Crystal Ball for 2024

With very few exceptions, the housing market begins every year with a question:  what will this year’s housing market bring?  The truth is that projecting beyond a few months enters one into the field of guessing, as there is no real estate Nostradamus.  But there are data points (courtesy of the Cromford Report) that tell us where we are and what the next few months may look like. 

The 2023 Housing Market ended the year in “balance”.  Of course that is a bit misleading – as there are parts of the valley favoring buyers (think outlying areas such as Buckeye, Maricopa, Pinal County) and others favoring sellers (Tolleson, Anthem, Apache Junction, El Mirage, Sun Lakes, Chandler, Laveen, and Fountain Hills).  Blending two out of balance areas doesn’t really create overall balance in the market place.  This is why knowing the actual conditions in the submarkets is critical for good buying and selling decision making. 

December is seasonally the slowest time of year for real estate and supply drops as homes come off the market for the holidays or expire by year’s end. 2023 was no exception.  But rates declining from 8.0% in October to 7% presented an opportunity for buyers to buy without too much competition and for motivated sellers to sell despite the holidays.  That drop in rates spurred demand even if only mildly and stopped the market from sliding into a buyer’s market. 

Interest rates

Interest rates have been the driving force in 2023, affecting equally both supply and demand.  Buyer demand is regulated largely by affordability, which is a combination of wages, interest rates and prices. The most volatile of these of late being interest rates. But a less visible component in the decision to buy also comes from rental rates.  The valley rental rates have been flat for the last two years courtesy of the increased rental supply from multifamily building as well as entire build to rent housing communities.   When rents are lower than the cost of purchasing – buyers become or remain renters.

Interest rates equally affect supply. Sellers are largely unwilling to replace their current 3% loans only to have to double when purchasing.  This leads to constricted supply.  Less supply combined with less demand amounts to a “shrunken market” and the number of transactions (sales) drop accordingly.  The market went from 110,435 yearly transactions in 2021 to only 86,534 in 2022 and then to an anemic 72,432 sales in 2023.  As the Cromford Report states:

“In a good strong market this number is over 100,00. We are currently below 72,600 and despite the improving interest rate picture, the annual sales rate is drifting slightly lower. This measure is free of seasonal effects, because it measures a whole year of sales activity, so if the market is improving we should see a rising trend, no matter what time of year. Admittedly closed sales counts are a trailing indicator, but it would be reasonable to expect something better than 73,000 if the market is starting to recover its mojo.”

Prices

Supply moves slowly, whereas demand is swift and responsive. If rates drop to 6% or lower we likely will see a spike in demand.  However, Sellers who are not already motivated by personal reasons to move, will be unlikely to move unless rates drop to 5% or lower.  Hence our personal belief that demand will rise before supply will meet it.   This creates the possibility that the market will shift to favor sellers again in 2024.  That is only our speculation, what seems certain is that prices are not headed downward.  The Cromford Report confirms this:

“The last 20 years have shown us that for home prices to go significantly down, we have to have an excess of homes for sale chasing too few buyers. Right now, buyers are indeed thin on the ground, but we still have overall supply well below normal and heading lower. For a housing crash we would need a flood of new homes for sale. The reason it might occur is not important, but without this flood, price will remain stable at worst…

To conclude we have any credible evidence of an imminent crash would be simply illogical. With the CMI (Cromford Market Index which indicates a balanced market at 100) above 100 we should not be seeing significant weakness in pricing, so I hope buyers are not waiting for overall price drops. Individual listings give us price cuts all the time, but these are balanced by new listings coming in at higher levels. Any price weakness is likely to be concentrated in the areas with the lowest CMI, such as Maricopa, Buckeye, Queen Creek (including San Tan Valley), Cave Creek and Surprise. Among the smaller cities, Casa Grande, Gold Canyon and Sun City look the weakest. In contrast we see strength building in Apache Junction and Litchfield Park.”

Summary

What is the takeaway for 2024?  To quote the Cromford Report:

The important stuff will happen in January. Will more than the usual number of buyers emerge due to falling mortgage rates, or will we see a surge in new listings. The balance between these two measures will determine the direction of prices in the first quarter of 2024 and anyone who tells you they already know what will happen is selling you a lie.”

For buyers, we suggest buying sooner than later as we see low probability for price drops.  For sellers, the best advice is one that works in any market:  price properly, spruce up your home to its best showing condition, and assist buyers with closings costs.  Further, as the Cromford Report sagely states:  These are the markets where quality marketing, exposure, and agent representation truly make a difference. We couldn’t agree more.

