The Cromford Report – Daily Observations July 2018

    July 31 – The last Tuesday of the month is always the date for publication of the Case-Shiller® Home Price Index®. The numbers released today include sales that closed between March and May 2018. Looking at the month to month change in the index we get the following raking table:

    1. Seattle +2.23%
    2. Cleveland +1.35%
    3. Chicago +1.28%
    4. Las Vegas +1.27%
    5. Portland +1.24%
    6. Phoenix +1.08%
    7. San Francisco +1.08%
    8. Minneapolis +1.07%
    9. Atlanta + 1.00%
    10. Denver +0.85%
    11. Miami +0.79%
    12. Boston +0.78%
    13. Charlotte +0.76%
    14. Detroit +0.76%
    15. San Diego +0.65%
    16. Washington +0.63%
    17. Dallas +0.63%
    18. Tampa +0.49%
    19. Los Angeles +0.48%
    20. New York -0.04%

    Phoenix has moved up from 15th to 6th over the last month, a rapid change which now has us well over the national average of 1.06%. It is also unusual to see Cleveland and Chicago among the top 3 in this table, while Los Angeles and San Diego are much lower than usual.

    For the year over year changes, the table looks like this:

    1. Seattle +13.6%
    2. Las Vegas +12.6%
    3. San Francisco +10.9%
    4. Denver +8.5%
    5. Los Angeles +7.6%
    6. San Diego +7.3%
    7. Phoenix +7.3%
    8. Detroit +7.1%
    9. Boston +7.0%
    10. Tampa +6.5%
    11. Minneapolis +6.4%
    12. Charlotte +6.0%
    13. Portland +5.9%
    14. Atlanta +5.6%
    15. Dallas +5.6%
    16. Cleveland +5.0%
    17. Miami +5.0%
    18. New York +4.2%
    19. Chicago +3.3%
    20. Washington +3.1%

    Phoenix has moved up from 10th to 7th place over the last month. The national average was 6.4%

    July 30 – The month of June was the busiest for new single-family home permits since June 2007, 11 years ago. The Census Bureau reported a total of 2,307 for Maricopa and Pinal counties combined, and 3,056 for the State of Arizona as a whole. Those interested in the details by city or county can obtain charts going back to 1996 from the Cromford® Public section of the web site.

    The latest number represents an increase of 28% from a year ago. Clearly developers are planning to build at a faster rate and the 12 month rolling average has reached 21,785, the highest since February 2008.

    The top 10 locations for 2018 year to date are:

    1. Phoenix – 1,942
    2. Unincorporated Pinal County -1,272
    3. Buckeye – 1,104
    4. Mesa – 835
    5. Gilbert – 830
    6. Goodyear – 778
    7. Surprise – 761
    8. Maricopa – 741
    9. Peoria – 722
    10. Queen Creek – 630

    July 27 – Below is an image extracted from a Tableau chart on our Cromford® Public pages.

    The Transaction Type filter has been used to select only new home sales. We can see an obvious upward trend from 2011 to 2015 reversing and heading downward between August 2015 and June 2018. Clearly developers are attempting to head off affordability problems by building smaller homes. This goes some way to address the chronic shortage of affordable re-sale homes. The annual average has dropped a total of 8.3% since peaking in 2015 and there is no sign of it halting at the moment. However, the average new home is still roughly 20% larger than the average re-sale, which is currently 1,919 sq. ft.

    July 26 – Although the numbers for the overall market have not moved much over the last month, there are some significant winners and losers when we look at the Cromford® Market Index for the single-family markets in the 17 largest cities:

    The Northeast Valley provides the big winners over the last month: Paradise Valley (+32%), Fountain Hills (+11%) and Scottsdale (+10%). Cave Creek did not follow that trend and lies in 16th place.

    The West Valley’s Goodyear was the best of the rest with a gain of 9%. However Avondale dropped by 15% and fell from 1st place to 3rd. Peoria gained 1% but still ended up in the bottom position of the table.

    In the Southeast Valley, Mesa moved into the top spot by holding steady, while Tempe (-15%), Chandler (-7%) and Gilbert (-5%) showed weaker conditions.

