Market Summary for the Beginning of August

Article Courtesy of Michael Orr
The Cromford Report

Although we didn't see the record breaking sales numbers of June, July had plenty of positive news for market watchers. An important exception was pricing, and no doubt much will be made of that by the housing doom folks, but then Cromford Report readers all know that pricing is a trailing indicator, don't we?

According to the current ARMLS data, 8,522 homes closed during July across all areas and types. This is 19.4% below the 10,568 we are measuring today for June. This dip between June and July is a normal seasonal effect. The key comparison to make is with July 2010. Here we are up 23.3% compared with 6,911 a clear sign that the market is healthier today than it was last year when we were reporting significant deterioration.

Due to the exceptionally large number of short sales in the ARMLS numbers, we experience a lot of "turbulence" in these sales numbers and they continue to change for many weeks after the end of the month. On July 2 last month we could see 3,057 short sales and pre-foreclosures across Greater Phoenix but this number is now measured at 2,481. The flexmls system automatically closes pending transactions when their Close of Escrow date is reached. Quite often a snag occurs in real life and a sale fails to close when expected and has to be manually reversed later. This is far more likely to happen with short sales than other types because of the large number of approvals and documents needed to successfully close escrow. As usual our sales counts will be constantly monitored and corrected as newer statistics emerge on a daily basis. The 19% drop-out rate for June is the highest we have seen and is unlikely to be repeated in July's numbers, but please treat all reports with caution due to this effect. 

 Here are some key figures for all areas & types:
Pending Listings: 11,491 on August 1, down 6% from 12,224 on July 1, but up 17% compared with August 1, 2010.
Active Listings: 27,787 on August 1, down 3.6% from 28,837 on July 1, and down 34.6% compared with August 1, 2010.
Listing Success Rate: 74.4% on August 1 which compares favorably with 73.5% on July 1 and very favorably with 58.5% on August 1, 2010.

In a normal year supply starts to increase from the beginning of July, so that 3.6% decline in active listings is a positive sign. Because of the lower monthly sales rate in July, months of supply has edged up from 2.9 to 3.0 months, but this is well below normal. The average months of supply for 2001 onwards is 5.8 months. A less volatile way to measure inventory is to divide active listings by the annual sales rate as this largely eliminates seasonal effects. Here we are seeing 105 days of inventory, improving from the 110 we measured last month and the lowest number of days of inventory since February 2006. The average days inventory since January 2001 is 174, so we have a significant under-supply of homes for sale through ARMLS.

Supply continues to drop while demand remains relatively strong. However that demand is not evenly distributed across the price ranges. In the last month we have seen the market strengthen at the low end while losing a lot of momentum at the middle and high end. Compared with July 2010, this month saw dramatic sales growth for single family homes below $100,000 but above that figure the picture is mixed. A few ranges performed fairly well, notably $100K->$125K, $175K->$200K, $400K->$500K and $1.5M->$2M, but there was a huge hole at the very top end of the market. Last year we had eleven closed sales over $3,000,000 during July and this July we have just one. Sales volumes are also down between $225K and $400K and between $600K and $1.5M. As you can imagine, an increase in the volumes under $100,000 pulls the average sales price and the average sales price per sq. ft. down substantially. The sales weakness in the higher range exacerbates this. However all that buying at the low end has caused the median sales price to stay fairly strong and it has barely changed over the last seven months.

As is normal when a market is attempting to recover from a long and disastrous plunge, there are plenty of conflicting signals:

Signs That Prices Are Going to Go Down

• The average list price per sq ft for pending listings continues to drift downwards, down 1.5% in the last month.
• The average asking price per sq. ft. for normal listings has fallen by 1.6% in the last month.
• Monthly average sales prices are making fresh lows.

Signs That Prices Are Going to Go Up

• The average asking price per sq. ft. for lender owned homes has risen by 7.4% in the last month.
• Sold price as a percentage of list continues to go up.
• Remarkably few listings are being canceled or expired.
• Investors are now purchasing nearly 40% of the properties auctioned at trustee sales in Maricopa County.
• Average days on market for closed sales is coming down.

Signs That Price Are Going to Stay Flat

• The average asking price per sq. ft. for short sales and pre-foreclosure has barely moved in the last month.
• Median sales prices are essentially flat.

So you can take your pick. It seems to me that although the supply/demand imbalance is becoming extreme, demand from investors alone is unlikely to sustain a significant upward price movement. We may have to wait until the general public realizes the degree to which the reality and perception of the supply picture have diverged, so that fear of missing out on a bargain overcomes the fear of prices dropping yet further. 