Russell & Wendy Shaw

(Mostly Wendy)

The Market Changes Yet Again

“The report of my death was an exaggeration” 

 — Mark Twain

2022 ended in a whimper. After a promising spring buying season, the market sagged under the weight of affordability issues – largely courtesy of rapidly rising interest rates.  The seemingly unstoppable sellers’ market that began the year, in fact stopped.  By November and December of 2022, the valley’s market landed squarely in the buyer’s camp.  That buyer’s market lasted approximately 4 weeks (qualifying for the shortest buyer’s market on record in the valley).  But that is so 2022.  Where are we in 2023?

Most buyers and sellers would be surprised to hear that the greater Phoenix real estate market is primarily a balanced market – and is now tipping in favor of sellers.  But it’s true.  Why doesn’t it feel that way? We think it feels unbalanced primarily for 4 reasons:

1. Appreciation has been strong since 2015 making the relatively minor 2022 price correction feel awful to sellers by comparison.

2. The number of transactions (market shrink) are much lower than normal as buyers and sellers headed to the sidelines.  Sellers feared equity loss, buyer’s feared rising housing expense due to increasing interest rates.

3. Human emotion – it’s not what’s true but what feels true. Skepticism is the current market emotion.  Therefore, improvement is viewed with suspicion.

4. Not all valley cities are having the same experience.  Of the largest 17 cities, the Cromford Report shows 4 currently in a buyer’s market (Goodyear, Queen Creek, Maricopa, Buckeye), 3 balanced (Gilbert, Peoria, Surprise) and 10 in a seller’s market (Fountain Hills, Paradise Valley, Chandler, Cave Creek, Scottsdale, Phoenix, Avondale, Glendale, Mesa, Tempe, Gilbert)

𝗠𝗲𝘀𝘀𝗮𝗴𝗲 𝘁𝗼 𝘀𝗲𝗹𝗹𝗲𝗿𝘀:  Now is a good time to sell if you have owned your home for 2 years or more.  The Cromford report gives these appreciation numbers for sellers : “ The long-term appreciation rates for homes in Greater Phoenix are as follows using January sales to date:  25% for 2yrs., 50% for 3yrs., 63% for 4yrs., 70% for 5yrs., and 86%+ for 6yrs or more.”  Balanced markets mean little to no downward pressure on pricing.  However, demand is much quicker to shift than supply is.  If interest rates rise, we could see a demand drop once again putting downward pressure on pricing.

𝗠𝗲𝘀𝘀𝗮𝗴𝗲 𝘁𝗼 𝗯𝘂𝘆𝗲𝗿𝘀:  The buyer’s market lasted for a short 4 weeks – November/December of 2022.  Interest rates have now settled back to below historic averages.  In a balanced market, competition amongst buyers is minimal (i.e. no spiraling bidding wars).  Prices declined around 13% in 2022 – providing buyers a better value.  Don’t be caught waiting for further price drops when the market numbers don’t support that happening. As we mentioned above, balanced markets mean little to no downward pressure on pricing.   Also, interest rates are still subject to change.  They go up fast, and down slowly. Take advantage of the relative (and perhaps temporary) interest rate stability.  Be skeptical of interest rate forecasts.  To quote Michael Orr “No-one has ever been very good at forecasting mortgage interest rates more than a couple of weeks in advance. This includes the Mortgage Bankers Association and it especially includes Goldman Sachs whose track-record on interest rate forecasts is extremely poor. This is not saying much because there is no-one who gets them right more than by random chance.

Any time spent listening to people making interest rate forecasts is time you could have spent more productively.”

None of us can predict the future.  But at the moment – this market is a green light for both sides.

Russell & Wendy Shaw

(Mostly Wendy)

How’s the Market?

About that real estate market of ours – it certainly was impacted by the pandemic.  Perhaps the biggest surprise to most people is what the actual impact looked like rather than what they assumed would happen.  Let’s examine the impact in the key areas that compose a real estate market.

Prices

The primary concern for most home owners in real estate is pricing.  When a sudden economic shift occurs (such as a pandemic, war, acts of God, etc.) fear tends to take over the financial markets.  This can cause dramatic swings in the stock market as well as other industries – but the housing market is very slow to react.  In fact it can take months or even years to react.  The Valley has been in a very strong sellers’ market for a long time. A few months of pandemic was not enough to really move the needle on pricing.  But like normal times, different price points behave differently.  It may surprise you to hear that prices in the under 500K range actually rose during this time.  The 500K-1 million market saw some minor softening in pricing as did the upper luxury market of over a million.  But any reports to the contrary, sellers do not need to give away homes or take low priced investor offers to sell.  The average home is holding steady and improving in value.  Even the luxury market very recently is showing renewed strength.

