Spring is here, bringing not only spring breakers but also the real estate spring “buying season”. Real estate is cyclical – in both long term and short term trends. Annual trends typically follow the same pattern year after year. Demand begins picking up in February, continues to climb to the peak in May then remains at this peak thru July (yes, even with our summers) and falling as it approaches the end of the year. Because of this, the first signals for the year’s pattern really begin to emerge near the end of February.
As pricing and the health of the market depend solidly on supply and demand, we tend to focus our lens solely on those two factors. Let’s begin first with supply. In 2014 sellers were placing their homes on the market at very low levels. 2015 has continued that trend to date. In fact, supply is actually weaker than this time last year. The supply of short sales is down 38% and is continuing to fall. REO (foreclosed) properties are down a whopping 49.6%. If the supply of active listings continues to remain at low levels, this should bode well for sellers and actually result in some upward price movement in the second half of the year. While we can speculate as to exactly why sellers are not coming to market in great numbers (i.e. distress properties are diminishing, sellers who survived the distress market still lack sufficient equity, etc.) the fact is they simply are not. Given the recent jump in FHA refinances due to changes in the mortgage insurance premiums (the Mortgage Bankers Association reports a rise of 76.5% of FHA refinances at the end of January) if one were looking for proof that sellers are staying put, the level of refinancing seems to provide that proof. So if the story of supply can be summarized by the word “constrained”, how is demand shaping up by comparison?
The good news is that demand is far more robust than supply. While demand seemed to be in a deepfreeze in January and the early part of February, the later part of February saw a very different story. As Michael Orr of the Cromford Report so perfectly states:
“Since the Super Bowl ended we have seen the liveliest two weeks for demand for a long time and we can see several areas with very strong numbers of listings under contract compared with this time last year. The most popular ranges are $150,000 to $600,000, which is good news for developers and for sellers of existing homes. Here we see a very sudden upswing in buyer interest that wasn’t there in January…
In 2014, pending listings grew from 5,420 to 6,395, between January 15 and February 15, a jump of 18%
In 2015, pending listings grew from 5,047 to 6,689 between January 15 and February 15, a jump of 33% …
We have not seen such a large percentage increase between January 15 and February 15 since 2009 when investors started to snap up the low hanging REO fruit.
As usual the recovery is not spread evenly…
Our first observation is that the price ranges
- $175,000 to $200,000
- $200,000 to $250,000
- $300,000 to $400,000
are the ones that are very hot and are seeing a large spike in listings going under contract. There were more normal listings under contract on February 14 than there were at any time during 2015 for these three price ranges.”
Although the market remains very subdued (low volume of home exchanging hands) and pricing remains flat, much like 2014, the public seems to be receiving a very different message. It is easy to look for villains, and frankly we needn’t look that far. (Hint: Zillow). Case in point, in speaking to a cable company technician the other day, he lamented that his home had dropped in value 60K in just the last few months. What?? The valley has had no major ups or downs in the last year and a half - how did his home drop 60K in just two months? We quickly assured him that short of a fire, his home did not drop 60K but asked the source of his information. As suspected, his source was Zillow. To their credit, they have done an amazing job at becoming the go to valuation site. Sadly they do a very poor job of deserving it. Zestimates are simply a fun tool but in no way are accurate for determining value nor the state of the market. The only accurate way to determine value is with a supply/demand analysis – and that takes a person to evaluate what is relevant and what isn’t. Automation is not a substitute for thinking. Don’t be fooled in to thinking otherwise.
2015 is now underway and all eyes are searching the horizon for signals foretelling this year’s real estate trends. Will 2015 differ from 2014, or will history repeat itself? Trends by their nature involve time. So attempting in February to predict the market of 2015 is a dicey proposition. But we certainly have a few early clues.
