Market Summary for the Beginning of September from Cromford Report
Several writers and commentators in the national media appear to be trying to stoke mass hysteria that the housing recovery is over and done. There is precious little hard statistical evidence to back that theory up, and almost none at all here in Phoenix. However many people are hyper-sensitive to any suggestion of weakness because they remember the last crash so vividly. They don’t want to be caught again in the same trap. There is no shortage of pessimists and skeptics who take delight in passing on the media’s gloom. In fact that is often a key identifying characteristic of a market in the early stages of a long term recovery. Here at the Cromford Report we prefer to focus on the facts. It is our duty not to get caught up in the hysteria or emotion. The facts tell us that the market has cooled over the last 2 months. They also tell us that the housing recovery is still intact.
Of course if mass hysteria takes hold and 90% of the population convinces itself that the housing market is doomed, it will be a self-fulfilling prophecy conjured out of nothing. I seriously doubt the bulk of the Greater Phoenix population is that gullible, but I suppose I could be wrong.
In the normal world. no market improves every month without a rest now and then. There are always changes going on, and we are way overdue for a cooling off.
A move towards normality should not be regarded as a sign of impending doom, just a sign of impending normality.
A move towards normality does not mean prices will come down. Unlike the stock market, prices almost never move downwards in a normal real estate market. Sellers only lower their price expectations when very desperate. Desperate times do occur a few times per century, but they are very rare. For a while in 2004 and 2005 we forgot that they could ever happen. Now the public knows all too well they do and consequently expects prices to drop at any moment, even when it is least likely to happen. From a statistical point of view any significant non-seasonal downward movement in pricing would be very strange because none of the exceptional conditions that existed in 2005 are true today. We are emotionally attuned to a price fall, but the market doesn’t care.
This month we can see a significant cooling in demand, but it is nowhere near large enough to balance with the shortage in supply. So pricing pressure remains firmly upward, albeit less intense. Demand will have to drop much further before there is any likelihood of a change in price direction. Demand is just as likely to firm up again once the surprise of the interest rate changes has been assimilated. The Cromford Market Index™ started to fall at the beginning of July 2013 and has been dropping quite quickly ever since. A return to the level of 100 would suggest that prices will only rise at the pace of inflation. A drop below 90 would signal a probable move to the downside. Right now we stand at 143.5, with the low demand still well in excess of supply.
Prices have risen a long way in the last 24 months and it would be very surprising if that didn’t take some steam out of the demand. If you look at the Cromford Demand Index™, down from 108.3 this time last year to 93.6 today, that appears to be exactly what is happening.
Here are the basic ARMLS numbers for September 1, 2013 relative to September 1, 2012 for all areas & types:
- Active Listings (excluding UCB): 18,182 versus 14,405 last year – up 26.2% – and up 10.5% from 16,456 last month
- Active Listings (including UCB): 21,359 versus 20,678 last year – up 3.3% – and up 8.0% compared with 19,779 last month
- Pending Listings: 7,302 versus 10,125 last year – down 27.9% – and down 5.8% from 7,755 last month
- Under Contract Listings (including Pending & UCB): 10,479 versus 16,398 last year – down 36.1% – and down 5.4% from 11,078 last month
- Monthly Sales: 7,097 versus 7,596 last year – down 9.5% – and down 16.3% from 8,213 last month
- Monthly Average Sales Price per Sq. Ft.: $118.91 versus $98.44 last year – up 20.2% – but down 0.3% from $119.31 last month
- Monthly Median Sales Price: $180,000 versus $145,812 last year – up 23.4% – and down 2.2% from $184,000 last month
Sales volume over the last 2 months was fairly strong at 15,310 which compares favorably with 14,803 in the same 2 months of 2012. The sudden spike in interest rates seems to have caused sales to be pulled forward from August into July giving us a stronger than normal July and a weaker than normal August. If we measure sales by dollars instead of units the numbers are impressive. Home buyers spent $3.6 billion in July & August 2013 versus $2.9 billion in the same two months of 2012. Even with the slump in unit sales in August 2013, we saw buyers spend $1.66 billion versus $1.46 billion in August 2013.
It seems odd to talk of a sales slump when revenue grew by 13.6%, but everyone likes to focus on unit counts. Revenue was improved because prices have increased faster than the unit count has fallen.