Supply/Demand

Real estate prices are tied to supply and demand. As long as the demand exceeds the supply, prices will rise. The bigger the gap, the faster prices increase.  So what happened to supply and demand?  The market was at the beginning of the spring selling season – typically the most active time of the market- when the pandemic hit.  By the second week of March, the news and subsequent shuttering of states finally impacted the market.  Within a two week period a large percentage of buyers exited their contracts (including the “iBuyers” such as Open Door, Zillow, Offer Pad).  The “back on market” status did a jump as these cancellations accelerated.  In fact demand dropped a whopping 39% – indicated by the number of contracts accepted.  So while demand was dropping rapidly, what was happening on the supply side of the equation?

Sellers fell in to one of two camps.  One group, fearing that prices were headed for a fall, jumped on the market immediately to avoid the looming future price drops they feared. This caused a short term spike in new listings of about 2000 homes.  The other group, concerned that “no one would buy now” or concerned about allowing buyers in to their homes, moved to the sidelines removing their homes from the market.

The net effect was a shrunken market.  As supply and demand fell in nearly equal measure, sellers retained the control as they have for years but less transactions occurred.   To sum it up succulently, Michael Orr of the Cromford Report writes:

 “I would say the impact on the Greater Phoenix housing market has been less so far than many people expected. Transaction volumes are lower than normal, but not dramatically so. Home values have not been noticeably affected at all and are likely to increase during the second half of the year.”

What is selling has changed – Another effect of the pandemic was the mix of what was selling changed.  The above 500K saw more of drop in demand than the below 500K.  Stock market fluctuations tend to impact the above 500K market, and the pandemic’s economic impact was certainly reflected in the stock market.  Jumbo loans were temporarily suspended by some lending institutions and others changed their lending criteria for the worse.  Consequently, what was selling changed.  The upper market faltered, while the below 500K began to dominate the solds – dropping the average price per square foot price.  When you have fewer high priced per square foot homes selling – the overall average for the market drops.  So if you see headlines saying “price per square foot is dropping” implying prices are dropping, be aware that the author has not examined the underlying numbers.  Another interesting factor is that the 55+ community homes have suffered in sales numbers.  Perhaps not surprisingly, considering they are the most vulnerable population in the pandemic.

Summary:

The market is expanding and moving rapidly to catch up with the 2019 numbers.  If you are a buyer, please don’t wait for price drops that are not coming.  Buy now while interest rates are at historic lows.  If you are a seller, please don’t panic and sell to investors for fear that prices are plummeting or that your home cannot be marketed to the entire pool of buyers safely.  We are armed with tools of the trade like virtual open houses and selling without physical showings.  All of which protect you as well as your pocketbook.  And that remains our goal – unchanged by market conditions- to protect you, our client.

Russell & Wendy Shaw

(mostly Wendy)

Sellers drag their heels

The market is on the cusp of the “spring buying season” and early prognostications are beginning to form.  As with all economic markets, supply and demand determine our market forecasts.  Typically we see one side of the equation having a bigger impact than the other – a situation that our market is currently experiencing.

Demand

Demand is staying in a normal range – about 1-2% above average.  This is always good news – given that it is the more elastic of the two factors.   It is all the more impressive considering the last quarter of 2019 saw a push up in price per square foot, typically a dampener of demand.  As Michael Orr mentions “…this comes after a rise of over 7% over the 4 months between September 15 and January 15. The market is generating strong upward pressure on prices.” A rise of 7% in 4 months is a fairly remarkable number. The fact that demand remains strong despite this rise, is fairly remarkable as well.

Supply

Supply is a very different story.  It should not be surprising that since demand is in a normal range, supply must be well below normal to see an upward push in pricing.  Exactly.  In fact supply is less than half of what is needed for a balanced market.  New listings are arriving to the market in much smaller than usual numbers.  Although it is a bit early to confirm a trend, the first two weeks of the year had 15% fewer new listings than 2018 did.  Add that to an already very low base supply of homes for sale, and 2020 is running at a 30% deficit of homes for sale compared to early 2019.  Obviously different price points can have different supply issues – but this shortage is impacting all price levels up to one million.  In fact it is the weakest start to a year since 2005.   No one comments on this issue better than Michael Orr of the Cromford Report:

“The lack of supply can only be described as shocking. A 30% decline since this time last year to reach the lowest level since August 2005. This to satisfy a population that has grown more than 20% since 2005. Anyone who thinks this severe shortage will not result in a significant rise in prices is going to have another thought coming pretty soon. The median sales price is already up 11% over the last 12 months and the average price per square foot is up almost 9% and probably heading for a double figure appreciation rate.

…The big hope for buyers must be for a surge in new listings arriving over the next 12 weeks. Perhaps sellers will be tempted by the higher pricing they can achieve. However if they are staying around Phoenix, they will have to pay more for their new home too. Phoenix is currently the strongest large-city housing market in the USA and this is fueled by inter-state population movements. Retirees are a big part of that, but so are people moving here from California and other Western states for work and the lower cost of living. Demand is likely to remain healthy despite the rising prices.

