MLS. During the same time period, an average of 2,312 contracts were accepted per week. This is what has caused the overall supply of homes to consistently drop and competition between buyers to escalate. While just over 2,000 new listings per week may seem like a lot, it’s actually the lowest rate for this time of year in at least 20 years. A normal level would be considered around 2,500 new listings.
For Sellers: While supply is still 77% below normal for this time of year and demand is 17% above normal, demand has been dropping faster than supply over the last 30 days. It’s not noticeable when one is in the midst of a contract negotiation today because sellers rarely notice when they’re getting, for example, only 15 offers instead of 25. But consider last December demand was 35% above normal; at this rate, demand could be at a normal level in a couple months and below normal by June. This will not cause prices to decline because there are still a miniscule number of competing listings in the MLS, but it could mean that the second half of 2021 could look different from the first, especially if there’s a temporary boost in new listings after the forbearance period ends and the foreclosure moratorium is lifted. The average mortgage rate rose to 3.02% this month according to Freddie Mac. Even though this is still considered an excellent rate, it understandably weakens the purchasing power for some buyers and reduces the affordability measure for Greater Phoenix overall. When a family making the median income can afford less than 60% of what’s selling, demand is typically expected to suffer. However, buyers with median incomes coming from Los Angeles and San Francisco are used to only affording 9-11% of what’s selling in their home towns, so Greater Phoenix prices look amazing by comparison. In fact, for some the idea of being able to own a home at all is amazing.
Here are the basics - the ARMLS numbers for March 1, 2021 compared with March 1, 2020 for all areas & types:
Active Listings (excluding UCB & CCBS): 4,491 versus 11,003 last year - down 59.2% - and down 13.3% from 5,180 last month
Active Listings (including UCB & CCBS): 9,094 versus 15,776 last year - down 42.4% - and down 6.5% compared with 9,727 last month
Pending Listings: 8,027 versus 7,215 last year - up 11.3% - and up 13.5% from 7,070 last month
Under Contract Listings (including Pending, CCBS & UCB): 12,630 versus 11,988 last year - up 5.4% - and up 8.7% from 11,617 last month
Monthly Sales: 8,020 versus 7,470 last year - up 7.4% - and up 9.1% from 7,354 last month
Monthly Average Sales Price per Sq. Ft.: $227.89 versus $185.09 last year - up 23.1% - and up 4.8% from $217.47 last month
Monthly Median Sales Price: $349,000 versus $295,000 last year - up 18.3% - and up 2.9% from $339,000 last month
In March 2020 we wrote that the lack of supply was making life extremely difficult for buyers. It is now down almost 60% since then. What phrase can we use to describe this - scorched earth?
The monthly sales count, pending listing counts and under contract counts are all higher than last year, but not by as much as last month. This confirms the downward trend in demand. Lower demand really does not make much difference when supply is this scarce. Even if demand dropped well below normal we would still have multiple offers for most listings.
Multiple offers are the mechanism that drives prices up. One offer per listing represents stability. No offers tends to drive prices down. We would need about 7 times the current supply to get back somewhere close to normality.
The full impact of the housing shortage is not being properly recognized, because many people incorrectly think the end of forbearance will bring a flood of distressed homes onto the market. We think this is very unlikely. While we can imagine a noticeable increase in supply taking place, it is very unlikely to reach the levels that would dramatically change the balance in the Greater Phoenix market. It is somewhat reminiscent of the "shadow inventory" theory of 2011 through 2013 which turned out to be a mirage, invented by a data analysis company that did not understand how to measure the foreclosure process properly. Their erroneous calculations were re-broadcast by the media and spread as if they were true. But it was all imaginary. There was no significant shadow inventory then and there is no huge wave of distressed homes waiting to hit the market now. Do not be taken in by these myths just because other people chose to believe them. Over the centuries many people have believed things that are now known to be false. It is still just as common today. In fact the internet and social media makes it even easier for falsehoods to become accepted as facts.
Many people also seem to have forgotten what really happened during the bursting of the housing bubble: The sequence is important.
The active listing supply increased dramatically between April 2005 and December 2006 due to over-building of new homes and the frantic speculative wave of 2004 quickly losing momentum
Prices started to fall from July 2006 onward due to supply becoming much stronger than demand
The fall in prices meant recent buyers had zero or negative equity from 2007 onwards, loosening their motivation to keep up their mortgage payments
Foreclosures started to be filed starting in 2007 against homes that were quickly abandoned due to the lack of equity
A huge wave of bank owned properties hit the market in 2008 and 2009, adding to the supply problem
The lack of equity meant many homes listed in 2008 through 2011 were short sales.