    Overall we have 9 cities deteriorating for sellers, while 8 improved. This is the first time we have seen the negatives outnumber the positive for several months. Phoenix continues to drift slowly lower, representing about 25% of the market.

    If it were not for booming sales in the luxury market we would probably be seeing a market that is cooling slightly. However every city in the list is still firmly in the seller’s market zone over 110.

    It seems that rising prices and climbing interest rates have coupled with low supply to dampen some of our buyers’ enthusiasm at the low end of the market.

    July 25 – Scottsdale has been one of the larger markets showing a strong decline in active listings without a contract. At 1,500 the count is the lowest we have seen for Scottsdale single-family homes since September 12, 2013. This time last year we saw over 1,800. The trend is still downwards, but we normally see an upswing during the third quarter. I wonder how low it will go in 2018 before this takes effect..

    July 24 – Back from vacation to find little has changed in the Greater Phoenix housing market. However the important Days of Inventory measure (365 x active listings / annual sales rate) has declined to its lowest level since October 2005. Hovering between 75 and 76 days (for all areas & types), we are now a shade lower than the minimum level of 2012. We are unlikely to approach the freakish readings of early 2005 which registered as low as 30 and should have been a warning of a bubble about to pop. However we can conclude that the market is now even more favorable to sellers than it was in the frenzied market of 2012.

    July 14 – Mike Orr is on vacation for 10 days. Normal observation service will be resumed on July 24.

    July 13 – We are seeing some exceptionally low numbers among active listing counts in the Northeast. Carefree has just 44 active single-family listings without a contract, which is easily the lowest we have ever recorded. The long term average is 99.

    Rio Verde has just 34, again the lowest we have ever recorded. The long term average is 92.

    July 12 – Our usual weekly look at the Cromford® Market Index for the 17 largest cities and their single-family markets:

    11 cities are showing favorable moves for sellers over the past month while 6 are showing moves that favor buyers.

    The biggest improvement is for Paradise Valley (up 23%), yet it remains at the bottom of the table.

    The biggest decline is for Avondale, yet it remains at the top of the table (just).

    Significant improvements are experienced by Goodyear, Scottsdale and Fountain Hills.

    Tempe and Chandler are the other significant moves backwards.

    July 11 – The Gross Rent Multiple (GRM) measures how many year’s rent would be equivalent to the purchase price of a property. The lower the number the better the return on investment a landlord gets. Unless maintenance and taxes are unusually high, it is easier to make a property cash flow if the GRM is low. A typical number for the Phoenix area would be about 14. For tenants you could argue that a high number means they are getting more for their rent dollar than a property with a low GRM.

    There are some areas with particularly low average GRMs, but these are often small and remote locations where homes are relative cheap and rents relatively high. If you can find a tenant you are in luck, but the remote location means that demand for rental homes may be much lower than in a more central area. Examples would include:

    • Aguila 85120 – GRM = 8.8
    • Valley Farms 85193 – GRM = 7.7
    • Coolidge 85128 – GRM = 10.8

    However 2 areas of Phoenix stand out as having low GRMs:

    • Phoenix 85009 – GRM = 10.9
    • Phoenix 85034 – GRM = 10.8

    This explains why landlords tend to have a much stronger appetite for homes in less desirable areas than ordinary home buyers.

    The places that have the best reputations as being desirable tend to have high GRMs. They are more difficult for landlords to cash flow but you could argue they may make up for this with stronger appreciation. I am not sure I would agree with that argument. Certainly the majority of landlords avoid these locations. However the high purchase price of such homes tend to make renting them a more attractive option if you are only going to stay for a handful of years or less. Example of high GRMs include:

    • Phoenix 85018 – GRM = 19.5
    • Gold Canyon 85118 – GRM = 17.6
    • Paradise valley 85253 – GRM = 21.1
    • Scottsdale 85255 – GRM = 18.9
    • Scottsdale 85262 – GRM = 22.6
    • Rio Verde 85263 – GRM = 18.3
    • Scottsdale 85266 – GRM = 19.8
    • Fountain Hills 85268 – GRM = 17.8
    • Carefree 85377 – GRM = 20.1

    The average GRMs shown above are based on the 2017 full year numbers.