The primary question is whether we will see any change in the meager supply of homes for sale. If this is to take place it is likely to be visible over the next few weeks. There has been no sign of an improvement in new listing flows in the last several weeks of 2019. But 2020 is a new year, so we will be watching closely for signs of change.”

Seller Motivation

This lack of inventory has spawned some interesting theories as to why homes are not coming to market as usual –with theories ranging from “shadow inventory” (the theory that floated around erroneously during the mortgage meltdown years) to interest rates and pocket listings.  But let’s remember why people sell at all.  People sell for one of two reasons – personal motivation and market conditions.  Personal motivation encompasses things like job changes, household formation or disintegration, and retirement. The second reason -market conditions – encompass things like home values, interest rates, and consumer sentiment (fear/greed).   It is worth remembering too, that homeowners are keeping homes longer than in years past.  Why?  The average number of people occupying a home is less than in earlier decades and homes are generally larger.  Meaning they are staying longer because there is less personal motivation to move.  The average home today can accommodate the average number of family members.  If it is suitable, why move?  Hence, market conditions are left to impact home selling.  At some point pricing if it continues its move upwards will spark selling (i.e. market conditions) and ultimately dampen demand.  We saw that in the 2006/2007 market.  The real question is when.

At the moment, 2020 looks to be firmly a seller’s market.  As always, we will keep you informed on market changes as they manifest.

Supply Tightens

In our last paper we discussed demand and its strong rebound (up 8%) from 2018.  But we didn’t expound upon the supply side of the story.  We will now attempt to remedy that.  While demand is more elastic (and therefore perhaps the sexier story) supply might actually be the buried headline.

The valley has been chronically low in supply for so long that it has become somewhat normalized – but it isn’t normal.  As of the writing of this article, residential properties actively for sale are at 17,460 (and only 13,241 without offers).  To put that in perspective, average supply would be just under 30,000.  While we have certainly seen more extreme past markets such as in 2005 (8,342 active) this low supply is putting tremendous pressure on buyers trying to find properties.   It isn’t just the increased demand that is causing the issue – it is also the dearth of sellers coming to market.  June 2019 was the second lowest new listings to market for a June since the Cromford Report began tracking it in 2001.  July 2019 was the lowest July recorded for new listings. August, the second lowest August.  To quote Michael Orr of the Cromford Report:

What is unusual is that supply is 43% below normal. We have had supply below normal ever since May 2011. But the weak flow of new listings has exacerbated the situation.

Does this mean prices are skyrocketing?  Perhaps surprisingly to most, the answer is not yet.  To understand why Michael Orr further explains:

Pricing is showing no excitement whatsoever, behaving as if the market was normal. This cannot last. Remember that sales pricing is a trailing indicator, often as much as 12 months behind the leading indicators. We expect to see fireworks in pricing over the next 12 months. In fact the current situation reminds us of 2004. The huge imbalance between supply and demand and the absence of distressed properties are very similar.

Now before you scream in fear that if this year resembles 2004, then we are just a year or two away from another housing meltdown, read on:

The big difference is that 2004 was seeing large price increases and a significant number of the homes were being bought for resale by speculative investors and remained empty. The level of mortgage fraud in 2004 was also extraordinary. Hopefully that is not the case in 2019.

These are very interesting times, unlike the past 5 years which were stable and predictable.

Interesting indeed.  In fact this year began headed towards a balanced market and has now evolved in to one of the best seller markets in 13 years.  But no market lasts forever. Supply and demand are constantly in flux.

What affects demand? The factors are interest rates, affordability, inbound relocation, income/employment, lending practices (i.e. strict vs. easy), population growth, consumer sentiment. It is noteworthy that the millennials have overtaken baby boomers as the largest US adult population.

What affects supply?  New builds, equity (positive and negative equity), foreclosures, outbound relocation, personal events (divorce, illness, tragedy, job loss), conversion to rentals or Airbnb, homeowner tenure, consumer sentiment.

How the factors affecting supply and demand will play out is anyone’s guess.  We do expect demand to cool in the last quarter as part of our normal seasonal patterns. This should stabilize supply until we arrive at our next spring buying season in February.  Pricing of course, will respond to these two factors and affect them as Michael Orr points out:

Once prices have increased sufficiently then we can expect a cooling of demand will follow and the market will start to move towards balance again. No market can stay unbalanced indefinitely.

As always, we will keep you posted as the future unfolds.

Russell & Wendy Shaw

(Mostly Wendy)

April Showers Bring May Flowers

The strongest time of year for the valley’s real estate market is typically our “spring buying season” – March through May. This year is no exception – but it could have been. We ended 2018 with a rather lackluster market due to anemic demand. Entering 2019 it looked like the market was heading towards a balanced market – something we haven’t seen in the valley for years. But buyers suddenly reversed course and began to enter the market place in strong numbers. What turned things around? Two financial factors: interest rates & raised loan limits.
 