Investors pounced on the bank-owned homes and short sales from 2009 onwards, bringing the drop in prices to a complete halt by 2011
This is unlike the current situation. We have far too little supply, not far too much. Note that the excess supply in 2006 was the primary problem that burst the bubble. The foreclosures came later and were an effect, not a cause, of the bubble bursting.
This bears repeating - FORECLOSURES DID NOT CAUSE THE HOUSING CRASH - they were a consequence of the excess supply of 2006. Falling prices caused the foreclosures, not the other way round. It then became a negative feedback loop until prices fell low enough to attract speculators and investors back into the market in 2009. The housing crash was visible and inevitable by the fourth quarter of 2005, while foreclosure were still at normal levels.
In 2021, we are entering a period of extreme appreciation. We are measuring 23.1% using the monthly $/SF figure and this is quite mild compared with what we expect to see in 2 or 3 months time. The average price per square foot for closed listings rose almost 5% in just 4 weeks during February.
Dollar volume is at very high levels for the time of year, thanks to unit sales up 7.4% and pricing up 23.1% compared to a year ago, when the market was already at full steam ahead.
We expect to see dollar volume hit new records during the second quarter, along with all of the pricing metrics.
Median Sales Price Up 18%, Inventory Down 61% Luxury Sales Over $3M up 140%
For Buyers: Yes, it’s still a good time to buy. Is it fun? No.
Inventory is down 61% from this time last year and competition among buyers is steep. New listings are not keeping up with demand and the purchase experience can be stressful, disappointing and heartbreaking; but it’s a good time to buy.
The median sales price has risen 18% to $339,000 and the median monthly rental rate through the Arizona Regional MLS has also risen 18%. A 1,500-2,000 square foot home is roughly $1,600-$1,700 per month to purchase with 10% down while that same home rents at a median of $1,850 per month, up $250 over last year at this time. For those who would like to reduce and stabilize their monthly housing expense with a historically low 30-year fixed mortgage rate, it’s a good time to buy.
According to the National Association of Home Builders, a family making the median annual income of $72,300 in Greater Phoenix could afford 60.6% of what sold in the 4th Quarter of 2020. That rate has been steadily declining, but it’s still within the normal range of 60-75% for now. In San Francisco, the median sales price is $1,350,000 and a family making the median annual income of $130,900 can only afford 11% of what’s selling there. For those who can work from home and no longer need to live in the same expensive city as their employer, it’s a good time to buy.
Finally, it’s a good time to buy because Greater Phoenix is experiencing a housing shortage. Over the past decade a gap between the total number of housing units built and the total number of people to be housed has been growing wider and developers have not been able to bridge it. This is not something that will be solved this year, and probably not next year either. As affordability wanes, it’s a good time to stake your claim on a home while it’s still an option.
For Sellers: Brace yourself, the showings are coming. It’s not uncommon these days to see a stampede of buyers through a home within the first day or so on the market. It doesn’t matter the price range, all areas and types of homes are flying off the market and so far this month 37% of closings are over asking price.
The most impressive development has been in the luxury market. After California announced it was considering raising income and other taxes last summer, contracts over $1M surged in Greater Phoenix. So far in 2021, sales between $1M-$3M are up 102% and sales over $3M are up 140% over last year and there is little sign of a slow down.
Appreciation rates based on annual sales between $1M-$2M range between 5%-6.5% and 2%-5% over $2M. While the northeast cities of Paradise Valley and Scottsdale have long been associated with luxury real estate, Gilbert has emerged in the top 5 cities for sales over $1M in 2020.
Appreciation rates for homes sold below $600K range from 7%-11% annually and 5%-7% for sales between $600K-$1M.
