May Daily Commentary

The below information is the Daily Commentary provided by The Cromford Report.

 

May 26 - Here is our latest table of Cromford® Market Index values for the single-family markets in the 17 largest cities

The decline in CMI values is still accelerating with an average monthly change of -28% compared with -24% last week. The pace at which the market is cooling off is both astonishing and widespread. Least affected are the active adult areas such as Sun City, Sun City West and Sun Lakes, none of which are big enough to appear in the above table.

The largest declines over the past month have been seen in Avondale, Gilbert, Queen Creek, Cave Creek and Chandler. The smallest declines can be found in Paradise Valley and Fountain Hills but even here the fall is a massive -21%.

Only 7 cities are still over 300. There were 15 a month ago.

Buckeye is interesting in that demand has actually improved over the past month. However supply continues to build quickly and overwhelms that effect.

In absolute terms 166 to 400 are all seller's market CMI numbers, so we are not yet close to the point where buyer's have an advantage. However buyers' disadvantage in negotiations has dropped dramatically. This is because there is much less competition from other buyers. Many of these have dropped out due to the eye-popping increase in mortgage rates. There are also many more homes to choose from compared with a couple of months ago.

Cash buyers remain active, but these are a much smaller part of the total demand and cannot compensate for the loss of financed buyers.

 

 

May 23 - Every leading indicator is pointing to a sharp slowdown in the Greater Phoenix housing market. Supply has increased very quickly over the last 2 months while demand is much weaker than it was in March.

Prices are much slower to react to a change in the market, especially closed sale prices. However prices for homes under contract react 1 to 2 months earlier than closed prices. Even sooner than that we would expect to see weakness in asking prices. This is now starting to appear as sellers gradually lose confidence. Some sellers will be in denial for many months yet, and will risk over-pricing their home in current market conditions. Others will be more reactive and make sure their asking pricing is competitive.

Here is a chart showing daily average price per square foot for 4 measures:

1. List prices for active listings as of May 23
2. List prices for listings under contract as of May 23
3. List prices for closed listings during the last month (Apr 23 - May 22)
4. Sale prices for closed listings during the last month (Apr 23 - May 22)

We can see that the average $/SF for active listings (the blue line) has not managed to break through $365 and is now showing signs of retreating below $360. The maximum was $364.81 achieved on April 27. This is probably going to be the top.

The green line is for listings under contract and has not yet shown any weakness. However, it is not showing much willingness to move above the current level of $313 to $314. This is probably close to the top, though we are by no means certain of this.

The closed prices are still blissfully unaware of the change in market conditions. The sale price per sq. ft. remains higher (at around $305) than the list price (around $300). However if the green line starts to drift lower we would expect the red and brown lines to do the same. Eventually the red line will drop below the brown line in a signal that market has returned to normal.

The remarkable speed of the change in the market is reflected in the fact that the Cromford® Market Index has dropped over 100 points in the last month.

May 21 - The Greater Phoenix market continues to provide plenty of reasons to be worried. Another domino is wobbling and looks like it might be getting ready to fall - the listing success rate. Below is the weekly chart for all areas & types.

At the moment we are just under 90%, a very strong number. However, if we look at the last 5 weeks, a clear weakening trend has started. A similar trend developed in 2005 between June and July. By the end of 2005 we were down to just 63% - meaning that 1 in 3 homes listed failed to sell. We cannot say this will happen in 2022. But if it were going to happen, the first signs of the success rate problem would look like just the chart above.

A similar downward trend started during the summer last year, but frenetic buying by investors, particularly large investors, pulled the nose of the airplane back up and we ended 2021 with a strong success rate of just over 90%. This does not look as likely in 2022. It would be advisable to watch this chart like a hawk. 2005 was a year full of red flags waving. 2006 was a full scale bubble burst. People now talk of the 2008 crash, but that was only when Wall Street woke up and entered a full-on panic. The real estate market was in dire straits as early as the middle of 2006 and 2007 was truly dreadful.

The problem that we faced in 2006 was compounded by all the foreclosures that piled up in 2007. This was largely because so many homeowners had little or no equity in 2006 so by 2007 they had negative equity and no reason to avoid foreclosure. At the moment, we have a more positive situation with a much higher percentage of homeowners having significant equity. They should be motivated to protect rather than abandon that equity. That gives us a reason to be less worried, but extreme vigilance is the order of the day. Those who refinanced and took a little too much cash out over the last 2 years are more exposed than most.

May 19 - Here is our latest table of Cromford® Market Index values for the single-family markets in the 17 largest cities

(Added by Troy to help you understand this chart) Cromford Market Index Definition: is a value that provides a short term forecast for the demand for resale homes in the market. It is derived from the trends in pending and sold listings compared with historical data over the previous four years. Values above 100 indicate more demand than usual, while values below 100 indicate less demand than usual. A value of 100 indicates the demand is close to normal.)

Our primary leading indicator, the Cromford® Market Index, is telling that us that the cooling trend is getting even more powerful. Every city has seen its CMI decline by at least 15% and the average for these 17 cities is a fall of 24%, compared with an average of 20.5% last week. At some point we would expect the nose-dive to decelerate and reach an equilibrium, but we seem to be a long way from that point at the moment. The first signal we are waiting for is for the average monthly change (-24%) to be lower than the prior week.

Worst affected are Queen Creek (-36%), Gilbert (-34%), Avondale (-30%) and Cave Creek (-30%).

It remains easy to sell a home at the moment but if this cooling trend stays in place, selling will start to get much more difficult by August.

We note that only one city (Fountain Hills) is still over 400. One month ago there were only 6 cities below 400. What a difference one month can make.

 

May 17 - Supply continues to increase at a fast rate across most market segments. The effect is most noticeable in the price ranges from $500,000 to $2,000,000.

