In the second half of 2005, supply rose dramatically but no-one seemed to take any notice. There was a widely believed myth that prices could never go down. Between March 31, 2005 and June 30, 2006, active listings rose from 8,394 to 45,729 (up 445%) creating a huge glut of homes for sale. Yet average sales prices continued to rise throughout this period, up 28.6% from $146.98 to $189.05 per sq. ft. Meanwhile demand fell 16.5%, with sales per month dropping from 8,490 to 7,093. It was as if everyone believed the laws of supply and demand no longer applied. Of course we found out by 2007
that supply and demand really did matter and the bubble burst explosively in
2008 causing untold damage to the economy and family finances.
It’s a question of timing. Supply and demand do control pricing, but in real estate there is a very long time delay between cause and effect. That timing can be extended even further by sentiment. In 2005 sentiment was off-the-charts positive – “irrational exuberance” ruled the roost and caused people to make decisions that in hindsight look crazy. Not just homeowners and developers, but especially lenders and the investors who fueled the credit surplus. Those few of us who tried to warn people in early 2006 that prices would fall dramatically were treated a bit like Harold Camping predicting the end times.
The opposite seems to be happening now. Sentiment is very negative. Everyone seems convinced that prices can only fall further, yet demand is rising and supply has been falling like a rock dropped off a cliff for 6 months now. It comes down to one simple fact: people believe what they want to believe. The facts do not exert a significant influence.
Here at the Cromford Report, we only deal with facts and figures, not beliefs, so here is the market update.
Sales – We are currently recording 9,814 sales in May. This is up 3.5% over April and up 10% over May 2010. This is a very strong sales total because in May 2011 sales are not being boosted by the government bribe (sorry, tax credit) that applied in 2010 for buyers of owner-occupied homes.
Pending Sales – At 13,268 on June 1, pending sales are down 0.4% compared with May 1 but up 6.7% compared with June 1, 2010. Again an extremely strong indicator of demand. In 2010 demand fell sharply during the summer after the tax credit expired, but there is no sign so far that the same will happen in 2011.
Active Listings – At 31,346 on June 1, active listings are 9.4% below May 1 and 23.3% below June 1, 2010. Supply is clearly falling fast. However this understates the situation because a large proportion of the active listings already have a contract against them. In fact there were 7,737 AWC (active with contingent contract) listings as of June 1, 2.6% higher than the very high level we saw on June 1, 2010. If we exclude these AWC listings, we have only 23,609 active listings, down 12.7% in a month and down 28.8% compared with last year. This is almost 60% down from the peak of October 2007.
Supply Versus Demand
The average months supply (active listings divided by monthly sales rate) for
the period Jan 1, 2001 to June 1, 2011 is 5.9 months. Right now we have a 3.2
month supply. Yet we read everywhere that there is a “glut of foreclosed home on the market”. What we are reading may have been true in November
last year. It is not true now. In fact available supply is really even tighter than this. If we only count active listings that don’t have a contract the months supply number drops to just 2.4 months. Anyone who thinks this is a “glut” is not living in the real world. They should just ask anyone who is actually trying to buy a home right now. Competition is intense, and not just for bank-owned homes and trustee sales. It is also heating up for short sales and normal listings. If you are trying to buy a home that is at all desirable and is priced at market or below, expect multiple bids. If you are a seller, then you only need to price realistically and your home well sell quickly.
(All the above numeric information is for “all
areas & types” within ARMLS.)
Records Being Set
In Maricopa County, May saw the largest ever number of distressed homes disappear from inventory. Pending foreclosures fell by 3,394 homes while REO inventory fell by 971 residential properties.
For Maricopa County, May gave us the highest ever percentage of out-of-state buyers. 29.9% of sales went to non-Arizona residents. The average between January 1999 and May 2011 was 11.9%. The absolute count was also a record – 2,648 homes sold to out-of-state buyers. The average since Jan 1999 is 1,446.
For Maricopa County, May saw the highest ever number of foreclosures selling direct to third parties at the courthouse steps. The record set was 1,476, 33% of all the trustee sales.
Exceptionally strong market activity is occurring in Paradise Valley where sales are now averaging 52 per month compared with 31 last year at this time. Inventory is down to 319 from a peak of 581 in April 2009 when sales were averaging only 9 per month.
After a bump upwards between mid April and mid May, average sales price per sq. ft. is back down a little at the beginning of June. Although we are still some 2% to 3% above the market bottom in January and February this year, in most places prices have not yet responded to the huge changes in supply and demand. Why not? Please refer to what happened in 2005, but with everything upside down. The rules of supply and demand have not been lifted. Of course, you don’t have to believe me, but please don’t say I didn’t
Every single city is showing a negative trend comparing last year with this year. However the picture is much more mixed when we compare this quarter with the one before it.
We can draw the following conclusions:
The recent $/SF trend is positive in cities with more expensive housing (over $70 per sq. ft), including Fountain Hills, Rio Verde, Carefree, Gold Canyon, New River, Tempe, Goodyear, Phoenix, Anthem, Paradise Valley, Litchfield Park, Scottsdale, Sun Lakes, Chandler.
Exceptions are Mesa, Gilbert, Peoria, Cave Creek and Sun City West, which are over $70 but still declining, if only slightly in some cases.
The recent $/SF tend is negative in cities with the cheapest housing (under $70 per sq. ft.) including Wittmann, Florence, Youngtown, Apache Junction, Arizona City, Avondale, Buckeye, Queen Creek, Tolleson, Waddell, Glendale, El Mirage, Maricopa, Sun City.
Exceptions are Surprise, Laveen, Casa Grande and Coolidge, where prices have risen since a quarter ago.
Contrasting Apache Junction with Gold Canyon, or Avondale with Litchfield Park, we can see that the recent pricing trend is significantly more positive in the higher priced neighboring city, despite huge falls in supply in the lower priced city.
Because the large cities Phoenix and Scottsdale dominate the market in dollar terms, their positive pricing trend is causing the overall market pricing trend to move higher. However, there are still a significant number of areas where sale pricing has yet to show a turn round. This includes major cities such as Mesa, Peoria and Gilbert.
The areas with the most negative pricing trend are either on the outer fringes, which get less attractive as gas prices rise (e.g. Buckeye, Florence, Wittmann, Apache Junction, Arizona City, Queen Creek, Cave Creek), or in the west valley where foreclosures have hit a larger percentage of the housing stock (e.g. Tolleson, Youngtown, Avondale).
Golf-oriented areas and cities that appeal to affluent retirees are tending to show the most positive trends in recent months, including Fountain Hills, Rio Verde, Carefree and Gold Canyon.
Anthem has the least negative annual price change (-1.7%), which reflects its unusually low supply level (currently only 1.8 months supply and 84 days inventory). Rio Verde and Paradise Valley are close behind with -2.2% and -2.6%. However Rio Verde still has an abundant supply while Paradise Valley’s active listings are at the lowest level since November 2007.
The greatest fall in pricing over the year is found in Youngtown (-18.1%), El Mirage (-17.1%), Tolleson (-16.3%) and Laveen (-15.7%) all cities which have suffered extremely high foreclosure rates between 2008 and 2010. The city of Maricopa is also down -15.5% over the year and has suffered a similar high foreclosure rate. However the foreclosure rates for all these areas are down a great deal from the peak of 2009.
Source: The Cromford Report because the information is too good not to pass on!