When you are asked, “How is the market?” what do you say? Is it a great time to buy? Is it a great time to sell? Is it a great time to be a homeowner? I would say yes to all of those. The data supports the continued growth, continued strength, and continued appreciation – just at a slower rate.
Despite that housing still faces continuing challenges; low inventory, rising prices, demand – traditional homeowners versus institutional investors, and negative headlines. The economy as a whole faces supply chain and labor shortages, inflation, and another variant. Muted seasonality is emerging, which is not to be confused with a crash, it is simple – and necessary – moderation.
Tom Ruff, with the Information Market, compiled this series of Ivy Zelman quotes from a recent presentation. She is the premier Wall Street housing analyst who has received a lot of industry attention lately due to her reports on future household formation and new construction.
“The market has started to show some moderation. It’s still extremely strong, and we expect that we’re going to see that reversion to the mean and normalization come to fruition in 2022, barring no large increase in mortgage rates. One of the primary reasons for the looming cool down is the current situation’s ultimate lack of sustainability. In some regions, mortgage payments on a medium-priced home have gone up in double digits because of an ever-increasing percentage of investors and fix-and-flip buyers hoping to tap into rising home prices. The market then becomes oversaturated to an extent where people who own only the home they live in cannot afford to buy at all, finally bringing down demand for all. You have the people who have real jobs and need a place to shelter their families, and you have non-primary buyers. When you’re competing with cash and investors paying above appraised value, at some point, the music stops.
Pricing is not elastic, and affordability matters. Too many homeowners are getting too comfortable in the belief that this situation will last forever. Some are hoping to see their property grow by more, while others are simply worried that, even if they sell well, prices have soared so much that they won’t be able to find another home to move into. The problem with such a market is that it does not work when there are no primary buyers. When only investors can afford properties and everyone else holds off on buying, the market ultimately stagnates for everybody. As a result, agents need to convince homeowners who are on the fence about selling their homes to do it quickly.
It’s the incremental buyer that you need to worry about. You, as a Realtor, need to convince the existing prospective seller that now is a good time to sell. If your clients thought they could double what they paid, that opportunity is going to start to compress.”
National Real Estate:
Zelman’s statements make sense. Demand pulled back slightly in mid-summer and inventory rose. Pending home sales declined, seasonality emerged. The iBuyer frenzy with absurd purchase prices that ultimately took down Zillow Offers was relatively short-lived.
Yet something doesn’t sit quite right. I can’t seem to put my finger on it either. Why would October have a 7.5% month over month increase in pending sales if sales are moderating? Mortgage applications have hardly declined since the beginning of the year, the trend line shows less than a 1% decline.
United States MBA Mortgage Applications
Available inventory has been dropping since 2014. According to a recent Redfin report, inventory has never been lower. It is 42% below December 2019 and 23% lower than December 2020. Available active single family homes declined by 7% week over week. At this rate, we will start 2022 with fewer homes on the market than at any point in 2021.
Between the consistent demand, low inventory, days on market at half the seasonal average, and increased housing tenure (2008-2021 averaged 10+ years) which further reduces inventory; prices should go up next year, right? In October prices were up 18% year over year, the supply/demand imbalance was extreme earlier this year. While the supply/demand imbalance remains, to a lesser extent, what is causing a forecast of only 2.5%?
The AZ Market:
Inventory has been dropping since 2011 which was also the year property values bottomed out after the crash at $110,000. November’s median sales price is $420,000 and is still rising. That is a 282% increase in 10 years.
As long as the demand remains above supply, there are currently about 4 buyers for each listing, prices will go up. When the mix of buyers is 8% iBuyer, 8% corporate investor, and 18% out of state (YTD) the demand has the potential to shift quickly, leaving Greater Phoenix vulnerable to outside forces.
In Q3 2021, iBuyers paid $1.47 Billion to Greater Phoenix home sellers. This is the first time iBuyer purchases exceeded $1B in a single market. 12.1% of sellers sold to an iBuyer.
The build to rent movement is popular nationwide, but here in Greater Phoenix it is more than just popular, developers are betting big. With a 96.8% occupancy rate for the existing 5,000 units with an average monthly rate of $1,990; another 6,900 units are under construction.
Wall Street and private capital continue to flow into our market and as Zelman said above without traditional buyers, the market stagnates. 66% of our buyers are traditional buyers, which is down from 2020’s 91%. This is the trend to watch.
The bottom line is if there are available jobs and a growing population, the real estate sector grows. Greater Phoenix has created over 14,000 more jobs than existed in February 2020 and people are moving here to fill those jobs. The headlines are often misleading, but I remain cautiously optimistic.