10-8 Housing in Arizona – Hold the Press

by Mark on October 8, 2013

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.

SCOTTSDALE AZ SEPT 2013 SUPP DEMAND

 

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

Scottsdale YoY Mos Supply

 

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.

{ 8 comments… read them below or add one }

Goldman October 9, 2013 at 5:14 am

Mr Hanson,
The ASU Real Estate expert, Michael Orr, you probably didn’t have a chance to look at his background. Every time there is a caution article the media rolls out an “EXPERT” from a University to refute it (the very Universities that are dependent on low interest rates to keep the coffers full). Mr Orr is a displaced Computer Industry person or cash out in 2002 and moved into Real Estate in 2005 (Mark I’ve heard you’ve got a few more years than Mr Orr in Real Estate)!
Michael Orr’s Bio:
“In 2012 Mike Orr was appointed Director of the Real Estate Center at the W.P. Carey School of Business at Arizona State University. Orr left the computer industry and California to focus on Arizona real estate in 2002. He obtained an Arizona real estate license in 2005 and started studying real estate statistics the same year….. created the Cromford Report (www.cromfordreport.com), which provides daily real estate market insight for realtors and investors covering the Greater Phoenix residential market.

When the longest Bull market in Bonds is ending it is impossible to get people to understand that Interest rates have been falling their entire adulthood and everything they believe about money/investing/real estate will change as Interest rates begin to rise.
Regards.

Reply

Mark October 9, 2013 at 5:59 am

Good color. I think Orr’s data are fantastic. However, I don’t believe he is focusing on the important things in the “new-era” housing market.

Reply

Goldman October 9, 2013 at 10:00 am

Mark,
How about the illusionary International buyer who is driving up prices in Florida (I do believe that is a factor). But, Cash buyers and International buyers are a minor factor – there are lots of folks buying Real Estate with minimal down payments and large mortgages.
For example, I looked up in the Miami-Dade County recent Mortgages on file for early August. after looking for 2 minutes I found 46 NE 171st Street, North Miami Beach, Florida which sold on Aug 1, 2013. Selling price was $128,000 – the new mortgage on this property is $125,681 (the buyer didn’t even put down 20 percent). This Mortgage was granted by Prospect Mortgage LLC and the best part is the Chairman of Prospect Mortgage is the Former CEO of Fannie Mae, Michael J. Williams (as they say you can’t make this stuff up). Here is the Press Release: http://myprospectmortgage.com/blog/2012-11-29/Press-Release/Prospect-Mortgage-Names-Michael-J-Williams-Former-Fannie-Mae-CEO-as-Chairman

Reply

JB October 9, 2013 at 10:13 am

Would the last one out put please shut the lights out !!! good call Marc!! been following this phenom via your blog .
MOAR supply !! I could not wait to post this , glad you good give us the Arizona update .

LOOK IT Vegas non contingent inventory !! http://www.calculatedriskblog.com/2013/10/las-vegas-real-estate-in-september-year.html

JB southwest florida

Reply

Logan Mohtashami October 9, 2013 at 3:56 pm

Best Housing Prediction of 2013

Ivy Zelman March 2013 on CNBC….. Housing is in Nirvana

… wait she just downgraded her outlook on new home sale today. That Pesky Housing Inflation in a low wage job recovery cycle that majority of the jobs recovered goes to people over the age of 50

http://loganmohtashami.com/2013/08/26/housing-nirvana-gets-slapped-by-higher-rates/

Reply

JB October 10, 2013 at 10:52 am

Hey Logan , I was wondering when you where going to ‘chime in ” . Can you reach out to your main stream media contact goddess Diana O and see what the hell is going on ?? LOL

http://www.businessweek.com/news/2013-10-07/a-lonely-housing-bear-predicts-a-big-fall

Marc made a gutsy call via his Bloomberg quotes and now has the moniker of “lone bear” . Of course Zillow
misread his prognostication as the ” wheels are going to fall off ” in regard to his implied correction.
Zillow offered a less drastic vision : Why homes are still very affordable ,,,

As pointed out by GOLDMAN above,, the mainstream pundits are still using legacy prediction models .
Affordability models are flawed in today’s environment . They need an “ABILITY” to buy variable.

Case shiller index does not ( I believe Mark alluded to this ) include the costs to rehab a home .

EVEN the old school economic models use by Yellen and Bernanke are flawed in today’s scenarios.

Do you really think that the rate surge was a major dampener on demand ? Could it be that we have reached
the point of diminishing returns of ZIRP and fed money creation ? A one percent uptick in rates squash demand ?

Anyways the next few months will be interesting . Will the speculative cohort try to book their gains in 2013
for tax purposes or wait for 2014 ?

Housing as an asset class is very illiquid .

Mark you are not the lone bear ,, There others (i.e David stockman , Harry Dent – master of demographics ) and now ME .

Reply

JB October 10, 2013 at 10:49 am

Hey Logan , I was wondering when you where going to ‘chime in ” . Can you reach out to your main stream media
contact goddess Diana O and see what the hell is going on ?? LOL

http://www.businessweek.com/news/2013-10-07/a-lonely-housing-bear-predicts-a-big-fall

Marc made a gutsy call via his Bloomberg quotes and now has the moniker of “lone bear” . Of course Zillow
misread his prognostication as the ” wheels are going to fall off ” in regard to his implied correction.
Zillow offered a less drastic vision : Why homes are still very affordable ,,,

As pointed out by GOLDMAN above,, the mainstream pundits are still using legacy prediction models .
Affordability models are flawed in today’s environment . They need an “ABILITY” to buy variable.

Case shiller index does not ( I believe Mark alluded to this ) include the costs to rehab a home .

EVEN the old school economic models use by Yellen and Bernanke are flawed in today’s scenarios.

Do you really think that the rate surge was a major dampener on demand ? Could it be that we have reached
the point of diminishing returns of ZIRP and fed money creation ? A one percent uptick in rates squash demand ?

Anyways the next few months will be interesting . Will the speculative cohort try to book their gains in 2013
for tax purposes or wait for 2014 ?

Housing as an asset class is very illiquid .

Mark you are not the lone bear ,, There others (i.e David stockman , Harry Dent – master of demographics ) and now ME .

Reply

Logan Mohtashami October 15, 2013 at 4:58 pm

I had a nice face to face talk with Diana recently here in Irvine.
As always I point out the DTI and LTI capacity for majority of Americans and point out that 68% mortgage buyers in year 5 of this economic cycle with rates under 5% is very telling of true capacity

Reply

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