December 2015 ended with a bang – with higher levels of activity and demand than is typical for December. This of course would lead most to believe that if December was that strong, then surely January would follow suit. Ever the contrarian, the market started 2016 with the whimper typical of most Januaries. This left prognosticators grasping at straws for trends. After so many years of uncertainty, one can appreciate the need for certainties. But the fact is, 2016 is still in its infancy and it will be the end of February before any definitive trends appear.
Before you toss this article in the trash (you weren’t really going to, were you?) there are a few things we can examine. As the real estate market is in essence a study in supply and demand, it is always worthwhile to take a glance at those two components.
Of these two factors, let’s begin with supply – the slower moving of the two and therefore perhaps the easier one to examine. Supply also can tell us a lot about the health of the market; is supply being consumed rapidly or is it accumulating? 2016 started with a 10% drop in inventory compared to 2015 but – like most statements – this one has a slight qualifier. As we’ve mentioned in previous articles, a more concise evaluation of the supply situation appears when you look at specific price points. Not surprisingly, supply is most constrained and likely to continue to be so, at the 300K and under range. The reason is really two-fold. Builders, whom are building at higher rates than we have seen in years, are largely building single family homes in the 400K+ range. The sheer cost of the land and commodities essentially make it prohibitive to build single family homes for less. Additionally, as the values of homes continue their gentle climb upwards – the lower price ranges begin to further erode. Even at a moderate increase of 4-6% yearly, a $275,000 home exceeds $300,000 in just a couple of years. Add to that the fact that FHA financing (the most commonly used financing in the valley) currently caps out at $271,050 – putting the largest pool of buyers in the smallest group of available sellers.
Summing up the supply situation is Michael Orr of the Cromford Report:
“The price ranges with the biggest loss in new listings year over year are:
- Under $100K – down 41% from 425 to 252
- $2M to $3M – down 35% from 40 to 26
- $125K to $150K – down 33% from 492 to 332
- $1M to $1.5M – down 25% from 117 to 88
- $100K to 125K – down 22% from 253 to 197
Luxury home sellers will be pleased to see that we have not seen a large increase in new listings at elevated price points. Only $1.5M to $2M increased by 10% and all other ranges above $800K are down year over year. Entry level buyers will be disappointed that the supply situation below $175K is just going from bad to worse.
The middle of the market between $300K and $800K is where the increases are concentrated – there are at least 10% more new listings here than last year in each of the price ranges.
Here we see clearly that luxury home buyers have quite a bit more choice than last year. In fact from $400,000 upwards there are more homes for sale. Yet the overall supply is down because supply below $275,000 is so weak. Last year there was already a shortage of affordable homes, so the situation has worsened for buyers, which is obviously good news for sellers.
Sellers of homes over $400,000 need to be aware that news of short supply does not apply to them. They have more competition from other sellers than they had a year ago.”
This leads us to the more fickle component – demand. If this year follows last year’s trend, the spring buying season will bring a leap in demand. We certainly felt the first signs of that after MLK day. If this continues, we can expect 2016 to be a seller’s market for most price points up to a million. Even if demand should falter, the 300K and under market will still retain a strong seller advantage. Add to this the fact that the rental supply also continues to remain very low pushing rental rates upwards. A certain group of renters, finding no relief in rental rates, may look to become purchasers. Additionally, the boomerang buyers (buyers who lost their homes in the distress market) are still re-entering the market. So it would appear that only economic factors (global and national) would slow the demand side of the equation. Although Arizona is not immune to the economic component, it is far less vulnerable than many other states that rely on the price of commodities (energy, etc). Therefore we believe the odds favor demand showing up in 2016.
No matter the market swings, we will do our best to keep you informed once the trends have been confirmed. As always, we are here to answer questions and help you make informed decisions whether buying or selling.
As we approach the last quarter, we have a few benchmarks that reveal market trends this year. Rather than trying to sweep this in to one cohesive thought – we simply offer you some observations in no particular order of importance.
