May 27, 2016
Founder and Owner, Cromford® Report
The second quarter of 2016 started pretty much where the first quarter left off. In fact, March and April were remarkably similar. Maricopa County unit sales for single family and condo homes were up 8 percent from April last year. The median sales price rose 8 percent to $230,000. However, it is only the affordable end of the market that is enjoying this strong level of appreciation. The rise in the median sales price is misleading because the chronically low supply of inexpensive homes is distorting the sales mix. Because the market balance is very different at different price points, prices are rising fast in some areas but stationary or falling back in others. Demand is unspectacular but a little stronger than normal. It is the supply that controls the nature of the market and it continues to be very poorly matched to the demand.
In the entry level ranges below $250,000 we see chronically weak supply, with multiple offers common. This is not because of heavy demand, but because homes for sale are vastly outnumbered by the perfectly normal number of buyers. To get back into balance we would need to double the level of supply by adding about 8,000 listings. Millennials entering the market for the first time, boomerang buyers recovering from foreclosure or short sale, and investors following both buy and hold or fix and flip strategies are all competing for a dwindling list of homes on the market. As a result, annual appreciation tends to be in the 8 percent to 15 percent range for this price segment. In many of these inexpensive areas only 1 in 250 homes is listed for sale.
For those searching for affordable housing, the picture does not get any better when they choose to lease, as most rents are going up even faster than purchase prices. It continues to be a very good time to be a landlord, and not a good time to be a tenant.
For the price range from $250,000 to $500,000 supply has been increasing, but demand is also on the rise. This intermediate market is well balanced and healthy, so price appreciation is modest. Price increases for homes in this “move-up” price segment tend to be between 2 percent and 6 percent per year. New homes are being completed in larger numbers than in any year since 2007 and are taking a larger share of the market. In any case, buyers are showing a strong preference for new or recently updated homes. Roughly 1 out of 60 homes are for sale and this level of supply is about right for the current level of demand. Developers are unlikely to overbuild because of the shortages of skilled construction labor which are proving persistent.
Problems start for sellers above $500,000, unless they are in one of the most sought after areas. These areas include Old Town Scottsdale, South Scottsdale and Arcadia. In most other areas, supply is more plentiful than it has been for many years and sellers are finding they are competing with plenty of similar listings. Price increases for homes over $500,000 have ground to a halt over the last 9 months and we are starting to see more price reductions as sellers try to undercut each other. Areas that are furthest from shopping and entertainment districts are the worst affected and in some of these we see as many as 1 in 18 homes up for sale. This presents opportunities for astute buyers.
To get back to balance in the luxury sector, we need to see about 1,700 fewer homes listed for sale, a 30 percent reduction in supply. Without this reduction, we are likely to see weak pricing trends continuing for some time. This is because buyers have the advantage in negotiations. Appreciation rates are typically between -2 percent and +2 percent for homes over $500,000.
New home closings were once again strong in April, up 49 percent from April 2015, whereas re-sale closings were up only 4 percent. This shift is in favor of new homes, a trend we expect to continue for some time.
From a geographic perspective, the West Valley gained additional strength during April while the markets in the Central and East Valley were little changed. Areas close to the freeways continue to outperform more distant locations. The allure of golf course homes have clearly declined over the last decade, corresponding to the significant drop-off in participation in the sport since peaking in 2003. As Maricopa County has one of the highest densities of golf courses in the world, this could prove a challenge over the next decade.
We saw only small increases in overall price per square foot during the first quarter of 2016 with increases at the low end being offset by weakness at the high end. We anticipate that the second quarter will see a little more upward movement than the first quarter. The average $/SF pricing is likely to decline during the third quarter which is in line with our usual seasonal pattern.
The table shows the more significant ZIP codes with the strongest appreciation in average sales price per sq. ft. between May 2015 and May 2016.
Michael Orr is the founder and owner of the Cromford® Report www.cromfordreport.com. Michael can be reached at email@example.com or by phone at 480-262-5839. Sample of Cromford® Report data included with this article. See Introduction to the Cromford® Report course offered July 13th.
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