Media is running wild in AZ about a “prediction” I made of 20% “crash” in the state. TV spot link: HERE
First off, I am a huge AZ fan…spend lots of time there with my family. I like virtually everything about it there other than the dead of summer. That said, I spent time there at the end of June this year during the mini heat wave and was playing some of the best golf courses in the world for $30 a round and $10 replays. (check out Quintero off 74…7200 yards of pure delight).
Back to housing…I certainly think in the “skirts” house prices could drop 20%…some of the region is up 50% or 60%. Perhaps it will rise another 10% and drop 25%. Nothing goes straight up even though consensus has changed completely over the past two years to think that housing “can never go down”. It’s overwhelmingly thought that in slow periods, housing just “rises more slowly”. Uh, ok. Humm, that sounds awfully familiar.
Bottom line: I am not prediction a “crash” like we saw from 2007 to 2009 in the Arizona housing market. But some regions are getting dicey.
Please see the following Sept data of Scottsdale for example and make your own decision. Important…for this analysis, I chose Scottsdale simply because I know it well.
But it isn’t the only region — happening nationally in the regions which bounced the hardest in the past 18-months — I watch “daily” that is exhibiting clear signs of imbalance. Or rather, of being in a “stimulus hangover” very similar to what we saw following the expiration of the 2009/10 Homebuyer Tax Credit.
But ‘this’ stimulus “hangover” should be much more severe, as the stimulus that drove house sales volume and prices since Q4 2011 — the Fed’s “unconventional monetary policy that pushed mortgage rates from 5.25% to sub-3.5% over the period of a month — was far more powerful. Heck, the surge in rates from 3.25% to 4.75% alone means a family using a mortgage loan to buy can “afford” 12% to 15% less house on the same income. Throw on top waning ‘new-era” investor demand, the lack of “distressed” supply — which contrary to popular opinion — has been a primary reason sales volume AND PRICES in the most beaten down regions have done so well over the past 18 months, and an overall “sluggish” economy and I think it should be obvious to anybody that if a housing market that’s up 40% in 2-years has a sudden reversal of the conditions that made those gains possible, half of the gains could disappear fairly quickly.
Scottsdale, AZ Supply and Demand numbers “post-rate surge” are frightening
Scottsdale’s key housing market fundamentals have flipped on their heads post the rate “surge”. Fresh Sept housing data out last week go a long way in confirming a major, 180 degree trend shift.
Looking at Scottsdale in this note, supply is surging while demand has plunged to post-crisis lows concurrently. It sure looks like “lack of supply” isn’t the reason for the meager demand, at least in this market. If this were a true, “durable” recovery this market would not experience such a sharp trend change on a paltry 1% rise in mortgage rates. A 20% immediate price decline can easily be modeled from the following data. Then again, if rates suddenly plunge to 3% and rents increase a 10% price increase can be modeled.
In short, the rate “surge” catalyst is manifesting itself in quickly changing supply/demand fundamentals all over the nation in local and regional MLS data I review daily. I am following dozens of regions that look very similar to this.
Not coincidentally, regions in which new-era “investors” swarmed for buy-to-rent/flip schemes — routinely paying with other people’s money 10% to 20% over list price/appraised value using a flawed cap-rate model as a guide — are exhibiting the greatest signs of growing stress .
Worse yet, builders are in the ‘process’ of community building in these regions — relying on supply, demand and pricing metrics of just a few months ago, which look fantastic — but suddenly aren’t pertinent any longer.
Item 1) Scottsdale Sept supply and demand numbers are frightening
- YoY Supply up 22%. More frightening is that supply is up from peak spring GOING INTO the slow season…something that never happens.
- YoY Pendings down 28% and at post-crisis lows…perhaps historical lows
- YoY Mo’s Supply up 31% (moreover, MoM supply is surging GOING INTO the off season for housing)
Bottom line: On the rate surge “catalyst”, supply here is way up, demand is uber-weak…”concurrently”. And the slow season lies dead ahead. If this were a true “durable” recovery this market would not experience such a sharp trend change on a paltry 1% rise in mortgage rates.
Remember, what everybody was saying over the past 12 months…the low demand was due to low supply? Well, not in this market.
Item 2) Scottsdale key metrics for the month of Sept
Here, the the data adds “mos supply”, which was up a record 29% in Aug and 31% in Sept YoY
So, who cares is housing goes up 40% on year and down 20% the next…it’s still up and housing is a “long-term” investment right? Well, not so fast. To most normal house buyers, this isn’t far off. Obviously, it sucks for people who bought using 3% down loans who may find themselves underwater by 10% simply because they bought at a time when the Fed’s stimulus was having the greatest impact on the market. Or, the people who sold at the lows when the Fed’s stimulus was having lesser of an impact.
But the big problem with these types of markets all over the nation — the mega-bubble years’ regions turned “new-era” investor havens — is that all of the “unorthodox” demand that drove housing from people in tall buildings 2000 miles away can stop buying in an instant. They can also all turn into sellers at the same time over a very short period of time. And I think you are seeing some of both of this now.
Housing is not supposed to be this volatile. I mean come on…10% gains in a year are extraordinary. Yet people think that 35% to 50% gains over the past 2 years is some “natural rebalancing” of the market.
Of course, I could be wrong about all this. I just look at the data and call them as I see them. I hope I am wrong. I hope “this time it’s different”. But that is rarely the case.
Despite all this, love Arizona, love Arizonians, and sup to my best real estate investor/golf buddy Sean H! See ya in March.