By April 4th the average 30 year mortgage rate had dropped to a 15 month low. Combine that with loan limits rising (conforming conventional loan limits went from 417K to 484K, and FHA saw a similar bump up) and the buyers responded by buying. As Tina Tamboer from the Cromford Report shares:
 
“The drop in mortgage rates could not have come at a better time for sellers. Up until 6 weeks ago the negotiating advantage sellers have been enjoying for years in Greater Phoenix had weakened to the point where the market was on track to enter balance within a matter of months and price appreciation would have begun to slow even more.”
 
But before we break out the party hats, she reminds us:
 
“Don’t get too excited though, the seller market is still much weaker than last year. Affordability and demand were helped by this interest rate drop but could quickly be negated as prices continue to rise. Sellers still need to be mindful of their asking price to get under contract before buyer activity seasonally begins to decline between May and the end of the year.”
Michael Orr of Cromford Report echoes those sentiments with this:
 
“We have witnessed a very favorable change in interest rates over the past 4 months and that effect will gradually dissipate unless rates continue to fall even further. Meanwhile prices continue to rise which will re-introduce affordability concerns during the second half of the year.”
 
The message here seems pretty clear – we are in a sellers’ market, again, and for now. But as the marketplace is a moving target with lots of moving pieces, sellers with a choice may want to pick selling now thereby avoiding the uncertainties of the back half of the year.
 
Cash offers and seller guarantees
 
So if the market still remains in the seller’s favor, why would any seller give up their hard-earned equity by taking a “we buy houses” offer? Shouldn’t selling below market occur only in a buyers’ market – where desperate-to-sell sellers are forced to open up their pocketbook to investors? Well, yes, but it would be simplistic to write this off as just illogical human behavior.
 
Given that we are Realtors with the job of advocating for buyers and sellers, we naturally have a bias against companies that appear to be “helping” in the name of corporate profit. With that said, here are our thoughts – both the good and the bad.
 
What we like about the “instant offers” or I-buyers:
1. Removes uncertainty. Avoids appraisal and concerns on buyers ability to qualify. Typically will close when the seller wants.
2. No showings, no need to prep the home for sale.
3. The largest one of them allows the seller to cancel the contract with no cancellation fees. Please note: others charge a cancellation fee. Make sure you know what the offer says before you sign.
 
What we don’t like about the “instant offers” or I-buyers:
1. Below market offers. Home sellers are giving away $20,000 – $30,000 or more of their equity. Most home sellers have no idea that they are taking a below market offer because they don’t know what their home’s true market value is.
2. The home owner is not being represented. The average seller sells every 11 years vs. corporate experts who buy daily. Knowledge is power.
3. Misleading advertising. They claim “No commissions” but charge 6-12% “customer experience fee”. They advertise an “as-is” sale and then typically charge 10k for repairs. They advertise their offers are “fair” when it is below market (“click here for a 15-20% below market offer” doesn’t make for a compelling marketing slogan)
4. Not all homes qualify.
 
The solution
 
Change is inevitable in market places. Amazon has changed forever how people buy (ask mall owners). We are not opposed to progress, we embrace it. For our customers (and you need only call or email us to become a customer) we offer a hybrid solution. If you wish to take an I-buyer or investor offer, we will represent you at no cost to you. We have established alliances with the largest investors in town so that we may do that for you. We will explain the costs and your options so you make the choice that is right for you. You don’t have to go it alone.
 
Russell & Wendy Shaw
(Mostly Wendy)

The Spring Market Awakens

After a slow and non-spectacular beginning to the year, the market appears to be finally waking up.  March heralds the beginning of the spring buying season – so

prognosticators watch closely for signs of market health.  In the valley the supply side of the economic seesaw (supply & demand) has been fairly stable, if persistently undersupplied. Supply changes tend to be slow moving.  Demand, as we have mentioned in the past, can change far more quickly.  Jitters were set off in the last quarter of 2018 when the erosion of summer demand persisted.  The erosion should not have been shocking given the hit affordability took both in years of rising prices combined with a rapid rise of interest rates.   As Tom Ruff in the ARMLS Blog so brilliantly explains:  “The decline in year-over-year sales volume began in October as interest rates rose. Adding angst to the problem, employees saw their 401(k)s shrink as the Dow Jones Industrial and the S&P 500 indexes fell 18.8% and 19.6% respectively between the first of October and Christmas Eve. Attempting to soothe nerves, the federal government shutdown from December 22 thru January 25. Happy Holidays everyone! “

We could not have stated that better.

