The shift from the strong seller market we saw in the first half of 2013 to a buyer’s market in 2014, has created a certain level of disbelief. Local markets shift fairly rapidly – and changes in supply and demand are generally the cause. Although we have commented on this shift in past articles, it is worth looking at again because shifts don’t always become trends. In this case, it is looking like a trend. Although supply is building, that is not the driving force behind the shift. The puzzle in today’s market seems to be “where did the buyers go?”
To quote our favorite real estate guru Michael Orr of the Cromford Report “…the number of active listings continues to grow. Although the total number…is quite normal at 30,314, we would usually be seeing declining numbers by now because March through May is the peak season for active listings going under contract. If the number of active listings manages to grow even slightly during March then it is likely to soar during the second half of the year, unless there is a major change in market direction. … the total today…is the highest we have seen since April 2011 and 60% higher than March 15, 2013.
New listings continue to arrive much faster than last year, but not in excessive numbers. We have seen 26,353 year to date, 11% more than the 23,813 we counted last year. This would normally not be considered excessive, but the shortage of buyers means there are more new listings than the market needs.”
So again, the real problem is the drop in buyers. Sadly, we haven’t heard much “expert explanation” for this but we have a few theories:
- The major investors that have been heavily buying (because they are well funded hedge funds – such as Blackstone Group and Colony) have largely ceased purchasing in the valley. We believe this composes the largest percentage of the “missing buyers”. While this drop does impact our market, we do not consider this purely a bad thing. Hedge funds purchased to hold and rent for 3-7 years and are not end users. While this helped push up values in the valley, it did take away properties to end user buyers who could not compete with these cash offers.
- The basic economic picture has still not fully recovered. To obtain loans to purchase properties (as the average buyer must) one must have employment. Although the employment rate is better than it was at the depth of the Great Recession, it is far from “normal” or “optimum”. No housing market fully escapes the basic economics forever. So although we consider the housing market “recovered”, we do not consider the job market recovered.
- The Millennials who largely compose the pool of first time homebuyers are not buying in normal volumes. Some of this is being subscribed to changes in their belief systems as to the value of home ownership – having seen housing equate foreclosure in the distress market. Personally we believe it has less to do with psychology and more to do with mounds of student loan debt and the lack of financial ability to purchase.
- Lending practices have not returned to the standards of previous years. Locally, FHA loan limits have been lowered down to 271K from the previous 350K range. Additionally, self employed borrowers even with perfect credit and sizable down payments are struggling to obtain loans. Too many viable buyers are being denied loans.
- Prices have risen over the last two years. Just as rapidly falling prices cause sellers to withdraw from the housing market, rising prices can cause buyers to withdraw as they find renting more attractive. This seems to be proven by the rental rates in the valley which have been in an upswing since January of this year. As rents continue to rise due to increased demand (after all if you are not buying, you are renting) purchasing will again become more attractive. When you can purchase and have a payment equal to or below what you can rent a comparable property for – most renters become buyers. If rental rates continue their rise – look for the pendulum to swing again to purchasing.
- We suspect net migration in to Arizona has faltered recently (see point 2 – jobs and weather seem to drive migration) although the census numbers seem a bit unreliable.
Does the drop in buyers mean that homesellers should despair? Absolutely not! But it does mean that the dynamics that drive a home sale are more important than ever – marketing, pricing, condition, location, accessibility and of course your choice of agent. You knew we were going to say that, didn’t you?
As always, we will continue to monitor our market as it shifts. If you are curious as to your home’s shifting value, feel free to contact us.
Despite a number of naysayers, the market has in fact shifted from a balanced market (which only lasted a few months) to a gentle buyer’s market. This has been caused more by a decrease in demand, than a huge increase in supply. Supply is still growing in most areas, but only slowly.
But viewing the real estate market as a whole is a mistake made by novices. The market can be broken down (and should be) in to sub-categories based on price or area. These microcosms are a better guide to “the market” both for buyers and sellers. Let’s focus for the moment on a few key areas of change.
Strong movement in favor of buyers:
Paradise Valley, Tempe, Cave Creek, Tolleson
Strong movement in favor of sellers:
Gold Canyon, El Mirage, Arizona City, Sun City, Sun Lakes, Apache Junction
So when buying or selling, the lesson is know your sub-markets!
