The Phoenix housing market has a special
place in the heart of housing bubble watchers: together with Las Vegas and
various California MSAs, this is the place where the last housing bubble was
born and subsequently died a gruesome death which nearly brought down the
entire financial system. Which is why the monthly WP Carey report on the
Greater Phoenix Housing Market is of peculiar interest for those who want to
catch a leading glimpse into the overall state of the bubble US housing market.
As hoped, this month's letter does not disappoint. What we find is that while
equilibrium prices have been largely flat month over month, and are up 6% on an
average square foot basis from a year ago, something very bad is happening with
a key component of the pricing calculation: demand has fallen off a cliff.
Some of the disturbing findings from the report:
Demand has been much weaker since July 2013. The slight recovery in demand that had been
developing over the last two months dissipated again in May. While move-up
owner occupiers and second home buyers are starting to compensate for the
departure of investors, activity by first time home buyers is unusually low.
At the top end of the market sales of single family homes
over $500,000 grew 1% over May 2013. Sales of single family homes below
$150,000 fell 37%. This fall was partly caused by the lack of distressed
supply, but mostly by the reduction in demand from investors.
The market over $500,000 was much weaker in May than it
was in April, with a 15% drop in dollar volume compared with a year earlier. However it is the market below $150,000 that has
contracted the most dramatically. The relatively low volume of low-priced home
sales is causing the monthly median sales price to rise.
Luxury homes over $500,000 went back to a 24% market
share, the same as in May 2013. The lowest-priced homes under $150,000 fell
from 15% to 11%. The mid range has increased its share of spending from 61% to
65%, despite a 9% decline in dollars spent. Contrary to what is often stated in
the national media, demand is nowhere inhibited by supply shortages, unlike in
April 2013 when supply was severely constrained.
So how is it that prices aren't crashing to keep up with
(lack of) demand? For now the sellers are simply staying put, and not rushing
to lower their prices even as supply remains largely stable despite slumping
demand for housing. As the Carey report summarizes "Although buyers now
have more homes to choose from and much less competition from other buyers than
in 2013, supply has not become excessive." At least not yet.
Here one could be philosophical and note that just like
the S&P 500, the leading bubble housing market is merely suffering from a
case of the CYNK (henceforth halted until perpetuity just so the SEC can stick
its head in the sand and pretend it never heard of that particular fraud): with
a plunging number of transactions, price discovery is becoming a farce.
And plunging they are:
- The
percentage of residential properties purchased by investors continued to
decline from 16.3% in April to 16.1% in May.
- Single family home sales decreased year over year
across every sector:
- Normal re-sales (down 2%)
- New homes (down 4%)
- Investor flips (down 53%)
- Short sales and pre-foreclosures (down 73%)
- Bank owned homes (down 20%)
- GSE (Fannie Mae, Freddie Mac, etc.) owned homes
(down 44%)
- HUD sales
(down 76%)
- Third party purchases at trustee sale (down 59%)
- Foreclosure starts on single family and condo homes
fell 8% between April and May, which confirms a continued declining trend.
They were down 47% from May 2013.
- Recorded trustee deeds (completed foreclosures) on
single family and condo homes were up 9% between April and May but down
50% from May 2013.
What is just as interesting is the ongoing decline in out
of state purchasers, cash buyers and investors:
Out of State Purchasers
The percentage of residences in Maricopa County sold to
owners from outside Arizona was 20.1% in May, down from 20.8% in April but
still the second highest percentage since June 2013, though lower than the
22.0% we saw in May 2013. Californians have reduced their market share from
4.7% to 4.1% over the last year but retained their normal position as the
largest group of out of state buyers. Canadian demand has plummeted from
2.6% to 1.5% over the last 12 months, which about the same as buyers from
Colorado which was the source of an unusually large number of buyers in May. Washington,
Illinois, Minnesota, Texas, Michigan and New York provided the next most
numerous home locations for home buyers in Greater Phoenix during May.