Much like our weather, the real estate market has “seasonal patterns’. Keep this in mind when the headlines scream “the real estate market is declining” as they often report in the back half of the year. Two things happen once the spring buying season is over, less luxury homes sell (thereby dropping the average price per square foot of sales – as smaller and less expensive homes dominate the mix) and the volume of home sales begin to gradiently taper monthly as we head towards the end of the year. These two factors can look like a “declining market” rather than a yearly seasonal pattern that is both expected and normal. As our local real estate guru Michael Orr of the Cromford Report comments:
“So the apparent drop in pricing in the overall market is an illusion. The real cause is a big shift in the luxury market with strong sales of homes under $1 million compensating for weaker sales over $2 million. This is a normal pattern every year, but this summer the effect is particularly strong because the super-luxury homes had such a successful spring season.”
The Luxury market performed very well the first half of the year.
Although typically posting the smallest number of sales in the market, the luxury market still has the power to fascinate. Fascinate it did this year, posting some remarkable numbers. Here is what Michael Orr shared about July (a month that often is a rather tepid one for luxury sales as those buyers typically flee for cooler climates):
“Luxury single-family home sales in the Northeast Valley remained surprisingly strong during July 2015. There were 354 closed transactions over $500,000 in the Northeast Valley though ARMLS, up 25% from last year. Almost all the strength was concentrated in ranges below $1 million. Over $1 million, sales were up only 2% while between $800,000 and $1 million sales rose an astonishing 69%. The top end went suddenly quiet with only 5 closed sales over $3 million, down from 16 in June. Unit sales over $500,000 were the second highest we have seen for any July since 2000 with July 2005 still holding the record at 479.”
The Supply/Demand situation
The supply/demand front remains much as it has this entire year. New listings coming to market are still very weak when compared to historic trends. In fact 2013, 2014, and 2015 all posted anemic amounts of homes for sale. While agents bemoan this trend (after all, who wants a store with nothing on the shelves?) it has actually been beneficial to sellers. This year’s normal demand levels juxtaposed against the below average supply – led to very constricted supply in some price ranges and areas. This helped prices not only stabilize, but in most cases to gently increase.
“Overall demand is nothing special, but it is still much stronger than last year. Supply remains weak overall and although new listings are arriving at about a 5% higher pace than last year, this is well below long term average levels…
Active Listings…: 19,459 versus 23,900 last year – down 18.6% …Under Contract Listings (including Pending & UCB): 9,705 versus 9,066 last year – up 7.0%….Monthly Sales: 7,942 versus 6,858 last year – up 15.8% …
… We may see a little more supply over the next few months for the popular ranges between $150,000 and $400,000. This may in turn bring a little welcome relief for the average buyer and stop the market getting even more favorable for sellers.” -Michael Orr
The “solar lease” trend.
This is a rather controversial subject – as solar leasing companies have done a very good job in selling the 21st century solar which is dramatically different from the 20th century solar some of us (cough) are old enough to recall. While “going green” is a wonderful ecological trend and one we happily support, we are often asked “will a solar lease add value to my home”? Sadly we must report the answer is “no”. In fact, our experience thus far indicates just the opposite. Buyers may happily accept a “no strings attached” solar unit (i.e. one that is owned by the seller) leases however pose a challenge. First, the buyer must qualify for the lease – not only in terms of credit worthiness, but also it must be factored in to their debt/income ratios. Secondly, buyers seem to dislike the idea of a long term commitment (many leases are 30 years) that they cannot be freed from. These factors not only fail to increase value, but in some cases prohibit a sale or even slightly reduce the value of the home. While this is not a popular answer, it is the current reality. Perhaps this will shift with time. Only time will tell.
So there are few tidbits about our current market trends. As always, we will strive to keep you posted on the shifts that continue to “normalize” our market.
Real estate affects everyone here in the valley – even those who don’t buy or sell. So being a Realtor, I get to see firsthand the level of interest the subject attracts. The second most common question I get asked is “How’s the market?” (The most common one being “Are you that guy on TV?”)
For the 800k seller in north Scottsdale? Or the 250k seller in Avondale? The answers are very different. Buyers in the 800k range have many homes to choose from. Juxtapose that to Avondale which currently has the hottest seller market in the valley. Glendale is just behind Avondale -but still a red hot market for sellers. Hot seller markets are simply markets that have lots of buyers – and too few sellers. It is always supply and demand.