Not unlike 2014, supply is still very constrained. Sellers are failing to come to market in any significant numbers – causing the supply of homes for sale to fall well below “normal” amounts. The first signs of this showed up in December, which was the first month in 2014 that active listings were lower than they were in the corresponding months of 2013. As a case in point, in the last 7 days of December, new listings were down 13% compared to 2013 and down 14% compared to December 2012. Beginning 2015, available homes were lower than any point of 2014 for Phoenix, Anthem, Avondale, Gilbert, Glendale and Tempe. In fact, El Mirage was at its lowest point of available homes in the last 10 years! Of course there were exceptions – such as Sun Lakes, Maricopa and Paradise Valley. But, this still seems to have been the first signal for 2015 trends – low supply of homes. Here is what our favorite real estate trend watcher, Michael Orr, recently had to say:
“There have been a total of 4,353 new listings added since the start of the year (across all areas & types) which is 9.1% below 2014 and 1.3% below 2013. This is a low number and suggests that supply trends are weak despite the seasonal increase in active listings that we see in January every year. In fact it is a new record low for the 15 year period 2001-2015.
New supply is particularly weak at the bottom of the market under $200,000 while it is quite strong over $800,000.
Sellers of entry level homes are going to have less competition while sellers at the top end are going to have more competition compared with last year.
The new supply of short sales and REOs across greater Phoenix is much lower than in any of the years since 2008, but is higher than 2007 and all previous years since 2001. HUD homes are down to insignificant levels, lower than all years since 2001 except 2005 through 2007.”
As referenced, the luxury market is a market unto itself. It rarely acts in unison with the market as a whole. For instance, supply remains heavy in the luxury market, despite December 2014 being a huge month for luxury homes sales. December 2014 was the best December for luxury sales since 2006 with 109 closed transactions across Greater Phoenix for homes priced at $1 million and above. But make no mistake; luxury supply still well outpaces demand.
Thankfully, the buyer mix has shifted away from investors and back to an owner occupied dominant market. We are of the mind that this is a good thing – as we have mentioned in previous articles. Abnormally large investor activity is a sign of a very unhealthy market – such as was the case in the over-exuberant market of 2005 or the walking dead market of 2009. In 2015, we are back at a market where the buyer is the end user. Recent changes to lending are now arriving to stimulate the market – particularly the first time buyer market (are you listening millennials?) President Obama’s visit to Russell’s alma mater (Central High) was perhaps more news worthy than noteworthy – but he did announce the changes to FHA‘s insurance program that will assist a small segment of the population. The drop in the cost of FHA insurance gives buyers in this price range an approximately additional $20,000 of buying power. Add to that Fannie Mae and Freddie Mac’s new lending programs with 3% down – helping homeowners who didn’t have the 5% down typically required and who may have exceeded FHA’s loan limits (currently $271,050 for FHA, $417,000 for Fannie/Freddie conventional loans).
Given our low supply and our slightly stronger demand, our market has drifted from a slight buyer’s market to a balanced market. If this trend continues, we could very quickly see seller’s regaining the upper hand in negotiations. In fact, should demand increase in any significant way, it will rapidly overtake our supply. It will take a bit of time for the constraint to result in higher pricing – price being a trailing indicator- but it will show up. If this comes to pass, Buyers may be wishing they bought in 2014. What is good for the duck hunter is rarely good for the duck.
Happy 2015! However tardy, we had to add our best wishes for a wonderful new year. 2015 has been a year long awaited by the real estate industry – as many speculated in the last few years that real estate would boom in 2015. So will 2015 in fact be the gangbuster year dreamed of? Given the tumultuous past we have navigated, we are loathe to make predictions. As Yogi Berra so famously stated “The future ain’t what it used to be.“ But, we are seeing early signs of improvement in demand.
