The trends that were forming in the first quarter of 2016, now are affirmed. As usual, the two most important laws of economics – the laws of supply and demand – are the driving force behind the trends. Demand – the more fluid and fickle of the two- is up. In fact demand has returned to levels not seen since 2013. Supply, the slower moving component, has fractured into distinct market segments. No one captures this market snapshot better than Michael Orr of the Cromford Report when he states:
Below $275K we therefore see continued strong appreciation, short times on market and low cancellation and expiry rates.
From $275K to $350K we see very healthy market conditions with new supply and closed sales both up significantly from last year.
From $350K-$400K the growth in supply was strong, but sales growth was much weaker than average, suggesting there may be a few problems developing for sellers. However from $400K to $500K the percentage growth in new listings was matched by the growth in closed sales. I would describe this sector of the market as normal, healthy and growing, with no major shortages of buyers or sellers.
From $500K to $800K new supply outstripped the growth in sales, so even though there was a healthy increase in volume we see more competition building between sellers.
From $800K to $1M the increases were balanced but we do see 3 times as many new listings as we see closed sales. This is likely to mean higher cancellation and expiry rates and long times to sell ahead. It also means minimal upward pressure on pricing.
The issue for sellers with homes priced over a million is that the number of new listings outpaced sales by at least 3.4 to 1. This is not unusual for this segment, where new listings comfortably exceed closed sales at all times. The bad news is that sales were slightly down (-1.4%) from last year, primarily due to surprisingly poor performance by the segment from $1M to $1.5M. Yet new listings were up almost 15% for homes over $1M. This is a good situation for luxury home buyers, but it is not very good news for sellers who would like to see some appreciation. The current market environment over $1 million is consistent with a flat to slight downward trend in prices, long times on market and high rates of cancelled and expired listings. There are some very fashionable locations (close to urban centers) where this does not apply, but the bulk of the luxury market has reasonably good demand but excessive supply. Because of the good demand, agents will be happy with the transaction volume, but sellers are likely to be disappointed with the sales prices that can be achieved, and how long it takes to achieve them. These sellers hear about prices rising both locally and nationally, but unfortunately it does not apply to them.
The question of why inventory has jumped so markedly in the 500K+ range has garnered some attention lately. National analysts have begun speculating on this trend, much as they did last year when bemoaning the apparent lack of interest in home ownership by millennials (a theory we do not subscribe to).
A theory put forward by several national analysts, particularly Stephen Kim of Barclays, is that a long term secular change is under way. They believe a wave of empty nesters is seeking to downsize, and now that the market has recovered from the crisis of 2006-2009 they are planning to do so in growing numbers. If a large number of baby boomers want to sell their suburban luxury homes at the same time, we are going to see an imbalance of supply and demand. ..We are seeing a rise in discretionary renting, where older homeowners sell their large homes and move into smaller rental homes. They appear to prefer upgrades and amenities to square footage. They are probably using their home equity as a source of funds to enjoy their retirement.
Although we are no analysts, the jump in supply does not seem particularly shocking to us. To our minds, this is the same “coiled spring” theory that demand operates on – so why not supply? When demand is artificially held down for an extended period of time, the recoil once released is greater than expected. So too, we believe, does supply follow the same “coiled spring”. The homeowners who lost their homes in the greatest volume were those in the lower end of the market. The higher end homeowners faced with negative equity – simply had to wait out the market. Having waited for years for appreciation to make home selling an option again, that coiled spring released numerous sellers back in to the market. At least according to our theory.
Whatever the reason, supply and demand continue to be an interesting equation in our housing market. No matter the reasons, we will do our best to keep you informed on housing trends. As always, we appreciate the continuing confidence of the clients we are so lucky to serve.