The “sky is falling” predictions of prices dropping, however, have no economic basis to them.  That happens only after time in a buyer’s market.  We repeat, we remain in a “gentle” seller’s market. In fact, despite the sluggish start – demand is picking up steam.  So naysayers predicting a buyer’s market or drop in prices will likely have to wait beyond this year.  At least in the valley.  The proof is in the numbers as evidenced by Michael Orr of the Cromford Report:

The market started the year far behind 2018 in terms of demand – the monthly sales rate was down 11% on January 1 from a year earlier while the count of listings under contract was down 17%. At the end of January these numbers had changed to down 17% and 14% respectively. At the end of February they had changed to down 8% and 12% respectively.

What can we conclude from this? First, we know the under contract count is a leading indicator for closed sales. The 17% gap at the start of January suggested that January closings would be weak and they were indeed, down 17%. The slight improvement in under contract counts to 14% down suggested a mild recovery in February. We actually saw an even stronger recovery to just 8% down. This is quite respectable when you consider that because pricing was up year over year, the dollar volume in February was $2,127 million, not far (2.6%) below 2018s $2,184 million.

At 12% down compared with last year, under contracts counts are recovering from 17% and 14% down at the beginning of the previous 2 months. We anticipate that March sales will reflect that recovery and it is possible that the sales gap could narrow further, even enough to close the dollar volume gap completely. This assumes that current trends continue, which is not certain, but reasonably likely.

Not all areas were impacted equally.  Phoenix and Central Valley fared the best (down 2.4%) and the Northeast Valley the worst (down the 4.7%).  All in all – not much to fret about.  To quote Mark Twain ““The reports of my death are greatly exaggerated.”  And so it is with our market.  As always, we will continue to keep you informed as the trends solidify for the year.

Russell & Wendy Shaw

(Mostly Wendy)

Supply and Demand Seesaw

The seesaw of supply and demand is our best barometer of the health of the housing market – so naturally we closely watch it.  We have been in a seller’s market for such an extensive period that like most veteran agents, we are expecting a correction.  A rebalance of the market we hope will come in the form of a gradual increase in supply due to a lessening of demand; ultimately resulting in a balanced market.

In fact some early signals seem to indicate supply is building in most price points.  Here are some numbers from the Cromford Report:

“October marks the 4th month in a row that supply has continued to rise between $200K – $400K, which is good news for many buyers as it provides them with more choice and fewer competing offers.  However, for those buyers with budgets under $200K, this trend in supply doesn’t apply to them and their choices are still extremely limited.. 

As usual, nothing is quite that simple.  Supply comes from homes already on the market (not yet sold) and new listings being added (or built).  But at the same time the supply seems to be increasing – the first weeks of October showed a dearth of new listings coming to market.  In fact, new listings hit historic lows for any previous October.  The Cromford Report further explains:

We are examining the first week of October in more detail to study how new listing counts dropped unexpectedly. We counted 2,017 new listings in Greater Phoenix during the first full week which is down dramatically from the same week in 2017. The overall decline is 23% year over year and this is the lowest number of new listings we have ever seen for the first week of October. The previous record low was 2,343 in 2014….

For whatever reason, sellers are surprisingly rare this month. Even if we change the measurement week to Oct 3 to Oct 9, the picture does not change – new listings down 25% from 2,520 in 2017 to 1,885 in 2018. This latter total is once again the lowest we have ever recorded for those dates.

What is happening?  We can only speculate about why October has had such a low supply of new sellers.  Certainly consumer sentiment is a factor.  A large stock market “correction” can affect the market.  Politics can of course play a role.  Also, interest rates affect not only buyers but sellers too.  Again, the Cromford Report points out:

Mortgage rates tend to increase when the economy is strong…. People usually worry about higher rates discouraging buyers and while that is a reasonable concern, I am also of the opinion that higher rates discourage sellers, because in most cases they are going to move somewhere else and pay a higher rate too. If they have the option to stay put, they may choose to do so when rates are increasing.

 … Freddie Mac reported an average of 4.63% during September for the 30 year fixed. This is the highest we have seen since May 2011, more than 7 years ago. Of course in 2011 this seemed like a very low rate because we had experienced rates over 6% almost continuously between 1970 and 2008, with occasional short periods in the mid 5s.

Now we have a lot of homeowners with loans bearing rates of 3.5% to 4.25% taken out over the past 7 years. To move to a new home, they will need to pay off that cheap loan and take out another at closer to 5%. This effect is likely to be a drag on the supply of re-sale homes for a long time to come. It is likely to be good news for remodeling companies as many home owners decide to preserve their cheap financing by staying in place and spending their upgrade money on improving and modernizing their existing home instead.