For Greater Phoenix, single-family detached non-distressed listings without a contract:

• Active listings priced between $500K and $600K have risen from 477 to 1,049 in the last 2 months (120%)
• Active listings priced between $600K and $800K have risen from 546 to 1,111 in the last 2 months (103%)
• Active listings priced between $800K and $1M have risen from 259 to 519 in the last 2 months (100%)
• Active listings priced between $1M and $1.5M have risen from 209 to 468 in the last 2 months (124%)
• Active listings priced between $1.5M and $2M have risen from 91 to 194 in the last 2 months (113%)

The rise in supply is quite modest for homes priced over $3 million or under $500,000. It is also hardly showing up in mobile and manufactured homes. It is quite obvious in the condo / townhouse sector.

 

May 15 - For years buyers have been crying out for more supply. Their wish is finally coming true. In the last 7 days we saw more than 3,000 listings added to the ARMLS residential database for the first time since 2010.

With demand dropping below normal, this torrent of new listings is growing our active inventory at the fastest rate since 2005. If you can afford the new interest rates (or are buying with cash), there are suddenly a lot more homes to choose from.

Look out for a list price cuts as sellers start to realize they have to be more realistic if they wish to compete. Asking for concessions is no longer a joke.

Sales price weakness is still a few months away, but asking prices are starting to look a little wobbly.

 

May 14 - It is time to look at another of the dominoes that have fallen over - the contract ratio. The contract ratio compares the number of listings under contract with the number of active listings without a contract. It is a classic case of comparing demand with supply. This ratio has plummeted over the past 4 weeks because demand has weakened while supply has increased sharply.

This tells us that the previously crazy hot market has turned into just a hot market. But it also tells us that if the cooling trend continues at a similar rate, we could be in a warm market within a month and a normal market in just 2 months. The former is very likely, the second is more speculative and anyone who tells you they know what the market will be doing in 3 months is kidding themselves.

Here is the contract ratio chart for single-family homes in Phoenix:

From a seller's perspective, this is dismal table. Your negotiation power is dissipating at a rapid rate. All 17 cities are cooling quickly and their CMI is dropping 10% or more over the past month. 9 cities have fallen by 20% or more over the last month and one (Queen Creek) by as much as 30%.

The average change was -20.5% compared with -18.1%.

Supply is growing in almost all areas thanks to a plentiful and growing flow of new listings, while homes are going under contract at a slower rate than we have seen for a long time.

It will take several months of this trend continuing to reach a balanced market, but this no longer looks like such a far-fetched idea.

 

May 9 - The Cromford® Market Index was the first indicator to sound the alarm about the current market direction. However we can now see several other early indicators fall like a sequence of dominoes toppling over.

The first we would like to highlight is days of inventory - 365 times the number of active listings divided by the annual sales rate. Here is the weekly chart

While all the numbers are low in absolute terms, the 2022 line is shooting skywards like a missile. This tells us that supply is increasing very quickly relative to demand.

At 24 days, inventory remains very low at the moment, but we have seen in the past (specifically in 2005) that 24 in April can grow to 82 by year end and over 200 the following summer. I am NOT saying this is going to happen in 2022 and 2023, but I am saying this trend needs to be watched very closely. A balanced market will have about 120 to 135 days of inventory and if we get more than 150 days we will be in a buyer's market, one where prices will tend to fall rather than rise.

My advice is to keep watching days of inventory like a hawk and react appropriately.

 

May 1 - Supply has been arriving in greater quantities over the past few weeks, This applies to both rental and for-sale listings.

The most dramatic rises are in rentals. There were 2,550 new rental listings created in the last 4 weeks, which is up 45% from the same 4 weeks of 2021. For 2022 year-to-date we have seen 26% more new listings (10,072 versus 7,995).

Residential for-sale listings added over the last 28 days number 10,476, up from 10,387 in the same period of 2021, a 0.9% increase. Year to date we have seen 40,198, down from 40,580 last year.

The problem for the market is that this extra supply is coming just as demand is dropping fast.

The for-sale active listing count (excluding UCB and CCBS) across all areas & types has jumped 27% in just 4 weeks. This is even faster than we experienced in April 2005. That's a scary percentage, even though the absolute numbers remain small. If this growth rate persists through May and June, the market will be very different by July.

 

April 24 - Red flag warning. The housing market is changing more rapidly with rising supply and falling demand. While it remains far above normal for now, the Cromford® Market Index is dropping fast.

Here is an image extracted from the weekly CMI chart:

We can clearly see that the CMI is accelerating downwards. Although it remains above 400, representing a very hot market, the downward trend is so powerful it appears possible that it will drop below 300 within a matter a weeks rather than months. It is not possible to predict the CMI, as it is designed to be the very earliest indicator of market changes. We do not know when this decline will bottom out.

Last year we saw a similar but less intense fall during June. However, investors and iBuyers filled the gap left by the fading owner-occupier demand and kept inventory at low levels. The CMI bottomed out well above 340 and staged a second rally.

April is supposed to be one of the best months for the market, but new contract signings are significantly lower than last year. This means active listings are staying active longer and inventory is starting to build in most (but not all) segments. At the moment the number of homes for sale remains very far below normal, but we have seen before how it can increase sharply if more sellers emerge just as demand is declining.

There are a sequence of market indicators that fall like dominoes when a major change occurs in the market. The CMI is specifically designed to be the first of those dominoes. We will be reporting on the state of those confirming indicators over the course of the next few weeks and we advise subscribers to pay close attention. Do not pay attention to prices. They will continue to rise for many months, since they are trailing indicators of market conditions.

 

 

Please let me know if you or someone you know is looking to Buy or Sell.

Troy Holland

480-773-5792