The spring buying season is now underway (sadly accompanied by the flu season) and trends are now becoming observable. Supply is up – 8.5% over 2015, 3.3% higher than 2014, and 13.2% more than in 2013. This would be good news for buyers,
except the mix of the new listings in not matching the mix of the demand. More on that in a moment, but first a word on demand. Demand, which was looking rather neutral at the start of 2016, is up – reflected in the 5% increase in all greater Phoenix sales over this time last year. However, that number is misleading in a couple of aspects. A closer look shows the sales numbers are being held down in the lower price points based on lack of supply. Homes under 200K are in very scarce supply (and in the range of 125K-175K the lack of supply is extreme) with the demand far outpacing the inventory. This has resulted in a lower number of sales in this price range than last year – over 10% lower – due only to the fact that buyers cannot find enough homes to buy. This is not going to improve, as we opined before, as we see no additional supply in single family homes forthcoming. This lack of supply has changed what is selling. Entry level buyers, unable to find homes to purchase under 200K, are turning in greater numbers to manufactured homes and townhomes/condominiums. Sales for attached homes are up 10% and an astonishing 14% for mobile and manufactured homes. As Michael Orr of the Cromford Report explains (in italics and quotes):
“At the lowest end of the market, supply was already very low last year and it had gone down another 20%. Under contract listings are barely higher and closed sales are down more than 10%. This is a market crippled by far too little supply and consequently average appreciation is over 8%. This market cannot be described as healthy because of the chronic supply problem, but it is a great market for sellers as long as they are not over-ambitious with their pricing.”
The picture changes for the mid range – the $250,000-$500,000 priced homes. Demand is much stronger than 2015, and supply is slightly increased. However, this increase is largely confined to the 400K-500K range. Again, deferring to Michael Orr who says is best:
“In the mid range, supply is modestly higher than last year while demand is sharply higher. Despite the stronger demand it is not enough to eat into the supply, but it is good enough to give us moderate appreciation of 2.6%. This is the picture of a very healthy and expanding market, good for sellers and buyers.”
The picture changes dramatically for the $500,000 and up market. Here supply has increased strongly and demand while improved, is simply normal. This is not a good recipe for sellers in this range.
“In total contrast to the low end, the market above $500,000 is wallowing in too much supply. Note that we have almost as many active listings above $500,000 as we have below $250,000. Yet we see almost 7 times as many homes sold below $250,000 than we see over $500,000. Supply was already high last year and has increased by another 15%. The contract writing and closing activity is good and we can conclude that demand is stronger than last year. But despite February sales being up 30% and a strong 21% rise in listings under contract, new listings keep flooding into the market and there is still well over a year of supply. Competing among themselves, most sellers have the weaker hand in negotiations and so pricing is suffering. Based on the monthly average $/SF, the current annual average appreciation rate for homes over $500,000 is a negative 5%.
With sales down 10% below $250,000 and up 30% above $500,000, the overall market price statistics are all being skewed much higher. The true pricing environment for the luxury market is far worse than most sellers appreciate. Even for mid range sellers, appreciation is more modest than many of them realize. Only for homes below $250,000 are the overall market’s price appreciation numbers a realistic guide.
It is still fair to describe the bulk of the market as healthy, because only 8% of the homes that sell are over $500,000. That means 92% of sales are coming from appreciating markets. However 30% of sellers are trying sell homes over $500,000 and for them, the market is not looking so great right now.”
So no matter what the headlines state or your friends who just sold their home, the experience when buying and selling in 2016 is going to depend on which segment of the market you are participating in. A $250,000 seller is going to have a very different experience from the 1.5 million dollar seller. No matter the price or area, we can help you decipher “your market”. As always, we are here to help.