Of course we cannot ignore the demand side of the equation.  A gentle lessening in demand appears to be underway – which ultimately effects supply.  When fewer buyers buy, supply typically begins to rise.  Which piece of the equation will affect 2019?  Will the lessened demand help shift the market towards balance or will sellers be reluctant to sell causing supply to remain scarce?  Either way, we will continue to monitor it and comment on it.

In the meantime, we want to give our heartfelt thanks for our wonderful friends and clients who place so much trust in us.  We are grateful every day.  We wish you all a wonderful holiday season.

Russell & Wendy Shaw

(Mostly Wendy)

Is the Housing Market Losing its Steam?

Recently national housing statistics have made headlines regarding the diminishing demand of homebuyers.  This is understandably unsettling to homeowners in the valley who recall all too well the housing crises where supply and demand went topsy turvey.  As interesting as it may be to listen to national housing statistics, they are generally antidotal.  Even in the midst of the housing crisis of the “Great Recession” there were markets that saw little downturn – proving that real estate markets are local. Is the valley in the midst of dwindling demand?  The short answer – a slight abating of demand is possibly underway.  Is it so great to affect pricing or cause any significant impact to our market?  No.  This is due to the largely chronic lack of supply.  Perhaps some numbers can better put this in perspective.

Demand The first thing to understand is the seasonality component of real estate – i.e. different times of the year perform differently.  Headlines can rather easily claim “buyer demand is down” simply by comparing April’s numbers to September’s numbers. Buyer activity reaches its peak in April and then increasingly slows through the rest of the year.  To have meaningful comparisons year over year numbers should be examined.  One key measurement of buyer demand is contracts.  We can then see for instance, that contracts have dropped 26% from the April peak this year, compared to a 20% drop in 2017 over the same time period.  That can lead us to the conclusion that a slight weakening in demand may be underway.  Slight being the keynote concept.

Supply Like demand, supply also follows a seasonal pattern.  Listings typically hit their low point in August and then rise until Thanksgiving (with a large exodus of cancelling listings at the end of the year).  In 2018 we hit the low point a bit early – July – and supply has been drifting upwards since.  But before we hit the alarm button, the overall numbers put this in perspective.  Here is an interesting analysis made in June of this year by the Cromford Report :

The total number of active listings … is 19,736 today for all areas & types across the ARMLS database. This is just slightly above June 15, 2011 when we saw 19,696. We have to go all the way back to October 2005 to find another 15th date (19,715) with lower active listings.

Active listing counts have been on a declining trend since April 2014 when we hit a short term peak of 30, 506. We would consider somewhere between 30,000 and 35,000 to be sufficient for a balanced market. The all-time record high for a 15th date is 58,195 in November 2007.

Between 30,000-35,000 active listings would be considered a balanced market.  As of this writing the active listing count is at 19,860 – not even close to a balanced market (and remember, that even balanced markets do not cause price drops – they just stop or slow appreciation).

Of course, different areas and types of properties are reacting differently on supply levels.  As Cromford comments:

There are some areas that have seen a dramatic rise, often from abnormally low levels. Florence is probably the best example. At the end of June we had just 100 active listings without a contract, but since then the count has shot up 38%. The trend does not affect mobile homes, but single-family listings have jumped from 71 to 111, an increase of 56% in just 8 weeks. A similar but smaller event has occurred in Casa Grande and Coolidge. The only areas outside of Pinal County with a jump like this (albeit more moderate) are Litchfield Park and Surprise.

The Answer -So what is the take away of all this?  If demand is showing early signs of lessening, and some areas are seeing increasing supply – when is the tipping point?  The answer is contained in the supply numbers.  Again, to quote  Cromford :

 Fluctuations in demand are unlikely to have much impact on the market until we see an increasing trend in listing counts. This was the first sign of a slowdown in April 2005 and will be the first sign of a slowdown if and when we get one in the future. It came suddenly and unexpectedly in April 2005 and it may do the same at any time. However, nobody paid any attention in 2005 and I am assuming we are all older and wiser now. Any unusual activity in the listing counts will show up in the daily Tableau charts which we create and study each and every day.

We too watch the listing counts.  When we see shifts, you will hear it from us.  Until then, do not believe the headlines.  As always, we are here to help you with any questions or concerns specific to your home or neighborhood.

Russell & Wendy Shaw

(Mostly Wendy)

Sellers Continue to Hang on to the Power

While some areas of the nation are at long last reporting a slowing of sales, the valley’s market is continuing to power forward both in rising sales and appreciation.  Real estate has always been area specific, so while national trends are interesting, they are not particularly meaningful when interpreting a local market.  New listings to MLS in the first quarter of 2018 for Maricopa and Pinal County under 400K are logging the lowest numbers for a first quarter since the Cromford Report began tracking in 2001.  Not surprisingly given the low supply, appreciation is higher than it’s been in the last several years.  To quote the Cromford Report:

“The annual $/SF for all areas & types is 7.3% above this time last year. The increase last year was 5.2%, with 5.5% the year before that while 2015 gave us 5.3%. Back in 2014 we were still experiencing the coiled-spring effect and $/SF had jumped 17.7%.”

