I see a light at the end of the tunnel, it’s bright and fast approaching.
We are now entering into prime home buying season for Phoenix, and things are looking busier than ever. The latest data and report from Mike Orr of ASU’s Center for Real Estate Theory and Practice shows an existing extreme shortage in current supply, high demand, and is forecasting things to not change much in the near to medium term future. When you consider the factors that can lead to noticeable increase in supply, or the things that can lead to a noticeable decrease in the demand….there’s not a whole lot near term to balance the market out, leading many to think this market environment of bidding wars and prices moving upward will continue. The rebound in prices we saw forming towards the end of last year looks like it is gaining momentum and rising even faster during this Spring. The only real noticeable source of future supply I see is…once we have some strong price appreciation it will lead to sellers being motivated to sell once again along the way up, but it will be regular sales, not the all the distressed sales of short sales and foreclosures we’ve seen over the last 5 years.
When you consider we currently have 15,985 homes for sale across all of ARMLS (all Maricopa county and parts of Pinal county), and counting 7,259 home sales for February of this year, that leaves us with a paltry 2.2 months supply of home inventory. Insane! Normal months supply for a balanced market is somewhere around 5 months.
To see what the short supply and high demand we’ve been seeing for the last year has been doing to prices take a look at this monthly $/sf pricing chart over the last 10 years and then also this short term chart over last year. (please note…you can sort by price range and should probably exclude the million dollar plus homes which have seen an usually high uptick in activity, as that will give you a better idea at the bulk of the market) Elliot Pollack, an economic and real estate consulting firm, thinks we could see average home price up 50-60 percent by 2015. Wow!
It’s not just REO bank owned properties that are disappearing or trickling out, the number of people needing to do short sales has drastically dropped too. Large short sale niche listing agents like some of my team have been feeling that all throughout last year. Banks kept saying they have a huge inventory they are withholding and that explains the shortage (maybe large compared to historical norm, though much much smaller and in decline compared to last few years and while there may be temporary bumps in supply or rates of foreclosure along the way the general trend is in decline)…but… the banks don’t have any control over people deciding to do a short sale and listing their home for sale. Total inventory for short sales went from 16,580 in Jan 2011 to 8,600 today. (these numbers include larger proportion of AWC short sales under contract but still give an idea for short sale inventory on the market, active available counts are lower….see below for active count listings)
That’s about a 50% drop. How do banks explain that? If banks are really abnormally withholding foreclosures and abnormally postponing more auctions, short sales should be going up in numbers since it would be giving homeowners more opportunity and time to do a short sale. There will still be people needing to do short sales and foreclosures going forward, but most of these people in the future are going to be late bloomers. Short sales and foreclosures will continue declining in their general trend, as already predicted by the huge improvements in loan delinquencies for AZ, and normal sales will continue gaining market share and be more of the source for future supply sooner than people imagine.
The most basic and likely reason for a decline in short sales and foreclosures, is, probably some of the same reason Arizona has led the country in the fastest improvement in home loan delinquencies going from 14% in Dec 2010 to 7% in Dec 2011 and expected to be 3-4% in Dec 2012…Perhaps our local market has already worked its way through most of the foreclosure mess and the worst is behind us. To see drops that massive in loan delinquencies its not hard to imagine a similar decline in foreclosure activity as well, since the whole process starts with people going delinquent on their mortgages. Look at this notice of trustee sale (foreclosure starts) chart over the last 10 years to see the downward trend in foreclosure starts. There have been bumps in activity along the way, and we are still above historical norms, but the important thing is the trend is downward and the current demand is outpacing supply so it doesn’t really matter that foreclosures are above historical norms.
The downward trend in active listings suggests we are heading for an unusual shortage of affordable homes for sale. Compared with February 26, 2011 we have:
- 1,437 versus 6,012 REO listings – down 76%
- 1,863 versus 9,731 short sale listings – down 81%
- 56 versus 875 HUD listings – down 94%
- 12,071 versus 16,292 normal listings – down 26%
If we narrow it down to the price ranges below $150,000 then we find:
- 869 versus 4553 REO listings – down 81%
- 959 versus 7,154 short sale listings – down 87%
- 55 versus 841 HUD listings – down 93%
- 3,559 versus 5,642 normal listings – down 37%
Cromford Report Data:
Market Summary for the Beginning of March
The supply of homes for sale is now unusually low below $400,000 and it is clear that pricing can no longer be held down by negative sentiment. Consequently prices are rising at an accelerating rate and unlikely to stop rising until a significant additional supply can be found from somewhere. Where this will come from is not yet clear. The developers can only build a relatively low number of new homes in the near term, constrained as they are by the scarcity of experienced construction employees. The banks are receiving only a fraction of foreclosed homes from the trustees, and REO listings are being added to ARMLS at the slowest rate for almost 5 years. More than three quarters of short sale listings are already under contract, leaving only a couple of thousand of short sale listings unspoken for. Bidding at the trustee sales by third parties is intense except for those where the lender opens the bidding at the outstanding loan amount, obviously not interested in selling until they have taken possession. During March we expect 2 out of 3 trustee sales to go to third parties. Prices at the trustee sales are rising fast and many long term professionals are getting outbid by newcomers.
Normal listings are still relatively plentiful, but are being added to ARMLS at much lower rates than usual, so are not even close to making up for the low supply from elsewhere. The only potentially significant new source is if the banks have been holding back sending foreclosure notices to a large number of delinquent homeowners. If this is the case, then the market is telling these lenders: “now would be a good time”. There is no shortage of demand to absorb them. Some lenders, notably Wells Fargo, Bank of New York Mellon, US Bank and Green Tree Servicing were indeed stepping up their foreclosure notices in February, but the overall rate of new notices is still considerably lower than in 2011 and unless many other lenders follow suit we cannot expect a significant increase in REOs coming to market. Most likely, any increase in foreclosure notices will result in an increase in short sale supply and third party purchases at auction.
You can see the extremely low new listing rates by looking at this new chart where you can also break the numbers down by geography and this one where you can break them down by price range.
January had the lowest number (9,908) of new Greater Phoenix listings we have seen for any January since we started counting in 2001. Even 2005 had 10,415 and in those days new builds and FSBOs were numerous but rarely listed on ARMLS.
February had the lowest number (8,695) of new Greater Phoenix listings we have seen for any February since we started counting in 2001. 2005 had 9,282.
March is not looking any better so far from a buyer’s perspective. So we conclude that constrained supply is going to be a severe problem throughout the near to medium term.
We currently count 7,259 sales in February across all areas & types in ARMLS. This is up 1.4% from February 2011 and the second highest February total in the last 12 years. Nothing weak about demand there. Pending listings number 11,782 and are slightly lower than last year, but they are a much higher percentage of the available supply. The contract ratio is 120.24, a very high reading that compares with 56.1 in March 2011. Given the time of year, the contract ratio is likely to rise to even higher levels, suggesting a very tough time for buyers.
Average sales pricing has moved from $85.15 per sq ft in January to $87.52 in February, a rise of 2.8%. Since pending listing pricing has moved from $83.82 to $88.14 over the same period, a rise of 5.2%, we expect sales prices to rise even faster during March.
Today the monthly median sales price is $123,525, 13% higher than this time last year when it was $109,000.
Average asking prices for active listings have increased from $129.80 per sq ft on March 1, 2011 to $152.41 on March 1, 2012, an increase of 17.4%. This is exaggerated by the scarcity of low end homes and the relative abundance of luxury homes.
The 55+ areas and luxury market are still much quieter than the rest of the market. However the strong tide of price recovery is starting to rise from the bottom of the market.