Each month Tom Ruff of The Information Market
gives his stellar commentary on the housing market. Tom is armed with
Pending data, which others do not have access. His insights are below. Read the full issue of STAT for the accompanying graphs.
Does this sound familiar?
An uncertain period of waiting for a decision or resolution.
That’s the definition of the word limbo and it perfectly describes our
current market where low demand and a lack of new inventory have
balanced the market into a standstill. This month I will share my
thoughts as to why demand is low and why new listings activity has been
extremely slow. I’ll also look at the confusion surrounding automated
valuation models and finish things up with the Pending Price Index
(PPI).
Low Demand
We’ve never seen a low demand / slow new inventory equation like this
before. How slow is sales demand? Through the first seven months of
2014, MLS sales volume has been running 17% lower compared to the same
months in 2013. Total sales in August of 6,428 were only 8.9% lower than
sales in August 2013 at 7,055. Yes, sales volume was higher last year
but some interesting dynamics are unfolding inside the numbers. The
number of normal sales in August 2014 was greater than the number of
normal sales in August 2013, although total sales were higher in August
2013. The balance between distressed sales and normal sales has
improved.
|
August 2013 |
August 2014 |
| Bank sales |
631 |
427 |
| Short sales |
729 |
233 |
| Normal sales |
5,695 (80.7% of total sales) |
5,768 (89.7% of total sales) |
| Total sales |
7,055 |
6,428 |
With foreclosure inventories continuing to fall, normal sales will
continue to grow as a percentage of total sales. In September of 2013,
6,314 total sales were reported in the MLS. We are projecting 6,150
sales in September. If correct, the September 2014 sales volume will
only be 2.59% lower than the total sales in September last year. Fewer
distressed sales, fewer investors and more traditional buyer translates
into a healthier market, we just need a lot more of them. Furthermore, a
large population base of first time home buyers is not yet moving into
the market, causing pent up demand.
Many perspective homeowners find themselves in a philosophical penalty box, which is restricting the level of demand:
| The Penalty Box |
- Those who lost a home to foreclosure in the last 7 years or
completed a short sale in the last 4 years are often ineligible for
financing. People with stellar credit can easily qualify for a loan,
people in the penalty box cannot, this is pent up demand.
- A Strict lending protocol restricts demand as the government and lenders weigh the outcomes of making bad loans. See this video here or this article for more.
|
Lack of new inventory
On the new inventory side of the equation, the number of new listings in
August was extremely low with only 8,175 new listings added. First in
June, then July, and now again in August we’ve seen the lowest total of
new listings for each of these months respectively in the last 14 years.
So, why is new inventory so low? The answer can be found when we analyze
current homeowners and what impact they have on new inventory.
The Non-Equity Group
Homeowners who purchased a home in February 2005 to July 2008 or
refinanced in this period will most likely have to sell their home for
less than they paid, which contributes to a lack of new listings.
Without equity, the pools of move-up buyers are eliminated, restricting
new listings and demand. Short sales are part of this group and short
sales are way down, this restricts new listings. Homeowner’s without
equity have limited options, unless they return to the market as a bank
sale after having been foreclosed on. Options: stay put, short sale, or
foreclosure.
The Equity Group
Homeowners who purchased a home before May 2004 and did not refinance
between February 2005 and July 2009, should have equity. The possible
equity can be seen when we compare the median sales prices now and back
then. The current median sales price is $195,000, In January 2009 our
median sales price was $130,000 and in February 2013 the median was
$160,000. This group provides positive new inventory potential, mostly
found in those trading up to another property.
Options: stay put or trade-up.
Investors who purchased homes between January 2009 and February 2013 to
create rental income are happy collecting rents and are not interested
in selling, this restricts supply.
The problem with Automated Valuation Models (AVMs)
Switching gears from the demand / new inventory problem, there is
another issue perplexing the media and consumers alike. One of the worst
things to come out the housing boom and subsequent crash and recovery
is the perception that home values change wildly and frequently. This
madness is further fueled by readily available computer models that
remove professional intervention and hand out home values like clowns in
a parade dispersing candy.
The companies providing these value estimates encourage consumers to
check on home values frequently, implying the value of their home is in
constant flux, even going as far as giving you a precise number as to
how much your home value has changed in the last 30 days. In doing
research for this commentary I checked on my personal residence. One
nationally recognized leader in home estimates reported my home falling
nearly 33% in a 60-day period.
No wonder there is confusion amongst the media and general public.
Simply put, pricing metrics can be confusing, particularly when left in
the hands of a layperson, or worse, someone with an agenda. Don’t get me
wrong, I’m all for transparency and sharing data, but let’s couple that
with quality data and professional insight.
Historically, home prices move quite slowly where the common theory
is that long-term appreciation should be pretty close to the general
rate of inflation, which is currently running about 2%. The median sales
price was $185,000 in July 2013 and September 2013, whereas the median
price August 2014 was $195,000, a 5.4% increase. The average price in
August 2013 was $235,800 and $249,000 in August 2014, a 5.6% increase.
The median and average prices are a summation of all homes sold through
ARMLS. If we shift the paradigm and view only Maricopa County public
records data and compare the median sales price for normal sales only,
and compare the median price for August 2013 to August 2014 the end
result is 1.7% higher.
No matter how many different ways I slice and dice the data, home prices
over the last 13 months have been remarkably stable, and even though
the number looks painstakingly precise, I guess I’ll just ignore the
latest email telling me my home value just decreased $103,389.
The Pending Price Index (PPI)
The PPI projected the median sales price in August to be $194,900, with
the actual median price coming in at $195,000. Our sales volume
projection for August came within 1.2%. We projected 6,350 sales and the
actual sales for the month landed at 6,428. For next month, the ARMLS
Pending Price Index is projecting declines in both the median sales
price as well as the average sales price. Anticipated declines in
September can be attributed to modest downward pricing pressure as well
as seasonable patterns. We’re projecting a median sales price of
$190,000 with sales volume of 6,150.