There are still many sources claiming that a "new tidal wave of foreclosures" is going to hit the Phoenix area. This is pure imagination and reminds me of the Y2K phenomenon in 1999. Despite a busy final week in July, the trustees of Maricopa County only issued 4,194 new notices of which 4,015 were residential. This compares with 8,140 in total and 7,802 residential for July last year. Foreclosure notices are down 48% to the lowest level since December 2007. As for actual trustee sales, we had 3,330 in July of which 3,176 were residential. This is 31% down from July last year and 36% below March this year. The trend is obvious and strongly downward and it seems we are about 75% of the way through the foreclosure tsunami of 2007-2012. This observation is only made about Maricopa County and is probably not true elsewhere, especially in states that use a judicial foreclosure process.

Mortgage Rates Reach Record Lows

Source:  National Association of Realtors®
Daily Real Estate News | Friday, August 05, 2011

Mortgage rates dropped sharply this week, possibly improving the purchasing power of many home buyers. The 30-year fixed-rate mortgage, the most popular choice among buyers, averaged 4.39 percent this week, its lowest average for 2011, Freddie Mac reported in its weekly mortgage market survey. The 15-year fixed-rate mortgage and the 5-year adjustable rate-mortgage also both reached new historical record lows. 

Rates mostly dropped across the board amid signs of a weakening economy, Freddie Mac says. 

"Treasury bond yields fell markedly after signs the economy was weaker than what markets had previously thought allowing fixed mortgage rates to follow this week with the 15-year fixed and 5-year ARM setting new historical lows,” says Frank Nothaft, chief economist at Freddie Mac.

Nothaft also noted some improvement in the housing market, however. "There were indications that the housing market is firming,” he says. (see Pending Home Sales Rise in June)

Here’s a closer look at rates for the week ending Aug. 4:

30-year fixed-rate mortgages: averaged 4.39 percent, downfrom last week’s 4.55 percent average. A year ago at this time, 30-year rates averaged 4.49 percent.  

15-year fixed-rate mortgages: averaged 3.54 percent, dropping from last week’s 3.66 percent average.Last year at this time, 15-year rates averaged 3.95 percent.  

5-year adjustable-rate mortgages: averaged 3.18 percent this week, falling from last week’s 3.25 percent average. Last year at this time, 5-year ARMs averaged 3.63 percent.

1-year adjustable-rate mortgages: were the only ones on the rise last week, averaging 3.02 percent this week, which is up from last week’s 2.95 percent average. Last year at the time, 1-year ARMs averaged 3.55 percent. 

Source: “Mortgage Rates Hit Record Lows Amid Signs of Weakening Economy,” Freddie Mac (Aug. 4, 2011)

Do-It-Yourself Home Security Check: Doors are First Line of Defense

Courtesy of the National Association of Realtors
Article Written By: Joseph D'Agnese

Protect against break-ins with a security check that shows where the entrances to your house—your doors—are vulnerable.

Think like a burglar 

 

First, stand back: is your front door visible from the street, or is it obscured by bushes? A door that’s covered by shrubbery offers thieves the perfect chance to break in without being seen. 

Trim back or remove shrubbery that offers cover for potential intruders.

 

Upgrade strike plates and deadbolts

 

Open all doors and check the strike plates, the metal fittings that catch bolts and latches. Chances are, they’re fastened to the soft wood of the door jamb with two screws only. Not good. Upgrade security with four-screw strike plates ($3) and 3-inch screws that bite all the way into the stud behind the jamb.

When conducting your home security check, make sure exterior doors have deadbolts that throw at least a 1-inch bolt. Ask your locksmith to upgrade to Grade 1 or Grade 2 locksets and deadbolts ($25 to $80), the most secure options.

Check garage doors

Back doors and garage doors are more likely to be attacked than the front door. If you have an attached garage, disable the automatic opener and lock the garage door before you go away on a long trip. The door leading from the garage into the house should be outfitted with the same hardware as exterior doors and kept locked at all times. 

Patio doors are vulnerable

Sliding doors leading to a patio can be a home’s weak spot. To beef up security:

• Closely inspect the doors and their hardware.

• Replace any missing or broken locks.

• Consider installing locking pins to prevent the doors from sliding.

• Get into the habit of locking the doors, not just the screen, when patio doors are unattended. 

Replace your entry door

Check the construction of your entry doors.  Those made of steel, solid wood, and impact-resistant fiberglass are all good choices for security. If you must have glass, make sure it is tempered or reinforced for added strength. Expect to pay $1,400 to $2,300 for an exterior replacement door, including installation.