Cash Buyers
For some considerable time, cash purchases have been
running at an unusually high level but this has been on a declining trend over
the past year. In Maricopa County the percentage of properties recording an
Affidavit of Value and purchased without financing was 25.0% in May 2014,
significantly down from 32.3% in May 2013. We consider 7% to 12% the normal
range for cash buyers, so mortgage lending still has a long way to go to get
back its normal share of the market.
Investor Purchases
The percentage of individual single family and
townhouse/condo parcels acquired by investors in May 2013 and May 2014 are as
follows:
These percentages are the lowest we have seen for many
years and are now close to the historical norm. The steep decline over the last
12 months confirms that investors are no longer driving the market the way they
did between early 2009 and mid 2013.
Finally, the Outlook:
The resale market is currently delivering a fairly low
number of new listings to market compared with historic norms over the last 15
years. Some home sellers appear to be cancelling their listings and waiting
for another time when buyers have a greater sense of urgency. Many families are
choosing to stay in their homes longer than they used to 10 to 15 years ago. Some
owners still have either negative equity or only a small equity position which
discourages both buying and selling. Others have low interest rates that they
don’t want to lose, and as they cannot apply their mortgage to a new home, it
is cheaper to stay put. These trends are likely to stay in place for a while
now that house prices have stabilized.
In May 2014 the Greater Phoenix housing market had
sellers outnumbering buyers but the numbers of both were well below normal. For
the prime spring selling season things were remarkably quiet. Supply has
stabilized at a level which is about 10% below normal and is starting to
weaken, an encouraging sign for sellers. However, except at the lowest price
ranges, we still have more supply than necessary to meet the weak demand which
is about 20% below normal. In May 2014 every category of single family sales
had lower volume than in May 2013, even normal re-sales which were down 2%.
Currently there is little movement on home prices in
either direction. However the mix of homes that are selling has changed a lot
in the past 12 months. There are fewer distressed homes and far fewer homes
priced under $150,000. This tends to push the averages and medians upward even
if prices are stable.
Compared with April, sales of luxury homes were weaker in
May, but we think this is mostly normal month to month variation and expect
them to recover somewhat in June. However it is likely that this will fade
during the hottest months of July through September when the luxury, snowbird
and active adult markets tend to go relatively quiet.
...
Single family new home construction and sales are well
down from last year, contrary to everyone’s expectations in Q4 2013, and they
remain about 65% below what would be considered normal for Central Arizona.
Population and job growth are not back to their peak levels but have recovered
much further than home construction has. People have been sharing homes and
renting instead of moving out and buying. All trends in housing tend to be
cyclical and this one is probably no exception.
With investors pulling back from the low end, the weak
demand from first time home buyers has come into sharp focus. But as lenders start to ease up on underwriting
restrictions this market is likely to expand from its current extreme lows.
Once this happens we shall probably be talking about the low supply again.
Between 2012 and 2013 we experienced a chronic housing shortage in Greater
Phoenix. This shortage has not gone away. It has just been masked by the
unusually low demand between July 2013 and now, and this state of affairs is
likely to be temporary.
Here one could be an optimist and agree with the
following: "There is plenty of pent-up demand which could emerge at any
time... But for the time being, the market remains unbalanced in
favor of buyers and if demand does not pick up soon then the next likely
alternative will be a fall in the supply as more sellers decide to wait for
better times. Unlike 2006 there is very little likelihood of a massive
increase in supply creating strong downward pressure on prices."
That is, unless all those who are locked in their houses
max out their credit cards and run out of ways to fund their lifestyle and,
contrary to traditionally wrong expectations, are forced to sell. Considering
the collapse in demand, what would happen then would be nothing short of an
avalanche.
Regardless of what a plunge in demand translates into on
the pricing front, it is becoming evident that little by little not only
fraudulent microcaps (which succeed in ballooning their market cap to over $5
billion before being halted), but also the S&P 500 and the US housing
market itself, are becoming "Level 3" assets: with virtually no
transactions to determine the equilibrium price, the value of ever more assets
is now in the eyes of the central-planner.
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