Here are the basics - the ARMLS numbers for February 1, 2021 compared with February 1, 2020 for all areas & types:
Active Listings (excluding UCB & CCBS): 5,180 versus 11,974 last year - down 56.7% - and down 14.5% from 6,055 last month
Active Listings (including UCB & CCBS): 9,727 versus 16,035 last year - down 39.3% - and down 0.6% compared with 9,788 last month
Pending Listings: 7,070 versus 5,969 last year - up 18.4% - and up 15.2% from 6,135 last month
Under Contract Listings (including Pending, CCBS & UCB): 11,617 versus 10,030 last year - up 15.8% - and up 17.7% from 9,868 last month
Monthly Sales: 7,330 versus 6,464 last year - up 13.4% - but down 26.8% from 10,015 last month
Monthly Average Sales Price per Sq. Ft.: $217.59 versus $182.18 last year - up 19.4% - and up 2.9% from $211.50 last month
Monthly Median Sales Price: $339,000 versus $289,900 last year - up 16.9% - and up 2.1% from $332,000 last month
January is usually a very good month for new listings and overall supply tends to be stronger at the beginning of February than it was at the turn of the year. However 2021 has been completely different. New listings arrived in the weakest flow we have ever recorded and although demand subsided a bit, it was more than strong enough to soak up almost everything sellers could offer. Instead of rising, supply collapsed another 14.5% during January. This does not show up if we look at active listings including UCB and CCBS, because so many agents place listings into these statuses when a contract is signed, rather than the more traditional pending status. The vast majority of these "active" listings are not really being marketed and the signed contract will quickly proceed to closure. Having a listing subject to the buyer's property selling is not so much of an issue when selling that property is easier than falling off a log.
The supply situation is the worst we have ever recorded, lower than the first quarter of 2005, which used to hold the record. When supply is this low, it starts to drag demand numbers down with it. Sales volumes are limited by the number of homes for sale. Although they are still much higher than January 2020, sales counts and under contract counts are not growing as fast as normal. This is probably due to a combination of factors: higher interest rates, lack of supply and affordability concerns. Prices rose by almost 3% over the last month, so in theory demand should decline as prices increase. We will see how true that turns out to be as prices are set for extremely high rises over the next several months. The annual appreciation rate has already surpassed 19% and could easily reach 30% by the time we are well into the second quarter.
New home builders are trying as hard as they can to create more supply, but there are many physical, financial and legal limits to how quickly they can do this. These additional homes are sure to be priced well above the current level. In times like this the MLS data paints an incomplete picture because a much larger percentage of transactions never touch the MLS:
homes sold privately (usually to investors for flipping or conversion to rental)
new homes (only a small percentage of these get listed on the MLS)
We can use the county records to track total sales and pricing but this takes much longer to collate than using data from the MLS. You can see this more complete and accurate, but far less timely, data in the Cromford® Public section of this web site. It is now complete to the end of 2020. but it will be the end of February before January's data is fully checked and processed.
There is currently no indication that supply trends will improve and at the moment it looks like supply will drop further over the next 2 months. We would not be surprised to see demand continue to trend lower, but this will have little effect on prices. We already have far more buyers than the market can support. Our best guess is that the average price per sq. ft. will continue to rise at about 2% to 3% per month for the next several months.
2020 Broke the Record for Luxury Sales Supply Down 51%, Slim Pickings in 2021
For Buyers: There were 111,036 new listings added to the Arizona Regional MLS (ARMLS) in 2020, only 38 more than 2019, while 100,650 sold. As of January 10th, 2021 there were only 6,162 listings still active in the MLS, which is the lowest supply count recorded in at least 20 years. To make matters worse, 10% of those properties are outside of the Greater Phoenix boundary.
While the number of new listings barely changed last year, demand for homes accelerated between June and December to 35% above normal. Luxury sales over $1M soared after the pandemic restrictions were lifted. While they were already up 7.7% over 2019 at the end of June, by the end of December annual luxury sales were up 48.7%, securing an enormous record for 2020 at 2,575 sales over $1M.
Outside of the MLS, new home developers have been struggling to meet demand as well. Despite the road blocks in production due the pandemic, forest fires and supply line disruptions, as of November builders still managed to sell 14% more homes and obtain 28,204 more single family permits for future supply, up 24% over 2019. The median price of a new single family home only rose 6% from $333K to $353K and considering the median price of a resale home is $335K, that’s extremely competitive.
As supply began to drop last month, December saw 33% of sales closed over asking price and only 10% involved seller-paid closing costs in the 4th Quarter. Bottom line for buyers starting their search in 2021, be on top of your loan and be ready to pounce on every new listing that fits your needs. Many new listings will be on the market for less than a week prior to accepting a contract.