Strengthen the lock on your outdoor storage shed

 

Don’t ignore the doors on your outdoor storage shed, especially if you store tools there; they could be useful to a burglar. As with house doors, the best option is a secure deadbolt. If your shed doors are unable to accommodate a deadbolt, a heavy-duty slide bolt ($15 to $25) secured by a padlock is a good substitute.


Joseph D’Agnese is a journalist and book author who has written numerous articles on home improvement. He lives in North Carolina.

Mixed Messages?

You may find that the information I provide is sometimes contradictory.  As I always try to remind everyone, "the market" is very location specific.  Reading news about national statistics or even state or county statistics may not be (and in most cases isn't) relevant to a local market.  Here in the greater Phoenix metro area, the range is HUGE.  For example, stats for the Paradise Valley luxury market have pretty much no relationship to the metro market, except that when you see stats for the metro market they include all areas and, as noted recently by Michael Orr, author of the Cromford Report, when there are less sales in the luxury market, the numbers can change drastically for the rest of the market.

Also, included in today's topics is an article about the rumored "Real Estate SalesTax" that has been flying around the Internet for some time now.  Contrary to what you may have read in such an email regarding a real estate sales tax (also being called a transfer tax) that is tied to the new healthcare bill, please note that the tax is not a real estate tax, but a tax on investments and it won't affect everyone... only those showing a profit over the capital gains threshold.  BTW, there are other tax rules for sale of a primary residence.  Anyone considering selling a home should certainly consult their tax advisor.

Below you'll find a link to the explanation about the so-called "sales tax" by SNOPES and an article from the National Association of Realtors® about the same issue.

 http://www.snopes.com/politics/taxes/realestate.asp

The 3.8% Tax Is Not a Real Estate Transfer Tax

Courtesy of the National Association of REALTORS®
November 24, 2010

By Robert Freedman, Senior Editor, REALTOR® Magazine

Shortly after the federal government enacted sweeping healthcare reform earlier this year, there was considerable concern over a last-minute addition to the legislation: a 3.8 percent tax on investment income of upper-income households to help shore up Medicare. The tax takes effect in 2013.

Among the concerns expressed among consumers and business people, including real estate professionals, both then and today, is that the tax amounts to a transfer tax on real estate. Not true, NAR Director of Tax Policy Linda Goold says.

Here’s how the tax works. For individuals earning $200,000 a year or more and married couples earning $250,000 a year or more, certain investment income above these income levels might be subject to the 3.8 percent tax on a portion of that income. I say “might” because whether the tax applies or not depends on many factors having to do with the kind and amount of the investment income the household receives.

Investment income includes capital gains, dividends, interest payments, and, for those who own rental property, net rental income.


Importantly, the $250,000 (for individuals) and $500,000 (for married couples) capital gain exclusion on the sale of a principal residence remains in place. So, if you’re a married household that sold a house for a $500,000 gain (that’s gain, not sale proceeds), that amount remains excluded from your income calculation.

Let’s take a look at a married couple that has $325,000 in adjusted gross income (AGI), plus $525,000 in capital gains from the sale of their house.

This household would be considered upper-income by most standards. Not only is their income relatively high, at $325,000 (adjusted gross income, or AGI), but they’re receiving a $525,000 gain on their house sale. Presumably, they bought their house years ago and it’s appreciated over the years, so upon selling it, their gain is a relatively high $525,000.

For this household, only $25,000 in investment income would be subject to the 3.8 percent tax. That would amount to $950. That’s because it’s the $25,000 over the $500,000 capital gains exclusion that’s taxable.

Before they would know that, though, they would have to do a calculation that involves their adjusted gross income. They would have to add their capital gain of $25,000 to the amount of their income above the $250,000 income trigger (for married couples).  Since their income is $325,000, they would add the $25,000 to $75,000 ($325,000 – $250,000), which would equal $100,000. Then they would compare the $25,000 to that $100,000, and apply the tax to the lesser of the two, which is the $25,000. Thus, $25,000 x 3.8%  = $950.

So, you have a household that had income of $850,000 for the year, and its tax on investment equaled $950.

This is a simplification. Other tax issues could come into play. But it shows that the tax applies to just a portion of investment income for certain upper-income households and that the capital gains exclusion remains untouched.

Nobody likes taxes, and this tax was inserted into the legislation at the 11th hour as a “pay-for,” that is, as a revenue generator to help offset some of the costs of the reform. It’s expected to generate $325 billion over eight years.