As we mentioned in past articles, the lack of demand in our market (and frankly across the country) has been the story of 2014. Oddly enough, the saving grace was that supply was also constrained at the same time. Buyers didn’t (or couldn’t) buy and sellers were scarce and did not put their homes on the market at expected levels. So 2014 became a low volume market – meaning lower than “normal” levels of home changing occurred. The signal we have been watching for is improvement in demand. Apparently Santa was listening because in December the first signs of improvement in demand began to trickle in. To quote our favorite real estate guru Michael Orr “When comparing 2013 and 2014 we can see that 2014 has been weaker than 2013 for most of the year but has recently improved. The difference is not great but I find it convincing evidence that a slow improvement has started.” Locally, the first few weeks of December showed the highest number for home sales for the same period since 2006. Trends by their nature must extend past a few weeks but these are the early signals (we hope) of what is to come.
Another possible factor behind demand picking up is the lack of rental supply. Finding homes to rent under $1000 monthly has become truly a challenge and at some point this lack of rentals will cause either more low end apartments to be built or cause renters to become buyers. Could the recent improvement in demand be the first signs of renters becoming buyers? We certainly hope so.
Lending seems to be the primary culprit behind 2014’s lack of demand. Add to that an economy still struggling to right itself, and the debt load carried by most consumers, and it’s not too hard to see why demand has been constrained. We feel confident that it is a matter of time until the lending community responds to the lack of programs for buyers. In fact, we are starting to see the first signs of the lending issues being addressed. Fannie Mae and Freddie Mac announced a program for first time home buyers that allows for a 3% down payment and lends up to $417,000 (currently FHA is 3.5% down and only lends up to $271,050 in the valley). Add in the remarkably low interest rates (currently at less than half the historic average of 8.5%) and lending certainly is poised for improvement. At the end of the day, lenders must lend to make money.
A possible additional bonus to the local market is the Super Bowl. Whether imagined or real as a real estate boon, approximately 90,000 additional people are heading to Phoenix. There can be little downside for our market to have that many valley visitors.
If demand truly begins to pick up steam, we could see 2015 convert back to a seller market. Of course, the one lesson the last ten years has taught us is nothing is for certain. No matter what happens, we will strive to keep you aware of the ever changing market. Here’s to a great 2015!
The last decade has seen some of the most volatile real estate profits and losses that most people will see in their lifetimes. The sad thing is what this has done to the average consumer’s perception of appreciation. If you have one year (as we did) with 47% increase in values – then the historical range of 2-5% appreciation looks pretty pathetic. But does it really when we look at a ”real life” scenario?
Take an average first time homebuyer who purchases a $175,000 home with 3% down at a 4% interest rate with 4% appreciation per year ( a very realistic number in the valley). In five years, that borrower has a net equity of almost $50,000. To see this example click here.
Still wondering why to buy vs. rent? The answer is all in the numbers!
Christmas lights galore, a snowy Christmas Village filled with 100’s of homes, businesses and 1000’s of people and animals. You will see one of the largest collections of Nativity scenes in the Southwest, ranging from life size to ½ inch tall.
And the Main Event…The Animals! Stop by and pet a donkey! We have 5 and 3 of them are minis, 8 goats and 4 of those are minis, and also our new cow Jax. He’s so sweet!!!
Live music and caroling, fun for the whole family from 2 to 92. Something for everyone!
Come by and make us a Christmas Tradition like so many other Arizona families have. We are an Annual Holiday Pilgrimage for families all other the United States and Canada. Stop by and see why.
Listed on AZ Central’s “Tour of Lights”, featured on ABC 15 News, CBS 5 News, 3TV News, My Fox 10 News and NCB 12 News.
Winner of “Best Christmas Display to Visit” by Scottsdale Independent, featured in the Arizona Republic Newspaper, 1st Place Prize Winner for best display by Paradise Valley Independent & Don Morley’s Christmas Lights Tour DVD, and Best Religious Display.
Location: 4345 E Carol Ann Lane, Phoenix, AZ 85032. That’s ½ mile North of Greenway & ½ miles South of Bell Rd.
When: Saturday, December 13th through Monday, December 22nd, from 6pm – 9pm nightly for 10 nights!
