The market balance is still weighted towards buyers, but not quite as much as in March. Demand remains weak while supply is normal.
April saw an improvement in sales volumes compared to March, but stronger closings at the end of April have left the pool of listings under contract at a relatively low ebb, especially for early May. Title companies are short of work to do in May and June and the whole market (especially mortgage lenders) could do with a lot more signed contracts.
If we focus exclusively on ARMLS data, then the market appears much stronger than it really is. This is because ARMLS sales are currently capturing a much larger share of the overall market than usual. Normal sales through the MLS have been the strongest transaction type and the only type that has grown year over year. Last year we saw higher sales of new homes, most of which do not hit the ARMLS closings. Investor flips, wholesale deals, short sales, pre-foreclosures, REOs, HUD sales, deeds in lieu, sheriff sales, IRS auctions and trustee sales were all more numerous in 2013 and have all faded in importance this year. Private bulk deals between investors have also plummeted compared with the last few years and pocket listings and FSBOs are now few and far between. Even though total ARMLS sales are a much larger percentage of the total, they have declined 12% from a year ago. But if we look exclusively at Normal MLS sales in Greater Phoenix (ignoring the REOs, short sales, pre-foreclosures and HUD listings) then we can actually see some constructive growth. April normal sales were up 3.6% over April 2013 and the annual sales rate was up 20.8%. There is a reasonably healthy resale market there, hiding in plain sight inside the overall picture.
Here are the basic ARMLS numbers for May 1, 2014 relative to May 1, 2013 for all areas & types:
- Active Listings (excluding UCB): 26,205 versus 15,482 last year – up 69.3% – but down 0.9% from 26,442 last month
- Active Listings (including UCB): 29,647 versus 19,847 last year – up 49.1% – but down 1.1% compared with 29,907 last month
- Pending Listings: 7,199 versus 10,888 last year – down 33.9% – and down 1.8% from 7,333 last month
- Under Contract Listings (including Pending & UCB): 10,584 versus 15,253 last year – down 30.6% – and down 2.0% from 10,798 last month
- Monthly Sales: 7,656 versus 8,704 last year – down 12.0% – but up 14.0% from 6,713 last month
- Monthly Average Sales Price per Sq. Ft.: $129.99 versus $116.62 last year – up 11.5% – but down 0.3% from $130.33 last month
- Monthly Median Sales Price: $190,000 versus $172,000 last year – up 10.5% – and up 0.5% from $189,000 last month
During March the Cromford® Supply Index was moving higher at almost the same rate that the Cromford® Demand Index was moving higher. Thus there was little discernible improvement for sellers. In April the Demand Index started to move a little faster and the Supply Index slowed down. That equates to a small but measurable improvement for sellers, and the trend is their friend at the moment.
If we look at the total number of home sales recorded at the two counties, then volume is down a long way compared even with 1999 when the population of Maricopa and Pinal County was 28% less than it is now. The biggest loss is in new home sales. In 1999 we saw 38,063 single family permits for new construction. In the last 12 months we have seen just 12,480. So new home builds are down 67% from 1999 even though the population has grown 38%.
Some agents who focus exclusively on normal MLS resales tend to wonder what the fuss is about. To them the housing market seems fine, even if it is a little quiet compared with the busy period of 2009-2013. They can see normal days on market, fair volumes and a reasonable amount of supply. However economists are almost universally gloomy about housing, lamenting the low home sales volumes, especially those for new homes which are a key driver of economic growth and job creation. Some people have suggested that new homes are too expensive relative to resales, based on comparing the median sales prices for new and resales. This is a fallacy, as we have pointed out several times. The new homes being sold in Maricopa County are about 25% larger than the average resale with better fixtures and fittings and a lower running cost. If simple adjustments are made on a price per square foot basis, rather than medians, then new homes are actually almost the same value as the average normal resale home in the same area. The main differences are that the resale will often have a swimming pool, landscaping and window treatments, whereas new homes usually leave those additional expenses to the new owner.
The underlying key problem for housing demand is a lack of household formation. This has been dropping for a long time due to a number of factors including unemployment, falling birth rates, lower net migration and greater home sharing especially among millennials. If household creation were at the normal long term average we would quickly have a housing shortage here in Greater Phoenix.
Household creation usually starts with stronger demand for rentals, as adult children move out from their parents’ homes. This is typically followed in the second stage by stronger demand for homes to buy. We are certainly starting to see demand for rentals pick up, though of course relatively few of these go through the ARMLS database. Vacancies are unusually low and supply is tight. Activity in multi-family (both new construction and resales) is strong. The bulk transactions going through recording in the last few months include a number of conversions and renovations of condos and town home communities to rental units under a single landlord owner.
The key issue for us is if and when overall demand for homes to buy will return to more normal levels for all property types. There are two main questions here:
- How quickly will lenders lower their requirements for credit scores? The critical level is 600-700 which is very typical for first time home buyers. This has not been sufficient to qualify for a loan for some time, but lenders are starting to go there.
- Will those who could qualify under these new guidelines actually apply for loans? Currently mortgage applications are at the lowest level since 2000 according to the Mortgage Bankers Association. Many people in the age group 20-35 are not even considering home purchase at this point in their lives. Will they start to take the option seriously, given how beneficial it could be to their long term wealth? Can they assemble the down payment somehow?
It would not take a huge change for demand to perk up. This could be: some more large lenders offering loans suitable for entry-level buyers with FICO scores of 620 and above; a greater degrees of forgiveness by loan underwriters for people who went through a foreclosure or short sale; 10% more millennials deciding to heck with renting, let’s get our own place to live. There is plenty of pent-up demand which could emerge at any time. I am almost tempted to call it Shadow Demand (but I won’t). But right now there is not much sign of it coming out and no-one knows for sure when it will. But it is a lot more significant and real than the so-called Shadow Inventory.
If increased demand does start to appear, then we should immediately see increases in the pending listing counts relative to 2013. Currently these are some 34% lower than last year. Total under contract counts (which include UCB listings) should also show a better year on year change than the current 31% drop. These will be two of the earliest signs to watch and you can be sure we will make a big fuss if we see it happening. We should also see a pick up in the MBA’s weekly mortgage application numbers, especially for purchase money loans rather than refinances. Until this happens sales prices look like they will stagnate. In particular reported appreciation rates are likely to drop quickly over the next 6 weeks. This is because prices went up more than 5% last year between May and mid June, not because prices are going to change very much in 2014. I don’t see a strong chance of prices making a 5% advance this year in the same 6 week period. However, it will most likely be August or September before this low annual appreciation rate is reflected in the S&P/Case-Shiller® Home Price Index®.