At the risk of dating ourselves with that song’s line, today’s market reminds us a bit of those words. What do we mean by that? Simply that our gentle balanced market appears to have now tipped to a buyer’s market. At least for the moment. A balanced market is where supply and demand are in equal supply. In fact, a balanced market is a supply of 4-6 months. If supply begins to exceed demand – the shift is to a buyer’s market. If demand exceeds supply, you are in a seller’s market. So what shifted? Supply or demand? The real answer is both. The supply of homes coming to market is certainly up from the drought of listings in 2013 – but the supply is only abundant when compared to last year. However, demand is weak – weaker than any year since 2001. Gulp. So the real shift and the real story is in the decreased demand.
To better make these points let’s turn to our real estate guru Michael Orr of the Cromford Report:
“ In true Phoenix tradition, the balanced market did not last very long – from October 27 to February 8 to be precise. We are now in a confirmed buyer’s market … Demand is weak …its lowest level since May 2008. Supply is not high, but it is growing fast … its highest level since July 2011. The deterioration in market conditions for sellers is across the board. No geographic area or price range is improving. However some sectors are much more favorable to sellers than others. In general the luxury market and the active adult areas are more favorable for sellers than the rest of the market. In the majority of sectors, prices are now under downward pressure, although they have not responded much yet due to residual seller optimism. However, if current market conditions prevail we are likely to see lower sales prices in many of these areas before too long.”
Going further he states:
“One easy way to observe how weak demand is at the moment is to compare the count of pending listings on January 15 and February 15. In every year there is normally strong growth in this number between these two dates. We have been measuring these numbers since 2001 and 2014 is the first year the increase has been less than 1,000. Even in 2007, which was a very soft year, pending listings grew by more than 2,000 from 5,201 to 7,255. In fact, the previous worst year was 2008 with a growth of only 1,317 from 3,610 to 4,927. In this context 2014′s growth from 5,420 to 6,396 looks very disappointing for sellers. The best year for this measurement was 2005, when pending listings grew from 7,831 to 11,208.”
So what do all these facts mean to the average home seller? It means that the approach sellers (and their agents) took in 2012 & 2013 will not work in today’s market. The approach of throwing the home on the market and allowing the velocity of the market to overcome a lack of marketing, inadequate home condition, and faulty pricing – simply will not work in today’s market. It is a time to get back to basics . But as in years past, the basics will work. A properly marketed home will result in a sale. Happily, some things never change.
If it is totally great for buyers can it really be totally great for sellers? I see some so called real estate “experts” saying it is always a good time to buy or a good time to sell.
It is “good” if the balance of inventory and demand favors you. For two and half years we were in a red-hot seller’s market. Then six months ago it started shifting to a balanced market. It is now a “buyer’s market”. Pretty much everywhere across the valley. Will that trend continue? I don’t know, my crystal ball is so cloudy just now. What I do know is if the question is now a good time to buy – with inventory now high and current demand low – it is an easy question to answer. And I suspect you have already answered the question too.
The Benevolent and Protective Order of the Elks (BPOE) takes on a very active task in supporting communities locally, throughout Arizona and on a national level. Elks Lodge #335, located on North 32nd. Street, is a hidden gem right here in our own neighborhood. This Lodge has many members whose mission is to help build a strong community. These members contribute and support such local programs as Veteran’s Dinners; The Thanksgiving Basket Program which provides food baskets for Veterans and their families; Dinners for our local Law Enforcement Officers and Fire Fighters; Drug Awareness Programs; Scholarships; Children’s Back to School Program providing new clothing and supplies for children; Young Readers Program; and programs that provide several local schools with dictionaries for their 3rd grade classrooms.
Their newest program, the Single Parent Relief Project, will offer support and assistance to single-parent families in need. On The First Saturday of each month these families will be welcomed into the Lodge for a hearty breakfast and each will be assisted with food, baby supplies, school supplies and more. The objective will be to assist 20 families in 2014.
Please join us on Saturday, March 8th from 9am to 2 pm for our Vendor Fair, featuring food trucks, arts and crafts booth, a DJ and Door Prizes. Free Admission and Parking at Elks Lodge #335, 14424 N. 32nd. Street.
