Now that we are past the spring selling season and into the lull that comes before the pre-holiday pickup, some interesting trends have appeared (at least to us who have been trend wonks for years). In no particular order of importance they are:
Listing inventory is at long last climbing. This year began with the lowest numbers since 2001 for new listings coming on to the market. The previous winner for that honor was 2012 (the highest number of listings coming to market was 2006). That has now shifted and the numbers are starting to climb. While we don’t expect this year to set records for new inventory – it would appear the shortage of homes for sale is starting to improve. This is primarily good news for buyers who have been “house starved” for quite some time. For sellers it means price increases are flattening as we move towards a more balanced market.
Move to a more balanced market. While listings are finally beginning to climb (supply), the bigger story is in the drop in demand. At the moment demand still exceeds supply by a wide margin, but the gap between them is smaller than it has been since August 4, 2011. The exact why of the dropping demand is not as easy to assess. Is it the interest rates rising, the fact that “bargains” are evaporating, the small pool of homes available under 150K, or a combination of them all? Whatever the reason, the fall in contract activity is certainly affecting the lower price ranges more than the higher ones.
The number of pending listings today is down a massive 28% from last year’s August. Scottsdale is the clear exception among the larger cities. There is an improving trend in the luxury market which is also affecting Paradise Valley. The slowdown in demand is most apparent in the close-in cities such as Phoenix, Avondale, Tempe and Glendale and in the Southeast Valley – Gilbert, Chandler and Queen Creek. These had been riding high until June. Cities on the fringes had slowed down many months ago … It is possible that some buyers have decided to drive until they qualify and diverted their attention from the inner locations to the fringes where the same house can sometimes be bought much more cheaply. Active Adult cities like Sun City, Sun City West, Sun Lakes are seeing exceptionally low supply for the time of year and are not part of the trend discussed above. The gap between supply and demand is widening in these locations. El Mirage and Litchfield Park are also bucking the general trend….
We note that the greatest decline is in the price ranges below $150,000. Above this mark the numbers are not so very different from last year and above $800,000 they are much higher than last year. The luxury market is seeing strengthening demand while the demand at the lower end is down substantially. Some might argue that the pending listings are down because supply is very low, but it was very low last year at the low end too.
Lending practices. Ever since the “mortgage meltdown” of 2007, lending has been constricted. The impact of lending upon the real estate market cannot be over stated.
Future appreciation will depend very much on how lenders change their mortgage guidelines. At the moment they seem to be warming up to jumbo loans and are making them both easier to obtain and available on more attractive terms. At the other end we haven’t seen much improvement in the flow of loans to first time home buyers. The significant increase in mortgage insurance costs for FHA loans has put a distinct dampener on this segment of buyers. We remain convinced that the recent surge in interest rates has had only slight impact on the market with some buyers stopping to rethink their strategy while others have been given a greater sense of urgency. …If President Obama’s initiative to make loans more freely available to new-home buyers is effective this will probably overcome the slowing effect of the higher interest rates. However if it is not effective, or comes too late, then we would expect the market to continue to cool down over the coming months… On balance, not much changed. As usual it is the availability of finance which is important not the cost. So the luxury market has improved while low end demand has waned a little.
Cash deals. Cash deals are declining in Maricopa County. In July 24.4% of the money spent on homes and recorded with an Affidavit of Value was in all-cash deals. This is the lowest percentages since October 2009. The peak was February 2011 with 35.8%. If we count transactions rather than the total spending, the cash share in July was 29.3%, which is the lowest percentage since June 2010. The peak was again in February 2011 with 41.9%.
We still have a long way to go to get back to the old ways in which the vast majority of housing transactions were financed. Until January 2008 the percentage of cash transactions was usually no more than 12%. Since the end of 2008 it has never been less than 25%.
Which of these trends surprised us the most? The push away from what seemed like what would be a very severe shortage of homes for sale – towards the trend, that if it continues, would appear to result in a balanced market. Stay tuned as these competing trends resolve.
All italicized quotes are from Michael Orr of the Cromford Report.
Russell & Wendy Shaw
From Michael Orr:
According to most of the media. the housing market in the USA is currently “dominated by institutional investors”. The largest of these (by far) is Blackstone (BX) which has about $60B in real estate assets under management. It currently owns about 31,000 single family homes in the USA with a total book value of about $5 billion. $5 billion sounds like a lot of money, but everything is relative. The total value of all homes in the USA is roughly $20 trillion. So Blackstone’s rental inventory represents approximately 0.03% of the housing stock value. Foreign buyers as a group are more than 13 times as significant as Blackstone. According to NAR’s reports, for just the 12 months ended March 31, 2013 foreigners spent $68.2 billion on US homes. The Chinese accounted for 18% of that number or $12.3 billion. Nobody (including me) is claiming that the Chinese are dominating the market, yet they spent more than twice as much as Blackstone’s entire inventory. Blackstone represents about 30% of all the institutional ownership, so the total value of all the single family homes owned by institutions is roughly $17 billion. This is only 25% of the value of all homes bought by foreigners in the period April 2012 to March 2013.
Large numbers seem to cause some people to lose their sense of proportion and form completely false impressions of reality. Many of them write blogs on housing and articles for news outlets. Many of these are misrepresenting the state of the housing market right now. Their conclusions are bogus.
Home prices are NOT going up because of institutional investors. It is the other way around. Institutional investors are buying homes because their prices are going up. In other words – they are not stupid and can recognize an opportunity to own an appreciating asset and have their holding costs paid for by a third party – their tenants.
Home prices are going up because of chronic low supply. It is as simple as that.