More Questions, email ChristmasOnCarolAnn@cox.net
Have a very Merry Christmas and a safe New Year!
Very few news stories can be built around “everything is just fine”. So while we don’t expect to see that in the headlines, it nonetheless is the story of our marketplace. Given the volatility of the real estate market from 2004- 2012, it is understandable that people are slow to believe that normal has returned. Michael Orr of the Cromford Report confirms this so beautifully:
“If we look exclusively at:
- single family homes
- in Maricopa County
- listed under $500,000
Then there has hardly been any change in pricing at all over the last 10 months. Here are the specific numbers … (price per square foot)
- Feb $115.82
- Mar $116.09
- Apr $115.23
- May $115.75
- Jun $116.04
- Jul $115.99
- Aug $115.95
- Sep $115.95
- Oct $116.31
- Nov $115.82 …
This is quite remarkable stability.”
Scared to buy or sell because prices are “crashing”? They aren’t. The water is safe.
“Tis the Season” has a unique meaning to those of us in real estate. As the holidays approach, the “seasonal effect” goes in to play – and this year is proving no exception. The seasonal effect refers to the calendar pattern that real estate tends to follow – year in and year out. This classic pattern shows a slowing of demand (less buyers buying) after the spring buying season (Feb-June) which creates a buildup of homes for sale in the back half of the year.
As we have mentioned before, this year has seen a lowered demand from buyers. Normally, this drop in demand would create a surge in supply. However, the first 3 quarters of 2014 also showed a dearth of sellers coming to market. So what should have been a buyers’ market all year – evaporated in to a balanced market after the spring buying season due solely to the lack of sellers coming to market. The market kept slowly building to a balanced market, only to in the last month, turn and ebb away from that balance point. And so the seasonal effect is here. The turning point appeared in October when we saw small surges of supply add to the inventory accelerating the erosion. It is certainly looking like we will begin 2015 back in a soft buyer’s market.
What does this signal for 2015? Most pundits are predicting 2015 will be a more robust market than 2014 – and we agree that is likely. But as real estate predictions have been notoriously difficult for a few years, let’s just focus on what we believe the largest factor is that will determine the 2015 market: lending.
The current noose around the neck of real estate is limited lending. We have expounded on this before, but it bears repeating. As an answer to the ridiculously loose lending guidelines that preceded the housing collapse, lending regulations after the collapse were excessively tightened. New loans issued reached the lowest levels of this century in 2014. When credit is unavailable to the average buyer, they become renters. In fact that is just what happened in the valley – this year showed rapid increases in rental demand (and rental rates). As a humorous way of making the point, we include this exchange as quoted in “Bloomberg”:
“Just between the two of us, ” Bernanke told the moderator at a recent conference of the National Investment Center for Seniors Housing and Care, “I recently tried to refinance my mortgage and I was unsuccessful in doing so,”
The audience laughed.
“I’m not making this up,” Bernanke insisted.
Bernanke also complained that stringent credit standards have made the process for first-time homebuyers excessively difficult, especially as economic conditions have improved. “The housing area is one area where regulation has not yet got it right,” Bernanke said. “I think the tightness of mortgage credit, lending is still probably excessive.”
“Probably excessive”. We agree. With that said, we truly do believe lending restrictions will be eased. Moderate lending restrictions, combined with attractive interest rates and a slowly improving economy should combine to make 2015 a cheerier year for real estate. That is why we approach 2015 with some optimism. Whether we are right or wrong, we will work hard to keep you updated on the market conditions as they shift.
As we live and breathe real estate, even the tiniest variation of the same old news is interesting to us. It is our hope that we are not taxing our readers sharing the nuisances of this market. The big headlines of 2005-2012 are gone, and frankly we couldn’t be happier. What is good for selling papers, is rarely good for a marketplace because, in fact, drama sells. So when you read the paper these days and it is claiming alarming trends in our market – a healthy suspicion should be maintained. The lack of headline news on real estate is not a bad thing and news should not be framed to make it so.