Contact Joe Carroccio for further information 480-329-3957
One of the most common questions that would-be sellers ask us is when is the best time to sell? The questions vary but generally sound something like this: “Isn’t it best to sell in a seller’s market?” “Now that the market has shifted to a balanced/slight buyer’s market isn’t that a horrible time to sell?” Actually, if you have a choice (and often we have no choice – selling is often driven by circumstances not under our control) selling in a balanced market may be one of the best times to sell. Here are some of the reasons we believe sellers should consider this time to get their homes on the market:
1. Price appreciation flattens in a flat market. We know this sounds counter-intuitive but bear with us as we explain this. Prices are always a trailing indicator in housing. This means that anywhere from 9-18 months after something happens in the market – it is reflected in prices. The market started shifting away from a seller’s market in June 2013 when buyer demand began withering. Pricing runs on fumes for a while before evaporating. That “fume” stage is a sweet spot for sellers because prices are gently floating up, word is not really out on the street that the shift has occurred, and the big future price appreciation that sellers would miss out on if they sell in a seller’ s market – is not being missed. In other words, when prices go flat – sellers are selling at a peak.
2. In a balanced market, builders remain conservative, adding only a trickle of new homes. In a strong seller’s market, builders – just like any other seller – want to cash in on the strong appreciation. This starts adding more and more supply of homes – which as we observed in 2005 – and can create a bubble that “pops” when supply becomes glutted. As we have seen, recovery can be painful and slow after that pop.
3. In a strong sellers market, successful sellers become “homeless” when they are unable to find a home to buy. Sellers who are buying locally, enjoy the power a seller’s market provides them as a seller, but then find themselves stressed and panicked when trying to buy in that same market. This can lead to poor buying decisions and huge concessions to obtain a home.
4. Less problems with low appraisals. An often overlooked problem in a strong seller’s market is the financing piece. Lenders base all their numbers on the appraised value of a home. In a rising market, prices begin escalating over yesterday’s pricing. While sellers often get a higher than expected yield at point of contract, they can find themselves giving that money back to the buyer when the appraisal comes in low or risk the transaction cancelling.
5. In a balanced market there are still enough buyers around to still sell without great difficulty. A balanced market means just that -buyers and sellers are in equal supply. So although the “feeding frenzy” may not be present, the buyers are still viewing and buying properly marketed properties in sufficient quantity to make selling a relatively easy and fast process.
How long will our market stay balanced? That is the million dollar question. At the moment, we see nothing dramatically pulling the market one way or another . But as Sir Isaac Newton so brilliantly said “ I can calculate the motion of heavenly bodies, but not the madness of people.” As always, we will do our best to keep you informed on the Valley’s volatile housing market.
2014 is not starting off with a bang. At least not yet. The 4th quarter of 2013 was one of the lowest for pending sales in many, many years (2008 to be exact). This has contributed to a dramatic shift from what was a red hot seller’s market into a balanced market and even – in many areas of the valley – a buyer’s market.
To my knowledge no major economist is predicting anything dire for the valley. Truthfully, it is not necessary to know what they are saying to see what is happening with residential real estate prices. There are only four factors that regulate the price of housing. Supply and demand, monitored by fear or greed. There are many factors that contribute to which direction the market or a market segment is heading. Probably the most important number that determines the state of the market is the current absorption rate – how long the current supply would last if the rate of sales stayed the same and no new inventory came on the market.
A perfectly balanced market is six months – actually, a range of 5 to 7 months. With a six month supply there is no price movement and neither buyers or sellers have an advantage. If we go back many years and look at what is a “normal” level of inventory we see that it is 4.5 months. A 4.5 month supply will create very gentle upward pressure on prices, about the amount necessary to keep housing in step with normal inflation. Get down to a three month supply and you can see the prices rising – it’s a “seller’s market”. Less inventory than that is a “red hot seller’s market”. Around an eight month supply you have a “buyer’s market”. These numbers are true in any market, any market segment, and in any geographic area.
As you can see, from the current chart (chart 1), the months’ supply varies considerably depending on the price range. This number also varies greatly based on geographic location. The current number for the valley (all price points and areas) is 4.9 months supply. On the inset (chart 2) you can see the recent range of the valley wide months’ supply has gone from a 5.9 months in Jan 2011 to a low of 2.2 months supply for June 2012.