February showed some signs of life for homes going under contract after surprisingly lackluster activity levels in January. But as we warned, trends take time to form, and so a good or bad month does not make a year. 2016 had been heralded by most to be a likely breakout year. Demand was expected to leap due to the continuing rise in rental rates, the boomerang buyers returning to the market (those who lost their homes and return to buy after credit recovery), Millennials beginning to buy, and the valley’s overall positive net migration. Despite the compelling reasons for a demand surge, the indicators so far have been underwhelming. Demand has remained in a pretty neutral range, neither retreating nor advancing significantly. The number of homes under contract is higher in 2016 than in the same time in 2015 by approximately 8%. That would be encouraging if that % was growing rather than eroding.
Interestingly the purchasers are much more dominated by local buyers – up by about 18%. Buyers with out of state addresses are running 8% less as they did in 2015. Anyone tracking the weakened Canadian dollar will understand why very few Canadians are buying these days – down 64% compared to January 2015 (but they are wisely selling – up 26% from a year ago).
The new listings to market are up over 2015 by 6.2%. This is higher than 2014 and 2013 as well – notoriously low years for homes coming to market. The low rate of homes coming to market in the last 3 years was the market’s saving grace (at least for sellers) given that demand was also lower than normal. With demand in neutral, a continuing arrival of new inventory is starting to shift the balance of the market in some areas and price points. Michael Orr of the Cromford Report offers this interesting breakdown by cities:
The active listing count has increased in all the major cities, as is normal for the time of year, but the largest percentage monthly increases are in:
- Goodyear 17%
- Scottsdale 17%
- Tempe 15%
- Surprise 15%
- Avondale 12%
- Chandler 12%
These increases give buyers a lot more choice. Scottsdale now has more active listings (including UCB) that at any time since 2011.
Queen Creek stands out by having the smallest increase of less than 2%, unusually low for the time of year.
Among the secondary cities the fastest growing active listing counts are in:
- Apache Junction 28%
- Sun City 20%
- Buckeye 18%
- Sun Lakes 16%
- Anthem 16%
- Cave Creek 15%
- Sun City West 14%
- Maricopa 12%
- Paradise Valley 10%
- Tolleson 10%
The inventory in the 55+ active adult areas is growing significantly faster than usual. Sun Lakes has the highest number of active listings (including UCB) since early 2011. Cave Creek beats this by having the largest number of active listings since 2010.
Conspicuously slow growth in active listings can be seen in:
- Litchfield Park -1%
- Laveen 0%
- Casa Grande 2%
Despite these geographically supply shifts, we cannot overemphasize that price point is still a major factor in the supply/demand analysis. Below 200K, we still see very constrained inventory with multiple offers being the norm. Even with demand in neutral, it is outpacing and exceeding supply. We see no relief in sight at the moment.
We will continue to watch 2016 and report the trends that affect our clients. As always, we are here to evaluate your particular neighborhood and provide a supply/demand analysis so you can make informed decisions.
December 2015 ended with a bang – with higher levels of activity and demand than is typical for December. This of course would lead most to believe that if December was that strong, then surely January would follow suit. Ever the contrarian, the market started 2016 with the whimper typical of most Januaries. This left prognosticators grasping at straws for trends. After so many years of uncertainty, one can appreciate the need for certainties. But the fact is, 2016 is still in its infancy and it will be the end of February before any definitive trends appear.
Before you toss this article in the trash (you weren’t really going to, were you?) there are a few things we can examine. As the real estate market is in essence a study in supply and demand, it is always worthwhile to take a glance at those two components.
Of these two factors, let’s begin with supply – the slower moving of the two and therefore perhaps the easier one to examine. Supply also can tell us a lot about the health of the market; is supply being consumed rapidly or is it accumulating? 2016 started with a 10% drop in inventory compared to 2015 but – like most statements – this one has a slight qualifier. As we’ve mentioned in previous articles, a more concise evaluation of the supply situation appears when you look at specific price points. Not surprisingly, supply is most constrained and likely to continue to be so, at the 300K and under range. The reason is really two-fold. Builders, whom are building at higher rates than we have seen in years, are largely building single family homes in the 400K+ range. The sheer cost of the land and commodities essentially make it prohibitive to build single family homes for less. Additionally, as the values of homes continue their gentle climb upwards – the lower price ranges begin to further erode. Even at a moderate increase of 4-6% yearly, a $275,000 home exceeds $300,000 in just a couple of years. Add to that the fact that FHA financing (the most commonly used financing in the valley) currently caps out at $271,050 – putting the largest pool of buyers in the smallest group of available sellers.
