Important Real Estate Update | Jan 2019
Good grateful Friday morning to yas! :)
About once or twice a week since the start of the year I have gotten texts and emails about the market and what's going on.. and it's a fair question for sure. I think about this crap ALL the time! >D...
That being said, there is a man whom I follow in the real estate industry, and his name is Michael Orr. He runs what's called the Cromford Report. The Cromford Report is deep into our Phoenix real estate market and is rich in data. Additionally, and more importantly, every single transaction that is connected to the Arizona MLS system (which is the vast, vast majority of all resale transactions) is then digested for factual data based on Phoenix closed real estate transactions. Like what is actually happening and what is actually closing, when, how much, how big, how anything.
News these days can be so hard to filter through on what's really happening. Given the knowledge this person knows and where he's pulling the data from, I very much respect his perspective. That being said, I've been reading things over these past few weeks and wanted to share some golden nuggets of wisdom with you.
I hope you find it as interesting and positive as we do. -------------------------------------------------------------------------------------------------
January 7, 2019
I have started to see a few writers claim that Phoenix is becoming a buyer's market. I think this is a huge stretch. It is possible that we have forgotten what a buyer's market really feels like. We have seen a noticeable downturn in demand but that alone does not constitute a buyer's market.
In a buyer's market, supply is higher than demand and currently we still have very low supply and little sign of a significant increase on the horizon. The weaker demand is still more than enough to match the current level of supply. Consequently sales prices still upwards momentum, although this has eased a little since last spring.
I also hear talk of lower prices, but this talk is not referring to closed sales prices. It refers to the fact that many sellers are adjusting their expectations and bringing list prices more in line with market conditions. This is not resulting in closed prices going lower than last year, as we would expect in a true buyer's market. In fact the average price per sq. ft. for listings under contract continues to hit new highs.
We have become used to a hot, growing market that strongly favors sellers and now that it is cooler, contracting in volume and moderately favoring sellers, we have a tendency to over-react and make more of the change than it really deserves. We have to stay calm and realistic and be guided by the numbers. These numbers look like a cooling off, not a downturn. We experienced a similar, though more severe, cooling off in 2013-2014, but the last significant downturn took place between late 2005 and 2009 and was followed by a 2 stage recovery from 2009 through 2013. There was also a mini-downturn in 2010-2011 which interrupted the recovery but had little lasting significance in hindsight.
There has been no decrease in loan approval rates and buyers have little to stop them apart from their own desires and perceptions. Many appear to think the current state of the market will mean lower prices for them if they wait to buy later. In this, they are very likely mistaken, but it will take time for them to realize this. Population growth in Central Arizona is still increasing faster than the number of homes. Despite a less friendly tax code since 2017, owning a home still makes better financial sense than renting unless you expect to own the home for less than 3 years. None of the conditions for closed prices to fall are currently in effect.
It seems more likely that demand will come back up, rather than more supply will appear out of nowhere. It is certainly possible that new facts come into play (e.g. interest rates) which could change the picture, but most measurements that impact the housing market are in normal to good ranges. Affordability has dropped below the ideal range but compared with neighboring California, we are amazingly affordable. 2019 is very unlike the situation in 2005, when almost every number was highly unusual and flashing danger signals, even though most of the population chose to ignore them.
As in most things, the numbers are more reliable that emotions. We will continue to report the natural numbers without adding any artificial ingredients.
January 18, 2019
There are a number a false myths circulating in the housing industry at the moment. Many are obviously untrue when you examine the history of the market, but are often stated as if they were natural laws.
when interest rates rise, home prices fall - this is hardly ever true, but I hear it claimed quite often
when sales volumes fall, home prices fall - this is hardly ever true, but certainly happened in the great crash of 2005-2009, so is fresh in our memory
Home prices fall when supply exceeds demand by a substantial margin. If supply is lower than demand then it is extremely unlikely that home prices will fall. We can find no examples in history of prices falling when demand exceeds supply.
Rising interest rates decrease demand, but they can also decrease supply if many home owners have an existing mortgage with a low rate. If supply is abundant and interest rates rise, then it is likely that home prices will fall. However it is surprisingly uncommon to find this situation in the last 70 years. This is because interest rate have tended to fall far more often than they have risen, and because supply has tended to be low far more often than it has been abundant. At the moment, interest rates are on an upward trend (although this trend has halted recently) but supply is a very long way from being abundant, Supply remains very low by historic standards, though it is slowly increasing.
Sales volumes fall when demand falls, but this tells us nothing about supply. Supply sometimes rises when sales volume falls (as in 2005-2009). If it rises enough to exceed demand then prices will fall until the balance is restored between supply and demand. Eventually lower prices will stimulate demand (as it did between 2009 and 2013). However it is often the case that demand falls without falling enough to match supply, and in this case prices continue to rise. This has been a common situation in the last 70 years and is also the situation right now.
If demand falls so much that it matches supply, then prices stabilize. We have not reached that point, but it did occur in 2014 for a short period. Demand then bounced back and has exceeded supply ever since.
If demand falls so much that it drops below supply, then price will tend to move lower. This is a relatively uncommon occurrence, but happened between 1989 and 1991, between 2006 and 2009 and for a short period between 2010 and 2011. The 1989 and 2010 declines were very mild, but the 2006-2009 decline was a true bubble bursting. This is something that tends to happen only once or twice a century, after almost everyone who remembers it has passed on. Bubbles require a suspension of disbelief that is impossible for someone who has already experienced one. In 2005 the most popular false myth was that house prices never go down.
There was a good chunk there and I take no credit to that kind of writing or wisdom. He has an unfiltered but knowledgeable perspective on things and I greatly respect that. I hope you found this kind of info helpful.
If you have any questions about the data I've shared here, I am more than happy to answer any and all questions you may have... over pizza and beer is not an issue at all! :) We are here to help! Now enough reading! let's get to pictures already!! :)
I am off to do a water feature install in Scottsdale right now! :) Here's a rendering of what it's supposed to look like. The water wall (fountain) is just to the left of the TV at the bottom.
I'm super excited for next week's grateful post!! >D jacked! :) I hope you have a great weekend!