One interesting observation is that the “failure rate” for listings in the MLS tends to go up sharply when the inventory level rises (i.e. homes that don’t sell). Home sellers who have highly experienced agents who can accurately read the market do not suffer from their home not selling. It is possible to successfully market a home in any market.
So what will the spring buying season bring this year? Doom and gloom or a balanced market? Truthfully, we don’t know. We suspect balanced. But, the first sign of market strength (and yes weakness) is pending sales. If we see increasing sales this spring, the cooling phase of the market is over. If not, then we are likely to have a very subdued spring season that could last more than just a season.
Weak or strong, as always, you will know just as soon as we do.
2014 is beginning quite differently than 2013 did. 2013 entered as an overheated seller’s market –with inventory unusually low and properties coming to market at one of the lowest rates in history. Fast forward to 2014 and we find a very different market. Only a few geographic areas in the valley are still in a seller’s market (i.e. a market where demand exceeds supply) while most are in a buyer’s market. Knowing the market in which you are attempting to buy will guide you on how best to negotiate – can you demand price flexibility or should you expect to pay “market value” or more?! Here are the markets currently by area:
The following are still in a seller’s market: Sun Lakes, Sun City West, Anthem, and Paradise Valley.
The following are in the balanced zone: Chandler, Glendale, Scottsdale, Litchfield Park, Arizona City, Avondale, Mesa, Sun City, Apache Junction, Cave Creek, El Mirage, Phoenix.
The following are in a buyer’s market: Peoria, Tolleson, Tempe, Fountain Hills, Gilbert, Goodyear, Laveen, Gold Canyon, Surprise, Casa Grande, Buckeye, Maricopa, Queen Creek & San Tan Valley.
As always, there are variances in individual neighborhoods, as well as price brackets. A Realtor provided supply / Demand Analysis will show which is which.
As 2013 begins to wind down, our real estate market seems to be following suit. As we reported last month, demand has dampened significantly. Many observers will attribute this to the “seasonal effect” – meaning that the market has its peaks and valleys every year in a somewhat predictable pattern – the fall season being one of the valleys. They would be wrong; this is beyond the season. This fall, pending listings are falling faster in 2013 than any fall since 2000. To restate again what is causing the steep drop in demand, as much as the psychology of buyers can be generalized, here is what we believe is happening:
1. Interest rates escalated rapidly (as a point, rates rise rapidly but drop slowly). The fact that they have now stabilized for the time being seems to be offering only a small amount of comfort to buyers.
2. Two years of price increases has made our fame as “one of the best bargains in the country” suddenly no longer true. The fact that our market is still below the hard cost of commodities (roofing, concrete, drywall, etc.) and below the inflation/appreciation trend line of the last 12 years seems, at the moment irrelevant to buyers.
3. Investors are dropping out of the market. Currently investors make up around 19% of the sales. This is the lowest percentage since June 2010. Even just a year ago the number was closer to 29%.
4. The economy, government shutdown, and threats of government debt defaults aren’t exactly instilling confidence in the buying public. When the future seems uncertain, the emotions that run the financial markets can turn from greed to fear. It would seem that fear is dominating at the moment.
So what will fix the demand problem? Well, usually price would be the answer to lowered demand. In this case, we are not expecting to see any major pricing drops. More likely than any significant pricing drops is that price appreciation is likely to come to a halt until the demand issues recover.
What is the message to sellers? We are now in a balanced market. If you have been waiting for prices to peak or flatten before selling – this is likely the time. A balanced market also means sellers may be required to be more flexible in contract negotiations, the days of multiple offers may become scarcer, and the choice of agent will matter more than ever.
The message to buyers? Ease your fears. Rates and home prices are both still under market norms. Choices of homes are finally becoming abundant and that should be welcome news for choice starved buyers.
How long will this last and what will 2014 bring? Whatever it is we will do our best to keep you posted on this ever changing market. What never changes for us is our deep gratitude to our clients who have allowed us to serve them this year and years past. We hope you have a joyful holiday season!