Summing up the supply situation is Michael Orr of the Cromford Report:
“The price ranges with the biggest loss in new listings year over year are:
- Under $100K – down 41% from 425 to 252
- $2M to $3M – down 35% from 40 to 26
- $125K to $150K – down 33% from 492 to 332
- $1M to $1.5M – down 25% from 117 to 88
- $100K to 125K – down 22% from 253 to 197
Luxury home sellers will be pleased to see that we have not seen a large increase in new listings at elevated price points. Only $1.5M to $2M increased by 10% and all other ranges above $800K are down year over year. Entry level buyers will be disappointed that the supply situation below $175K is just going from bad to worse.
The middle of the market between $300K and $800K is where the increases are concentrated – there are at least 10% more new listings here than last year in each of the price ranges.
Here we see clearly that luxury home buyers have quite a bit more choice than last year. In fact from $400,000 upwards there are more homes for sale. Yet the overall supply is down because supply below $275,000 is so weak. Last year there was already a shortage of affordable homes, so the situation has worsened for buyers, which is obviously good news for sellers.
Sellers of homes over $400,000 need to be aware that news of short supply does not apply to them. They have more competition from other sellers than they had a year ago.”
This leads us to the more fickle component – demand. If this year follows last year’s trend, the spring buying season will bring a leap in demand. We certainly felt the first signs of that after MLK day. If this continues, we can expect 2016 to be a seller’s market for most price points up to a million. Even if demand should falter, the 300K and under market will still retain a strong seller advantage. Add to this the fact that the rental supply also continues to remain very low pushing rental rates upwards. A certain group of renters, finding no relief in rental rates, may look to become purchasers. Additionally, the boomerang buyers (buyers who lost their homes in the distress market) are still re-entering the market. So it would appear that only economic factors (global and national) would slow the demand side of the equation. Although Arizona is not immune to the economic component, it is far less vulnerable than many other states that rely on the price of commodities (energy, etc). Therefore we believe the odds favor demand showing up in 2016.
No matter the market swings, we will do our best to keep you informed once the trends have been confirmed. As always, we are here to answer questions and help you make informed decisions whether buying or selling.
As we approach the last quarter, we have a few benchmarks that reveal market trends this year. Rather than trying to sweep this in to one cohesive thought – we simply offer you some observations in no particular order of importance.
Much like our weather, the real estate market has “seasonal patterns’. Keep this in mind when the headlines scream “the real estate market is declining” as they often report in the back half of the year. Two things happen once the spring buying season is over, less luxury homes sell (thereby dropping the average price per square foot of sales – as smaller and less expensive homes dominate the mix) and the volume of home sales begin to gradiently taper monthly as we head towards the end of the year. These two factors can look like a “declining market” rather than a yearly seasonal pattern that is both expected and normal. As our local real estate guru Michael Orr of the Cromford Report comments:
“So the apparent drop in pricing in the overall market is an illusion. The real cause is a big shift in the luxury market with strong sales of homes under $1 million compensating for weaker sales over $2 million. This is a normal pattern every year, but this summer the effect is particularly strong because the super-luxury homes had such a successful spring season.”
The Luxury market performed very well the first half of the year.