    July 10 – Based on Affidavits of Value filed in Maricopa and Pinal counties we can summarize the activities of iBuyers during June:

    June 2018 Opendoor OfferPad Signpost (Zillow)
    Number of homes purchased – Maricopa 283 86 16
    Number of homes purchased – Pinal 16 29 0
    Number of homes purchased in total 299 115 16
    Percentage share of iBuyer purchases 70% 27% 4%
    Number of homes sold – Maricopa 236 85 0
    Number of homes sold – Pinal 18 27 0
    Number of homes sold 254 112 0
    Percentage share of iBuyer sales 69% 31% 0%

    The situation a year ago was like this:

    June 2017 Opendoor OfferPad
    Number of homes purchased – Maricopa 165 80
    Number of homes purchased – Pinal 17 18
    Number of homes purchased in total 182 98
    Percentage share of iBuyer purchases 65% 35%
    Number of homes sold – Maricopa 88 37
    Number of homes sold – Pinal 9 13
    Number of homes sold 97 50
    Percentage share of iBuyer sales 66% 34%

    Opendoor has grown 98% over the year and increased its market share slightly.

    OfferPad has grown 53% and lost some market share, but has become the largest iBuyer in Pinal county.

    Signport has achieved a 4% market share for purchases in just over 1 month but has yet to record a sale.

    There were 9,883 sales in June 2017 excluding new homes and homes over $500,000. iBuyers had a 2.2% share of this market in June 2017.

    In June 2018 there were 9,205 sales with the same exclusions, making the iBuyer share 4.3%

    We can conclude that the iBuyer market share has almost doubled from 2.2% to 4.3% in 12 months.

    July 9 – Looking at the single-family market under $250,000 we of course see a lack of supply. Comparing areas with last year:

    Area Active Listings excluding UCB & CCBS Now Last Year Change
    Northeast Valley 175 239 -27%
    Phoenix & North Valley 983 1,260 -22%
    Pinal County 581 796 -27%
    Southeast Valley 545 836 -35%
    West Valley 1,085 1,653 -34%
    Greater Phoenix 3,369 4,784 -30%

    We see that the Southeast Valley has experienced the largest percentage decline in supply, but the West Valley is close behind. Phoenix and the North Valley has experienced the smallest percentage decline but this is still a hefty 22%.

    By comparing with the annual sales rate we get the days of inventory as follows:

    Area Days of Inventory Listings Now Last Year Change
    Northeast Valley 35 42 -17%
    Phoenix & North Valley 31 37 -16%
    Pinal County 37 49 -24%
    Southeast Valley 22 26 -15%
    West Valley 26 35 -28%
    Greater Phoenix 28 35 -20%

    We see that the West Valley has experienced the largest percentage decline in days of inventory with Pinal County in second place. The Southeast Valley has experienced the smallest percentage decline, but it was already in the worst shape for supply last year and now has just over 3 weeks available.

    July 6 – We have added a tab to the Tableau Chart showing List Price versus Sales Price. The new tab shows how the median percentage of list price has changed over time.

    The measure gets higher as the market gets more favorable to sellers. in July 2018 we are seeing 99.24% versus 98.93% last year. We usually see a peak around July and then a fall back reaching an annual low point in January. The series of higher highs and higher lows shows the market is still getting hotter rather than cooler.

    We also note that the median is somewhat higher than the average because the lower end of the market invariably achieves a higher percentage of list than the mid-range or high-end. The median is less affected by high-end sales than the average.

    July 5 – Today we take another look at the Cromford® Market Index for the single-family markets in the largest 17 cities:

    We see 10 cities with improving conditions for sellers and 7 cities deteriorating. The major decliners were Avondale (-11%) which has seen lower sales and increasing supply but still remains at the top of the table, and Chandler (-6%), falling slightly behind its Southeast Valley rivals Mesa and Gilbert.