The sticking point is that supply and demand numbers are not universal to an area or price point. So when the news reports “it’s a red hot seller’s market” take a moment and look at the valley as a series of sub-communities – each with their own numbers.
To quote directly from Michael Orr’s Cromford Report:
“Multiple offer situations are increasing. If buyers are wanting to spend more than $500,000 then they are in luck – supply is much more plentiful above that mark, though a few very popular areas like Arcadia have relatively slim pickings. During May even those upper price ranges saw a downward trend in active listing counts, but not enough to cause any real problems for most buyers. If today’s normal demand can cause supply to drop as much as it did in the last month, then buyers are going to have an even harder time if demand were to grow. This is especially true for the entry level market which is desperately short of homes for sale or rent.
The price trend is now very different for the low end, where strong appreciation is likely, and for the high end where a gently drift sideways is more likely, except in those areas where inventory is unusually low…
We note that the monthly median sales price has increased much faster than the monthly average price per sq. ft. The low end of the market is not pulling its usual weight due to the painfully low levels of supply in so many areas. This generates insufficient sales to keep the median down at its natural level. Prices are not really improving as much as the median suggests, except in a few very affordable areas, which may not remain so affordable for much longer…
The growing sense of justifiable optimism in the housing market tends to bring out ever more ridiculous articles in the media, usually forecasting doom and gloom ahead. Some even pretend to use mathematics to justify their case.
As John Kenneth Galbraith said (or was it Ezra Solomon; we don’t even know the past for certain), “The only function of economic forecasting is to make astrology look respectable”.
We will continue to stick to reporting the present and very short term forecasts. Right now the Greater Phoenix housing market is experiencing more than usual upward price pressure due to a chronic shortage of affordable housing to buy or rent. The majority of new development is focused on the mid-range or luxury markets, not the affordable market, for understandable business reasons, so there is no imminent solution to this shortage of affordable homes.”
Wondering if it a good time to sell for your price and neighborhood? Most likely the answer is yes. As always, the best answer is a researched answer. We simply need an address to give you a real answer to that question – anytime.
After a year and a half of the real estate market being in the doldrums – low supply and low demand – demand has fully corrected. In fact, demand is now in a “normal” range. Supply however, has failed to follow. In fact supply is down about 15% from last year. That is great news for sellers.
In the last 2 weeks of February, demand finally began increasing. That increase appeared to primarily come from first time home buyers. Even that picture has shifted a bit, and now demand is largely coming from the move up buyers. This move up buyer has allowed improvement in higher price points as well as in most geographic areas. In real estate, this is the “trickle up theory” – that improvement begins in the lower price ranges and migrates upwards. If demand remains strong, and supply continues to be constrained, then with time, prices follow.
Supply and demand trends tend to follow certain patterns, ultimately adjusting with the effect of coming in to balance. For example, when supply stays low but demand accelerates, the first signs of the shift are multiple offers – often pushing contract prices above listing prices. Then the appraisals begin to come in “low” (as rising prices are not supported by historical prices) often forcing sellers to accept less and thereby artificially holding down prices. Eventually enough demand creates buyers who will pay above appraisal or enough attractive cash offers, and prices begin their climb. Higher pricing then encourages more sellers to come to market, and as supply builds price appreciation moderates. Supply and demand then are brought back in to balance.
Where are we currently in this cycle? At the moment, we are seeing multiple offers with contract pricing pushing upwards, only to be depressed by low appraisals. If this trend continues, we likely will see price increases in the next few months.
Summing up the market shift is our favorite guru, Michael Orr of the Cromford Report:
Now we are fully into the height of the prime selling season it is becoming clear that it is not the first time home buyer who is making the biggest impact. It is the move up price ranges that are doing best compared with last year.
Here are the price ranges which have growth dollar volume the most between March 2014 and March 2015:
1. $350K-$400K – up 46%
2. $300K-$350K – up 40%
3. $500K-$600K – up 40%
4. $275K-$300K – up 28%
5. $200K-$225K – up 26%
6. $800K-$1M – up 26%
7. $250K-$275K – up 26%
8. $175K-$200K – up 24%
9. $2M-$3M – up 23%
10. $600K-$800K – up 21%
11. $400K-$500K – up 21%
All ranges below $125,000 are delivering lower dollar volume than last year and so are the ranges over $3 million and between $1.5 million and $2 million.