Although typically posting the smallest number of sales in the market, the luxury market still has the power to fascinate. Fascinate it did this year, posting some remarkable numbers. Here is what Michael Orr shared about July (a month that often is a rather tepid one for luxury sales as those buyers typically flee for cooler climates):
“Luxury single-family home sales in the Northeast Valley remained surprisingly strong during July 2015. There were 354 closed transactions over $500,000 in the Northeast Valley though ARMLS, up 25% from last year. Almost all the strength was concentrated in ranges below $1 million. Over $1 million, sales were up only 2% while between $800,000 and $1 million sales rose an astonishing 69%. The top end went suddenly quiet with only 5 closed sales over $3 million, down from 16 in June. Unit sales over $500,000 were the second highest we have seen for any July since 2000 with July 2005 still holding the record at 479.”
The Supply/Demand situation
The supply/demand front remains much as it has this entire year. New listings coming to market are still very weak when compared to historic trends. In fact 2013, 2014, and 2015 all posted anemic amounts of homes for sale. While agents bemoan this trend (after all, who wants a store with nothing on the shelves?) it has actually been beneficial to sellers. This year’s normal demand levels juxtaposed against the below average supply – led to very constricted supply in some price ranges and areas. This helped prices not only stabilize, but in most cases to gently increase.
“Overall demand is nothing special, but it is still much stronger than last year. Supply remains weak overall and although new listings are arriving at about a 5% higher pace than last year, this is well below long term average levels…
Active Listings…: 19,459 versus 23,900 last year – down 18.6% …Under Contract Listings (including Pending & UCB): 9,705 versus 9,066 last year – up 7.0%….Monthly Sales: 7,942 versus 6,858 last year – up 15.8% …
… We may see a little more supply over the next few months for the popular ranges between $150,000 and $400,000. This may in turn bring a little welcome relief for the average buyer and stop the market getting even more favorable for sellers.” -Michael Orr
The “solar lease” trend.
This is a rather controversial subject – as solar leasing companies have done a very good job in selling the 21st century solar which is dramatically different from the 20th century solar some of us (cough) are old enough to recall. While “going green” is a wonderful ecological trend and one we happily support, we are often asked “will a solar lease add value to my home”? Sadly we must report the answer is “no”. In fact, our experience thus far indicates just the opposite. Buyers may happily accept a “no strings attached” solar unit (i.e. one that is owned by the seller) leases however pose a challenge. First, the buyer must qualify for the lease – not only in terms of credit worthiness, but also it must be factored in to their debt/income ratios. Secondly, buyers seem to dislike the idea of a long term commitment (many leases are 30 years) that they cannot be freed from. These factors not only fail to increase value, but in some cases prohibit a sale or even slightly reduce the value of the home. While this is not a popular answer, it is the current reality. Perhaps this will shift with time. Only time will tell.
So there are few tidbits about our current market trends. As always, we will strive to keep you posted on the shifts that continue to “normalize” our market.
Real estate affects everyone here in the valley – even those who don’t buy or sell. So being a Realtor, I get to see firsthand the level of interest the subject attracts. The second most common question I get asked is “How’s the market?” (The most common one being “Are you that guy on TV?”)
For the 800k seller in north Scottsdale? Or the 250k seller in Avondale? The answers are very different. Buyers in the 800k range have many homes to choose from. Juxtapose that to Avondale which currently has the hottest seller market in the valley. Glendale is just behind Avondale -but still a red hot market for sellers. Hot seller markets are simply markets that have lots of buyers – and too few sellers. It is always supply and demand.
The sticking point is that supply and demand numbers are not universal to an area or price point. So when the news reports “it’s a red hot seller’s market” take a moment and look at the valley as a series of sub-communities – each with their own numbers.
To quote directly from Michael Orr’s Cromford Report:
“Multiple offer situations are increasing. If buyers are wanting to spend more than $500,000 then they are in luck – supply is much more plentiful above that mark, though a few very popular areas like Arcadia have relatively slim pickings. During May even those upper price ranges saw a downward trend in active listing counts, but not enough to cause any real problems for most buyers. If today’s normal demand can cause supply to drop as much as it did in the last month, then buyers are going to have an even harder time if demand were to grow. This is especially true for the entry level market which is desperately short of homes for sale or rent.