    Moving strongly in a positive direction for sellers were Paradise Valley, which has seen a downward trend in supply, Goodyear and Scottsdale.

    With the bottom 7 cities all rising, all 17 cities are comfortably inside the seller’s market zone.

    July 4 – Rental prices have increased sharply over the past 3 months, up from 89 cents per sq. ft. per month in March to 96 cents per sq. ft. per month in June. These are still very low by the standards of cities like San Francisco or New York, but for Phoenix they represent a big increase. Between 2006 and 2014 they remained flat around 70 cents for the entire period.

    This calculation is based on leases closed through ARMLS, which represent a relatively small subset of the market. Yet it is large enough to be a representative sample and an 8% rise in just 3 months is a little alarming. The cost of homes to rent is increasing faster than the cost of homes to buy.

    It gives us some insight into the motives of Progress Residential and Cerberus paying market price to turn single-family homes into rentals.

    July 3 – The monthly median sales price is a popular measurement that often gets a lot of attention in the news media. Real estate data often contains a certain amount of garbage data so when you receive a list of sales prices there will be a few that look like $0, $100 or $100,000,000. If you use average sales price these pieces of garbage really mess up the answer. To avoid this problem, you have to do a lot of work to detect the garbage and supply the correct data. This is the approach we take. However if you use median sales price instead of average sales price, the garbage has almost no effect on the median, so you can be lazy and just ignore the garbage. As you can imagine, this lazy person’s approach is very popular.

    Real estate analysis is the only discipline that I know that pays a lot of attention to medians. Almost everyone else regards them as a mathematical construct of little interest. You never hear Wall Street referring to median share prices. The only exception would be population demographics, where median age is often a useful measurement. The Census is another area in which a certain percentage of data is garbage.

    There are times when median sales prices can become misleading, and now is one of them. They work great when the mix of homes being sold remains constant. However, we have a very low number of low-end homes available and a plentiful supply of high end homes. This means the mix is highly skewed in favor of expensive homes, compared with normal. This makes the median sales price shift upwards to a much greater extent than if the mix had stayed constant. We therefore get an over-optimistic impression of how much prices are increasing. This makes for good headlines but will lead to plenty of disappointment when sellers find out their home has not really increased in value as much as the median.

    We saw a similar but opposite effect during the housing crash when the market was dominated by bank-owned homes and the median sales price collapsed much faster than other price measurements.

    Let us look at the change between May and June 2018

    Measurement (all areas & types) May 2018 Jun 2018 Change Observation
    Median Sales Price $262,900 $267,329 +1.69% a large jump in median price
    Average Sales Price $332,239 $332,743 +0.15% a tiny increase in average price
    Average Price per Square Foot $164.35 $163.59 -0.46% a fall in average price per sq. ft
    Average Square Foot 2,022 2,034 +0.59% a significant rise in average home size

     

    The median price jumped almost 1.7% in a single month, about 10 times faster than inflation. It implies falsely that prices are accelerating higher.

    The sales mix caused the average home size to rise almost 0.6%. 2, 022 to 2,034 sq. ft. is an unusually large change month to month and 2,034 is one of the highest readings we have ever seen.

    Average price rose by a small 0.15%, less than the increase in average home size.

    The average price per sq. ft. fell almost 0.5%. Price per sq. ft. was weaker in June than May.

    Note that the change in the median sales price gives us a very unrealistic picture of what is happening in the market. We recommend using the average price per sq. ft. which is much more laborious to calculate but is much less prone to changes in the sales mix. It is quite normal for the average $/SF to decline between May and September. The heat of the summer has this effect almost every year.

    July 2 – At this half-way point in the year, it is tempting to assume that not much has changed since January. The overall Cromford® Market Index is bouncing around within a narrow range between 150 and 170 and everything looks pretty stable. However when we look at individual ZIP codes we see some that are reaching new lows in single-family active listing counts while others are moving much higher.