Given the amount of market strength most sellers have (particularly under 400K), it would seem improbable that sellers are still managing to give away thousands, right?  Well history has a terrible habit of repeating itself – so just like in the past (anyone remember 2005?) – overheated seller markets don’t just cause trouble for buyers.  Yes, seller markets can still cause problems for sellers.

Here are a few of the top mistakes we currently see sellers making:

 

  1. Thinking that having one buyer is a success story. As sellers and agents so often say “we just need one buyer” – and of course there is some truth in that. But one of the perks of a seller’s market is the potential of multiple offers.  Too many sellers (and their agents who should know better) take the very first offer that they receive.  That may be a great strategy in a buyer’s market. The premise “your first offer is often your best” – is based on the fact that long days on the market create the perception the property is over-priced or has condition issues making it harder to defend value to buyers.    By contrast, in a strong seller’s market taking the first offer eliminates the option of multiple offers.  From our years of experience, creating the opportunity for multiple offers is how we really maximize your profits.  Agents who don’t do this (which sadly is the majority) or “for sale by owners” who find one buyer are likely giving up thousands of dollars.

 

  1. Thinking the new business models of online offers or investors are paying “fair market’ value. It is interesting to us, given that we have seen about every business model in our 40 years of practicing real estate, that this business model of online offers is getting a lot of hype. Admittedly they have tapped in to the public’s desire for Amazon type selling.  But at the end of the day, they are investors who don’t represent the homeowner.  Their pitch says things like “commissions are too high” while charging “customer experience fees” averaging 12% – far more than any commission.  Or they say “this is a competitive offer” while eliminating any competition – costing sellers 10-30% in unrealized net dollars.  Also, while telling sellers there is no need for them to go on the market, these same investors always put their homes on the market when they resell them.  Shouldn’t that be a dead giveaway as to how to get top dollar? It would be far more accurate if they said “we are investors who want to buy your home for less than it is worth and then re-sell it for a profit”. But then, that wouldn’t look like a sexy new business model would it?  Take away the online component, and this is the same old investor model that has existed since we began our careers.

 

  1. Thinking that preparing your home for sale is a long and expensive process. Most sellers overthink and over prepare for the home sale process. The truth is that many homes can be sold in their current condition.  We sold a house that had the garage caved in and was tagged by the city as unlivable until repaired.  We had multiple offers, sold it in 4 days, obtained over list price, and the seller made no repairs.

 

  1. Thinking that you have to show your home 24/7. Depending on the price range, we have had “weekend only” sellers or even “one weekend only” sellers. This is a supply and demand equation.  The higher the demand and the lower the supply, the smaller the window for showings required to sell. Many sellers can allow one full weekend of showings, review the multiple offers on Monday and be under contract by Tuesday.

 

  1. Thinking that all agents are the same. Oh heck, we’ve taught you better than that, haven’t we? One of the pitfalls of a strong seller’s market is the amount of inexperienced agents it attracts.  Even the “experienced” agent does around 6-10 deals a year.  If you subscribe to Malcolm Gladwell’s theory of 10,000 hours of experience are needed to get expert at something, most agents will be retired before they hit 10,000 hours.  In the last year alone we helped over 300 sellers sell.

 

  1. Failing to be aware of market value. The problem with either improving or declining markets is that history is not repeating itself. Therefore using only past sales will not tell you where the market is now.  In evaluating pricing, we examine the supply/demand ratio in your neighborhood which determines value.  Even then the market can move more quickly than can be seen.  Demand can be very volatile while supply is not. That is why exposing the home to the most buyers possible secures the highest price – it accommodates demand volatility.

 

  1. Thinking that commissions are where the most money is saved or lost. Shakespeare said “A rose by any other name would smell as sweet”. Perhaps, not the best analogy when discussing the second most dreaded word in the English language “commissions” (the first being “taxes”).  The truth is that the seller is going to pay someone to sell their home.  Sellers will either pay by hiring a professional, paying “seller experience fees” to an instant offer company, or selling to an investor who “charges nothing” but takes a minimum of 10-30% off the price. Rather than quoting Shakespeare, perhaps the better quote is “there is no free lunch”.  With that said, are we still an advocate for a flexible commission structure?  Sure – we too love to save money.  Just don’t give away way more than the cost of a commission in an attempt to avoid commissions.  Instead make sure you are paying for the best representation money can buy.

Thank you for allowing us to share our thoughts on what pains us the most – watching sellers give away their hard earned equity.  As always, we are here to serve you.

Russell & Wendy Shaw

(mostly Wendy)