Demand for homes has been a complete non-issue in the valley for the last 3 years – so much so that the current drop in demand has come as a bit of a shock to anyone observing it. Supply has been beyond abundant through our recent distressed market. Banks were overwhelmed with the volume of short sales and foreclosures swamping them – and unlike “normal sellers” the banks had to sell – no matter the price. The number of listings on the market hit all-time new highs. In short, the only headline was supply, supply, supply. As the supply of homes surged, so did demand. Investors swarmed Phoenix to pick up bargain basement values that were everywhere. Tax credits lured the first time home buyers to the market. Net migration was up (i.e. more people moving in to the valley than were moving out). New builds were effectively at zero – meaning no new supply was being created. Sellers were swamped with multiple offers, many cash. It seemed like that party would never end.
Of course the only thing that stays the same is change. So the pendulum has swung (however temporarily) and now the real estate headline has switched to the drop in demand. This drop is inciting the “doom and gloom” gang to heat up once again (although we cannot recall them ever really cooling off). These are the same people who refused to believe there was no “shadow inventory” being stashed by the banks which would “be released” and crash the market. That theory never materialized, but gave birth to the newest version: demand is down and therefore the “recovery has stalled”. Like the earlier rumor, we don’t believe there is any basis to this theory. As Michael Orr so brilliantly states:
In the normal world, no market improves every month without a rest now and then. There are always changes going on, and we are way overdue for a cooling off.
A move towards normality should not be regarded as a sign of impending doom, just a sign of impending normality.
A move towards normality does not mean prices will come down. Unlike the stock market, prices almost never move downwards in a normal real estate market. Sellers only lower their price expectations when very desperate. Desperate times do occur a few times per century, but they are very rare. For a while in 2004 and 2005 we forgot that they could ever happen. Now the public knows all too well they do and consequently expects prices to drop at any moment, even when it is least likely to happen.
So if “everything is fine” why is the market stalling? Affordability and Psychology. Buyers have been hit by a double whammy – rising prices and interest rates. Affordability in an area is monitored by pricing, interest rates, and income. It is a pretty safe bet that income has not jumped much in the last 2 years – and certainly no where near the level that prices and interest rates have jumped. So although local real estate is still (in our opinion) undervalued, affordability has taken a hit. The fact that long term trends for “normal interest rates” fall around 8%, placing today’s rates at well below normal, the psychology of affordability has kicked in. Buyers, hoping that either rates or pricing will come down, move to the sidelines as emotion overtakes logic. The bulk investors, the hedge funds, have done the bulk of their purchasing here and that also adds to the drop in demand. This should be good news to the “normal” buyer who often lost out when competing with these “professional” buyers. Michael Orr further explains:
“Buyers probably need some love and to be treated with more respect. There is still a long term shortage of supply and prices are unlikely to come down, but ordinary buyers need more convincing of the virtues of stepping into the market at this time. Large scale investors are backing off. They have made the bulk of their purchases already. If the market is to run at full speed we need more owner-occupier buyer motivation to overcome the sticker-shock…
Going forward, we should expect buyers to feel like they have the option to say no. More marketing and selling is going to be required to maintain the speed of the recovery. Without that, the recovery will probably slow and price increases will moderate. We are still in an early phase of a long term recovery, but right now home buyers will need much more convincing of that fact.
This is probably a temporary phenomenon, like the lull in demand after the tax credit expired in 2010. However at the moment it is still unclear how long it will last
What does dropped demand do to supply? One would suppose that the lessened demand would create a large surplus of supply, but the story is more nuanced than that. Michael Orr further explains:
So far in September we have only 2,988 new listings added to ARMLS. That is the lowest number in 13 years. However 1,848 of those listings are priced between $150,000 and $500,000. That is the largest number for this period since 2009 and it is 29% more than last year. Between $250,000 and $500,000 we have the most new listings during this early part of September since 2008. So supply is growing in the mid-range and in contrast the low-end under $150,000 has seen new listings drop by 40%. I’m sure a lot of buyers wish there were more homes available under $150,000. Above that mark buyers now have a lot more choice, but can they afford them?
What does this mean for home sellers? If the trend towards normalcy continues, we can expect fewer offers, slower price appreciation, and more competition for buyers. Sellers, who have been waiting for price appreciation to peak, might consider if that time is approaching. Buyers who are waiting for lower rates and price drops, are likely to be disappointed and should get off the sidelines.
Doesn’t “normal” sound like a place we all want to be? As always, we will strive to keep you apprised of the ever changing market.