For Sellers: The state of Arizona ranked 3rd in the nation for population growth behind Texas and Florida in the latest 2020 Census release. When the full report comes out later this year, we expect to see California as the #1 source of inbound migration for Greater Phoenix. Moving companies such as Atlas, United Van Lines and North American have released their annual migration reports and 2 out of the 3 list Arizona in their Top 5 states for inbound moves. United Van Lines specifically cites “retirement” as the primary reason for 37% of inbound moves, 70% were over 55 years old and 63% made incomes over $100,000 per year.
While median home prices have risen 15.5% year-over-year, the median rental rates through ARMLS have also risen 12.9% from $1,550 to $1,750/month. This increase, combined with historically low mortgage rates, has fueled more demand to purchase.
As the population continues to grow, the housing gap is becoming harder to close. After a decade of underbuilding, this will take more than a few months or a year to correct. However as prices rise and affordability quickly drops, it’s reasonable to expect some demand to drop with it. With that expectation, home prices are still projected to rise throughout 2021 but possibly at a slower rate in the latter half of the year. It will be another great year for sellers.
Here are the basics - the ARMLS numbers for January 1, 2021 compared with January 1, 2020 for all areas & types:
Active Listings (excluding UCB & CCBS): 6,055 versus 12,141 last year - down 50.1% - and down 18.0% from 7,388 last month
Active Listings (including UCB & CCBS): 9,788 versus 17,577 last year - down 44.3% - and down 21.6% compared with 12,481 last month
Pending Listings: 6,135 versus 4,662 last year - up 31.6% - but down 16.5% from 7,347 last month
Under Contract Listings (including Pending, CCBS & UCB): 9,868 versus 7,539 last year - up 30.9% - but down 20.7% from 12,440 last month
Monthly Sales: 9,989 versus 7,788 last year - up 28.3% - and up 8.9% from 9,175 last month
Monthly Average Sales Price per Sq. Ft.: $211.62 versus $179.97 last year - up 17.6% - and up 1.8% from $207.84 last month
Monthly Median Sales Price: $332,000 versus $289,500 last year - up 14.7% - and up 0.6% from $330,000 last month
Buyers cannot be blamed if they are in despair about the lack of supply. We have less than half the number of active listings without a contract that we had a year ago. This time last year we described the lack of supply as shocking, so what do we call the current situation? We actually saw more new listings arrive during 2020 than we did during 2019, but only 1.4% more. The annual sales rate increased by 6% so the extra supply proved thoroughly inadequate in the face of the demand.
Prices have accelerated due to the huge imbalance between supply and demand, but as yet we have only seen part of that reaction. Sales prices are a trailing indicator and lag behind the leading indicators by up to 15 months. We can therefore expect to see prices move even higher during the next 12 to 15 months with appreciation rates possibly rising over 20%.
Those who think the increases in mortgage delinquency are going to to halt these rise are wishful thinking. The level of delinquency is nothing like as bad as it was during the 2006 to 2008 crisis and the level of delinquency has improved for the last 6 consecutive months. Any extra supply coming onto the market, due to home owner financial distress, is likely to be snatched up quickly by desperate buyers. Few of the homes with delinquent loans are likely to make it to foreclosure. They can be quickly sold prior to foreclosure to pay off any loans and the record levels of home equity will leave the vast majority of sellers in the black even if they can no longer afford their mortgage payment. It is the strong home equity levels that will motivate distressed buyers to sell up rather than walk away. In 2007 prices started to crumble due to huge excess supply, meaning many homes went underwater quickly and homeowners could see no advantage from avoiding foreclosure. The current situation is opposite, not similar.
January is usually the strongest month of the year for new listings - you can see this in our seasonal trend chart here. Therefore if we are going to see any relief for buyers, it should arrive during the next 4 weeks. If it does not, then the peak selling season of February through May is likely to be limited by what little is available. This may put a cap on any growth in unit sales, but it will not put much restraint on dollar volume as prices rise to compensate.
Supply Down 48%, Contracts Up 35% CARES Act and Eviction Moratorium Due to Expire December 31st
For Buyers: Existing protections in place for homeowners during times of financial hardship have come to the forefront in 2020. While both renters and homeowners alike were struck with unemployment and loss of income this year, homeowners in particular were provided with more immediate relief and a pathway to recovery than their renting counterparts.