There is little change in the supply of new listings. They continue to arrive at close to the lowest level in 13 years, just a tad higher than last year. We still have a chronic shortage of supply. This may surprise many observers who can see clearly that active listings are growing in the majority of areas. There are three effects at work here:
- Between July and November, the sales rate is always considerably less than rate at which listings arrive (the opposite is true between February and June). This is a seasonal pattern that always appears in Greater Phoenix.
- Fewer active listings have been going under contract since June – the seasonal fall in pending listings is greater than usual this year, similar to 2010 after the tax credit expired.
- The 65% drop in completed short sales means listings spend dramatically less time in escrow.
If we look at closed listings since 2011 and compare the Contract Date and COE Date recorded on the listings we find that:
- normal listings take an average of 35 days to close after the contract is signed
- REO listings take an average of 34 days to close
- HUD sales take an average of 54 days to close
- short sales take an average of 99 days to close
In the typical life of a successful short sale listing it spends a lot of time under contract and not much time in active status (excluding UCB). At one time (November 2010) we had 20,609 short sale listings in active, UCB and pending status. Now we have just 4,120. This has had an enormous impact on the statistics we measure. Now the market is going back towards normal, we see listings spend more time in active status and less time pending. We also see that UCB is used more sparingly when short sales are scarce. This will push the contract ratio down to traditional levels instead of the extremely high ones we have seen for the past few years.
Most indicators in our market snapshot are negative compared with this time last month, but when we compare months of supply of single family homes by price range with last year at this time, this is what we find:
| Price Range | 9/1/13 | 9/1/12 | 9/1/10 | 9/1/07 |
| Under $25,000 | 5.0 | 2.0 | 2.5 | |
| $25,000 to $49,999 | 1.6 | 1.6 | 3.3 | |
| $50,000 to $74,999 | 2.0 | 1.6 | 4.5 | |
| $75,000 to $99,999 | 1.7 | 1.7 | 5.5 | |
| $100,000 to $124,999 | 1.6 | 1.8 | 5.7 | |
| $125,000 to $149,999 | 1.9 | 2.1 | 5.8 | |
| $150,000 to $174,999 | 2.1 | 2.1 | 5.2 | |
| $175,000 to $199,999 | 2.5 | 2.4 | 6.2 | |
| $200,000 to $224,999 | 2.3 | 2.4 | 5.3 | 10.3 |
| $225,000 to $249,999 | 2.4 | 2.2 | 5.6 | 12.2 |
| $250,000 to $274,999 | 2.5 | 2.6 | 5.9 | 11.8 |
| $275,000 to $299,999 | 2.8 | 3.0 | 7.1 | 13.1 |
| $300,000 to $349,999 | 3.4 | 2.8 | 6.8 | 13.4 |
| $350,000 to $399,999 | 3.8 | 3.2 | 7.2 | 13.7 |
| $400,000 to $499,999 | 3.9 | 3.7 | 8.2 | 13.2 |
| $500,000 to $599,999 | 5.2 | 4.8 | 9.0 | 16.5 |
| $600,000 to $799,999 | 6.4 | 7.6 | 12.1 | 21.1 |
| $800,000 to $999,999 | 6.2 | 8.1 | 16.3 | 20.1 |
| $1,000,000 to $1,499,999 | 9.0 | 11.8 | 16.3 | 18.1 |
| $1,500,000 to $1,999,999 | 9.0 | 11.6 | 21.1 | 20.6 |
| $2,000,000 to $2,999,999 | 32.3 | 16.1 | 49.2 | 15.1 |
| $3,000,000 and Over | 34.0 | 53.7 | 67.0 | 30.0 |
It seems strange to us now, but between 2004 and 2007 there were so few sales below $200,000 that I didn’t bother to measure the months of supply for those price ranges.
We can see from the above table that months of supply remains low, well below normal and quite similar to this time last year. The figures for 9/1/07 show us what they should look like when impending doom is about to strike.
The price range where supply is improving most for buyers is from $300,000 to $599,999. On the other hand, between $600,000 and $1,999,999 supply is now tighter than last year. That part of the market is noticeably stronger than 12 months ago.
So what is going to happen to prices going forward? They are almost certainly going to start rising again. The average $/SF for pending listings and for listings under contract are both moving higher each day now that August is over. I expect to see the average sales $/SF move up from $119 per sq. ft. to around $122 per sq. ft. in the next 4-8 weeks. After that the future is uncertain but it would not surprise me if they hit $125 per sq. ft. by the end of the year.