The story for over a year now has been supply and demand shifts. For over a year, demand has receded to very low levels. It is understandable that this has created some concern, especially after the marketplace had adapted to being a demand oriented marketplace with investors gobbling up inventory at every opportunity. At that time “normal” buyers were struggling to compete for properties as cash investors with insatiable appetites seemed to win every battle for a home. By 2013 the investor portion of the market began withering away – a positive sign in a recovering market. It is difficult to claim recovery at the same time you are known for being one of the best bargains around. Vultures rarely circle a healthy animal. So as the investor market returned to the small portion of the market demand looked anemic and alarming. The investor withdrawal exposed what true demand existed, a fact that was obscured in the distress market.
So what is causing this low demand? We have addressed this before by discussing the economy, lending guidelines, and the millennials and their buying behaviors. The one thing we strongly disagreed with as theories go, was the idea that real estate had somehow lost its appeal after the distress market. If that were true, you would have never seen the high volume of the market in the midst of the distress – and the savviest of buyers (hedge funds) would not have come to Phoenix in force for a buying frenzy. No the appeal of the West, and Phoenix in particular, for real estate remains. Just as food never goes out of style, housing doesn’t either. What does trend is renting vs. buying. This year, in the valley, renting has jumped in demand as purchasing slumped. This is a pendulum that moves from time to time depending on economic factors and net migration. We are of the opinion that demand for housing is there and is being held down by the economic factor of severe lending constrictions resulting from the distress market. If what fueled unprecedented demand acceleration in the marketplace (insanely loose lending guidelines) then the counter balance to low demand is overly constricted lending guidelines. As Sir Isaac Newton pointed out “for every action there is an equal and opposite reaction”. We are not advocates for the insane lending that was going on in 2004 & 2005, but neither do we believe the Dodd/Frank bill and restrictions of this kind are any better. There are valid purchasers who simply cannot get loans at this time due to the lenders fear now that lending risks have been placed back on their shoulders where they belonged all along. Here are some interesting numbers by real estate expert Michael Orr of the Cromford Report:
“Approved home loans are the fuel that drives the housing market. The year 2000 was a relatively normal year for home loans. With roughly the same level of applications as in 2000, 15% more mortgage applications are being denied in 2014 than in 2000….” And…” The weighted credit score at origination for non-GSE loans stands at about 750. In 2006 it was 670.” (GSE = Government Sponsored Enterprise, as in Fannie Mae & Freddie Mac)
Alarming? Not really, just the counter balanced reaction to over-lending. As lenders only make money when they lend, eventually they will loosen their purse strings. It may take a year or two, but memories fade with time and the need to seek profit will likely show up eventually.
Normally such a pause in demand would send the market tipping strongly to a buyer’s market. Although demand faltered and did in fact create a buyer’s market last year, a rather unexpected shift followed – dropped supply. Normal additions to supply from sellers placing their homes on the market failed to arrive and supply became constricted. Let’s take the month of August as an example. To quote Michael Orr:
“New listings have been arriving at a rate which is lower than in any August we have seen since 2001. In the last four weeks we saw 15.6% fewer new listings than last year and 13.2% fewer than in August 2012, the previous low record holder.
It is quite surprising that a slump in demand would be followed by a slump in supply, but it is certainly good news for sellers who might otherwise be facing growing competition from other sellers. If demand were to recover to normal levels now we could be facing a supply shortage fairly quickly.”
In fact, that supply has been so constricted that we have slowly and surely been moving away from a buyer’s market and into a fully balanced market, where we are now. Of course there are marketplaces within marketplaces – meaning there are areas and price points that are varying from this balanced picture. For instance, below 225K demand is showing a slight increase and so properties in this range may experience more than one offer. Some areas are a “seller’s market” such as Sun City. It is best to get a supply/demand analysis of your specific area to understand “your marketplace”.