Case in point, there are few experts in the field predicting a foreclosure crisis for homeowners; however there are many housing experts concerned about an eviction crisis for renters after the eviction moratorium ends December 31st. Under normal circumstances in Arizona a homeowner typically has to miss multiple monthly payments before the lender files a Notice of Trustee Sale, which then provides another 90 days for the homeowner to remediate the situation prior to foreclosure. However, a renter can be at risk of eviction within a few shorts weeks after missing a single rent payment depending on their landlord’s disposition and rental agreement.
The CARES Act extended another layer of protection for homeowners through forbearance, allowing them to postpone their payments in 3 month increments for up to a year without an effect on their credit. Many lenders have already put in place refinance options after forbearance for homeowners who have accumulated thousands of dollars in unpaid mortgage payments. There is no such plan for renters after the eviction moratorium. Their rents will be due in full and if they haven’t received rental assistance or sufficient unemployment benefits to cover the amount owed, they will be facing eviction and their credit will be affected.
So for those questioning whether or not purchasing a home is a good financial decision, the answer is yes. The value of owning a home is not just in its market value, but in stabilizing monthly housing costs during a period of rising rents and the comfort of more protection during times of financial and job insecurity. Losing one’s home, whether rented or owned, is one of the most stressful things a human being can endure.
For Sellers: If you are one of the many homeowners facing the end of a forbearance period sometime in the next 3-4 months, you have at least 5 options to remediate your situation. 1) STAY IN YOUR HOME and consult your retirement plan administrator about tapping into your retirement account without penalty until December 31st to cover your unpaid payments; 2) STAY IN YOUR HOME and consult a lender about refinancing your unpaid payments into a new loan; 3) MOVE OUT and rent your home for more than your mortgage payment to cover missed payments or replenish your retirement account; 4) MOVE OUT and consult a lender about acquiring a new loan on a more affordable home; 5) MOVE OUT and sell your home for more than your mortgage balance, walk away with your equity and credit intact to purchase another day.
None of these options were viable solutions for homeowners facing the 2008 housing crash 12 years ago. These options are why there is little risk of a foreclosure crisis and price crash in 2021. Because population growth has consistently outpaced housing growth every year over the past 10 years, rents and values are projected to continue rising through 2021 in Greater Phoenix unless builders are able and willing to ramp up production at ludicrous speed. They are doing their best, but even 25,549 permits issued and 19,889 sales closed on brand new single family homes through October this year hasn’t proven to be enough to satisfy the level of demand for housing that has descended on Greater Phoenix. Sellers need not worry about their home values declining anytime soon.
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. Pre-payment 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.
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
For Buyers: The Rent vs. Buy scenario has become heavily in favor of buying over the last 5 months. Eviction moratoriums due to the pandemic have greatly reduced turnover rates in a rental market that is already short of supply. Lease rates on listings through the Arizona Regional MLS have increased 17% since April overall; and for a home between 1,500-2,000sf the median lease price in the 4th Quarter is $1,850 a month, up a whopping $255 from the 4th Quarter last year.
While leases have been rising, home values have also risen 16%; however declining interest rates have kept the monthly payments level. The median sales price for a 1,500-2,000sf home is currently $316,000, up $27,000 since April. Despite this 9% increase (assuming a $15,000-$30,000 investment and interest rate under 3%), purchasing a home could possibly save a renter hundreds of dollars on their monthly budget while simultaneously building equity and ensuring a level of stability in their housing cost.
For Sellers: While many people are waiting for the final results of the 2020 election, at least one thing is for certain in Greater Phoenix. The housing market will not crash in 2021 regardless of the outcome. It may be hard to believe, but the new and resale housing markets don’t move quickly. Unlike the stock market where it takes a push of a button to sell a stock and record the price, it takes longer to sell a home between the marketing time and escrow process. In today’s market, it may take up to a week to negotiate an offer and another 30-45 days for the price to be publicly recorded. When a market weakens, it takes longer.
Supply in Greater Phoenix has been gradually shrinking for 6 years and was the driver behind price appreciation until the pandemic. To put things in perspective, the Arizona Regional MLS should seasonally have between 25,000-30,000 listings active at this time of year; as of November 9th there are under 8,600. That type of shortage doesn’t happen overnight and new construction will not be able to fill the gap quickly.
Listings Under Contract should seasonally have between 9,000-10,000 in escrow at this time of year; as of November 9th there are over 13,000. This level was reached in June and has stayed consistent for nearly 5 months. Even if demand were to scale back in 2021 and return to a normal level, the market would not see a massive drop in prices; just a slowing in appreciation.