The price trend is now very different for the low end, where strong appreciation is likely, and for the high end where a gently drift sideways is more likely, except in those areas where inventory is unusually low…
We note that the monthly median sales price has increased much faster than the monthly average price per sq. ft. The low end of the market is not pulling its usual weight due to the painfully low levels of supply in so many areas. This generates insufficient sales to keep the median down at its natural level. Prices are not really improving as much as the median suggests, except in a few very affordable areas, which may not remain so affordable for much longer…
The growing sense of justifiable optimism in the housing market tends to bring out ever more ridiculous articles in the media, usually forecasting doom and gloom ahead. Some even pretend to use mathematics to justify their case.
As John Kenneth Galbraith said (or was it Ezra Solomon; we don’t even know the past for certain), “The only function of economic forecasting is to make astrology look respectable”.
We will continue to stick to reporting the present and very short term forecasts. Right now the Greater Phoenix housing market is experiencing more than usual upward price pressure due to a chronic shortage of affordable housing to buy or rent. The majority of new development is focused on the mid-range or luxury markets, not the affordable market, for understandable business reasons, so there is no imminent solution to this shortage of affordable homes.”
Wondering if it a good time to sell for your price and neighborhood? Most likely the answer is yes. As always, the best answer is a researched answer. We simply need an address to give you a real answer to that question – anytime.
After a year and a half of the real estate market being in the doldrums – low supply and low demand – demand has fully corrected. In fact, demand is now in a “normal” range. Supply however, has failed to follow. In fact supply is down about 15% from last year. That is great news for sellers.
In the last 2 weeks of February, demand finally began increasing. That increase appeared to primarily come from first time home buyers. Even that picture has shifted a bit, and now demand is largely coming from the move up buyers. This move up buyer has allowed improvement in higher price points as well as in most geographic areas. In real estate, this is the “trickle up theory” – that improvement begins in the lower price ranges and migrates upwards. If demand remains strong, and supply continues to be constrained, then with time, prices follow.
Supply and demand trends tend to follow certain patterns, ultimately adjusting with the effect of coming in to balance. For example, when supply stays low but demand accelerates, the first signs of the shift are multiple offers – often pushing contract prices above listing prices. Then the appraisals begin to come in “low” (as rising prices are not supported by historical prices) often forcing sellers to accept less and thereby artificially holding down prices. Eventually enough demand creates buyers who will pay above appraisal or enough attractive cash offers, and prices begin their climb. Higher pricing then encourages more sellers to come to market, and as supply builds price appreciation moderates. Supply and demand then are brought back in to balance.
Where are we currently in this cycle? At the moment, we are seeing multiple offers with contract pricing pushing upwards, only to be depressed by low appraisals. If this trend continues, we likely will see price increases in the next few months.
Summing up the market shift is our favorite guru, Michael Orr of the Cromford Report:
Now we are fully into the height of the prime selling season it is becoming clear that it is not the first time home buyer who is making the biggest impact. It is the move up price ranges that are doing best compared with last year.
Here are the price ranges which have growth dollar volume the most between March 2014 and March 2015:
1. $350K-$400K – up 46%
2. $300K-$350K – up 40%
3. $500K-$600K – up 40%
4. $275K-$300K – up 28%
5. $200K-$225K – up 26%
6. $800K-$1M – up 26%
7. $250K-$275K – up 26%
8. $175K-$200K – up 24%
9. $2M-$3M – up 23%
10. $600K-$800K – up 21%
11. $400K-$500K – up 21%
All ranges below $125,000 are delivering lower dollar volume than last year and so are the ranges over $3 million and between $1.5 million and $2 million.
The mid range and the lower luxury ranges are where we are seeing the most strength and this is in stark contrast to last year.
All in all, encouraging news for most sellers. After a year and a half, it’s nice news to report.