    Supply Moving Higher:

    • Phoenix 85006 – 74 active listings excluding UCB & CCBS – the highest count since 2011
    • Phoenix 85008 – 68 active listings excluding UCB & CCBS – the highest in over 2 years
    • Phoenix 85013 – 63 active listings excluding UCB & CCBS – the highest in 15 months
    • Phoenix 85015 – 79 active listings excluding UCB & CCBS – the highest in over 4 years
    • Phoenix 85023 – 74 active listings excluding UCB & CCBS – the highest in 14 months
    • Phoenix 85053 – 52 active listings excluding UCB & CCBS – the highest in 19 months
    • Phoenix 85083 – 115 active listings excluding UCB & CCBS – the highest in over 4 years
    • Phoenix / Anthem 85086 – 291 active listings excluding UCB & CCBS – the highest in 14 months
    • New River 85087 – 88 active listings excluding UCB & CCBS – the highest in over 4 years

    The low inventory plaguing most of the valley does not apply in the above areas, so buyers may do well by shopping there.

    Supply Reaching New Lows:

    • Phoenix 85045 – 26 active listings excluding UCB and CCBS – second lowest level since 2013
    • Mesa 85206 – 46 active listings excluding UCB and CCBS – the lowest number we have ever recorded for the start of a month
    • Gold Canyon 85118 – 115 active listings excluding UCB and CCBS – the lowest level in 6 years
    • Casa Grande 85122 – 103 active listings excluding UCB and CCBS – the lowest level in 6 years
    • Florence 85132 – 80 active listings excluding UCB and CCBS – the lowest level in 6 years
    • Paradise Valley 85253 – 267 active listings excluding UCB and CCBS – the lowest level in almost 3 years
    • Scottsdale 85255 – 424 active listings excluding UCB and CCBS – the lowest level in almost 3 years
    • Scottsdale 85257 – 46 active listings excluding UCB and CCBS – the lowest level in 3 years
    • Scottsdale 85258 – 82 active listings excluding UCB and CCBS – the lowest level we have ever recorded for the start of a month
    • Scottsdale 85262 – 360 active listings excluding UCB and CCBS – the lowest level in almost 3 years
    • Rio Verde 85263 – 43 active listings excluding UCB and CCBS – the lowest level in almost 3 years
    • Fountain Hills 85268 – 161 active listings excluding UCB and CCBS – the lowest level in almost 5 years
    • Casa Grande 85294 – 36 active listings excluding UCB and CCBS – the lowest level we have seen since the ZIP code was first created in 2007
    • Gilbert 85298 – 137 active listings excluding UCB and CCBS – the lowest level in over 5 years
    • Aguila 85320 – 7 active listings excluding UCB and CCBS – the lowest level in almost 7 years
    • Arlington 85322 – 0 active listings excluding UCB and CCBS – the lowest level in almost 5 years
    • Surprise 85374 – 110 active listings excluding UCB and CCBS – the lowest level in almost 3 years
    • Sun City West 85375 – 87 active listings excluding UCB and CCBS – the lowest level we have ever recorded for the start of a month
    • Carefree 85377 – 53 active listings excluding UCB and CCBS – the lowest level in almost 5 years
    • Surprise 85378 – 15 active listings excluding UCB and CCBS – the lowest level in 14 months
    • Buckeye 85396 – 178 active listings excluding UCB and CCBS – the lowest level in almost 3 years

    It is counter-intuitive that the ZIP codes showing growth in supply should be all in the central and north valley. However it is true. Phoenix is better supplied than most of the other large cities.

    Many of the ZIP codes hitting low points are in southern Pinal County and the Northeast Valley.

    The 4 most expensive ZIP codes (85253, 85255, 85262 and 85377) are all in the list of ZIP codes making new lows in supply. It would appear that wealthy people are spending some of their tax cuts on luxury homes. The strong increase in luxury sales in 2018 has made inroads into what used to to be an excess of supply.

     

    The data used to create the Cromford® Report is obtained from public records and obtained under license from the Arizona Regional Multiple Listing Service, Inc (ARMLS). Cromford Associates LLC and ARMLS expressly disclaim and make no representations or warranties of any kind, whether express, implied or statutory, as to the accuracy of the data used or the merchantability or fitness for any particular purpose.

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