The mid range and the lower luxury ranges are where we are seeing the most strength and this is in stark contrast to last year.
All in all, encouraging news for most sellers. After a year and a half, it’s nice news to report.
While sellers are gaining the upper hand in the marketplace this spring buying season, they don’t have power in all areas. Let’s evaluate where buyers are winning and losing. Relatively strong supplies (which give buyer’s potentially more bargaining power) currently exist in:
Chandler –supplies have been rising since early March and are about at the same level as last year
Fountain Hills – starting to fall but higher than any time since 2010
Gilbert – active listings are climbing in 2015 (although still below 2014)
Scottsdale – listings are slightly down from last year but still plentiful
Laveen – listings are up and at equivalent levels of 2012
Cave Creek & Paradise Valley – both areas have abundant supply and are hitting new highs for supplies
Gold Canyon- listings are more plentiful than last year
Where can buyers expect tough competition for homes? The west valley is particularly low in supply, largely because housing is most affordable there. Glendale, Tolleson, El Mirage are seeing multiple offers and stiff competition from buyers for homes. As demand is up in all areas, smart buyers will learn the dynamics of their particular shopping area to learn how to win.
The early suspicions that 2015 might actually see an increase in demand are finally proving to be fact. In real estate, improvement in a market goes from the bottom up, rather than from the top down. This means that to stimulate a market place (i.e. see price improvement and a high volume of turnover) you need the entry level buyer to show up in force. That purchase then allows for the seller to buy their next home, which then allows that seller to buy and so on. It is said that the first time home buyer can spark a domino effect of 7 sales on average. This was the thought process that spurred the dubious tax credit back in 2009. The government seeing that the housing market was in severe meltdown mode, decided to stimulate the first time home buyers through a purchaser tax credit. In one sense it worked – first time home buyers started buying. In another sense, it was an utter failure. Unlike a “normal” housing domino effect, in the distressed market it simply meant that the first time buyer bought the foreclosed home or short sale – spurring exactly nothing. Once the tax credit expired and the artificial stimulation of the market ended, the market dipped and simply reverted to the full blown distress market.
Fast forward to today’s market which for the last year and a half has stubbornly remained in the doldrums. In that time an abnormally low number of homes exchanged hands despite extremely favorable interest rates and flat pricing. The only thing that saved that market from becoming a strong buyers market is that sellers disappeared at the same time the buyers did. So the recent spike in demand is a welcome one. But even welcome changes bring challenges, demand is not spiking in all areas and price points – and demand changes much more quickly than supply can. The areas and price points that are currently adding supply are not where the demand is strongest. As Michael Orr of the Cromford Report recently so succinctly stated :
“Demand is up strongly for the lower and middle price ranges but new supply is heavily skewed towards the higher price ranges, where demand is actually lower than last year. As a result, sellers of properties over $800,000 are facing stronger competition from other sellers. Sellers below this price point are in a much more favorable position than last year, particularly those with homes priced below $400,000.
When we look at listings added from February 7 to March 6 in 2015 and compare with the same dates in 2014, we find:
- new listings priced below $100,000 are down 30% (total value at list down 27%)
- new listings between $100,000 and $200,000 are down 16% (total value at list down 15%)
- new listings between $200,000 and $400,000 are up 1% (total value at list up 2%)
- new listings between $400,000 and $800,000 are up 6% (total value at list up 7%)
- new listings at $800,000 or more are up 13% (total value up 12%)
The surge in demand is for homes between $75,000 and $800,000, so the extra supply above $800,000 is joining inventory that is already plentiful.
Meanwhile inventory for the first time home buyer is in short supply and contract ratios for the well-located areas that are dominated by such homes are headed into “frenzy” territory.”
So does this “frenzy” mean that prices are immediately rising? No. As we’ve mentioned in the past, price is a trailing indicator. It will likely take a few months to begin showing up in pricing – but price improvements do seem to be on their way. That is very good news for sellers and a strong nudge to buyers to get buying sooner than later.
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.”