NAR has prepared a brochure that looks at how the tax might apply under eight income scenarios: 1) sale of principal residence (which we just looked at), 2) sale of a non-real estate asset, 3) gain, interest, and dividend from securities, 4) real estate investment income, 5) rental income as sole source of earnings, 6) sale of second home with no rental use, 7)  sale of inherited investment property, and 8. purchase and sale of investment property.

Please contact me if you'd like to receive a copy of this brochure.

Are Prices Going Up or Down?

Article Courtesy of Michael Orr
The Cromford Report

July 16, 2011

I don't think we have ever had such a confusing set of pricing data so it's not surprising that opinions on price direction are all over the map. Even the facts are all over the map, which is a much rarer condition.

I'm going to wade into the issue and try to explain what I see going on. Hopefully it will shed light rather than adding to the confusion.

Before I start, let me make it clear that market direction and price direction are not the same thing. Sometimes the market gets worse while prices rise. This happened between April 2005 and August 2007. Throughout this period the market deteriorated - supply was increasing and demand falling and although prices reached a peak in June 2006 they did not start to decline significantly until September 2007 (see here). In contrast, since November 2010, when the market was in poor shape, supply has been falling while demand has been rising, but prices have shown little to no interest in responding by moving higher. 

Nevertheless the improvement in market conditions is very substantial. Let's look at some key indicators for all areas & types:

1. The Cromford Market Index™ is higher now than at any time since October 2005.
2. The inventory of active listings is lower now than during the buoyant market of July 2003 and a far larger proportion of the current inventory has a contingent contract than was the case in 2003.
3. Monthly sales rates are setting new record highs.
4. Recent contract ratios are in the low to mid 90's, the highest we have seen since September 2005.
5. Listing success rates are approaching 75%, the highest recorded since October 2005.
6. Pending foreclosures and REO inventories are declining faster than at any time since 2005.
7. Foreclosures are off to a very slow start in the first week of July.

I could go on...
But let's get back to prices. The first thing to point out is that much depends how you measure them. First we have to choose between averages and medians. Why do we have two different measures? Because neither is entirely satisfactory. Average price, which you obtain by adding all the money spent on homes and dividing by the number of homes sold, can sometimes be unduly influenced by a relatively small number of large and expensive luxury homes. So instead, analysts often refer to the median sales price which is hardly affected by luxury homes at all. The median sales price is the price of the home that sits half-way between the lowest and the highest priced homes when you arrange them in an ordered list by price. You can add fifty multi-million dollar luxury homes and the median sales price won't move much, and possibly not at all. The disadvantage of the median sales price is that if you have a huge number of extremely cheap homes being snapped up by bargain hunters, it can drop to alarmingly low levels completely unrelated to the value of the bulk of the houses in the area. This is what happened in the first half of 2009 when investors were snapping up low-priced REOs in West Phoenix so fast that the median sales price for the City of Phoenix fell to $60,000 in March 2009 from $95,000 in January. By October 2009 it had recovered to $100,000. So while the median is insensitive to the high end it is sometimes over-sensitive to bargain buying at the bottom of the market.

It follows that we have to treat both average and median sales prices with a good deal of caution. At the Cromford Report we tend to focus on average sales price per sq. ft. which dilutes the disproportionate effect of luxury homes a little, but certainly not completely. It also goes a long way to avoid the problems associated with medians when REOs are selling like hot cakes. However $/SF is still highly susceptible to changes in the market mix, or "blend" as Tom Ruff likes to call it. This is especially true of changes in the blend at the high end of the market.

Today the average $/SF for monthly sales across all areas & types fell to a new extreme low of $80.32. We know it was $84.11 on June 9, so that's a big drop of 4.5% in a single month. Yet the monthly median sales price went up by 1.8% over the same period.   

Apparently prices are going up and down at the same time. Hitting a new bottom, at the same time as rising. Can this be true? You see what I mean about the facts being all over the map?

The facts are not really to blame. We must remember that averages and medians are not only different, they are not even closely related and often move in different directions, especially over short periods like months. It is only over the long term that they tend to follow similar trends. 
 
To find out what has really happened, let's break down sales into 5 broad price ranges to see if we can detect what changed in the 30 days between June 9 and July 9.

List Price Range	Sales per Month June 9	Sales per Month July 9	% Change in Sales per month	Monthly Avg $/SF June 9	Monthly Avg $/SF July 9	% Change Monthly Avg $/SF
Under $100K	4,488	4,539	+1.1%	$43.48	$42.88	-1.4%
$100K to $200K	3,325	3,560	+7.1%	$71.48	$71.14	-0.5%
$200K to $400K	1,547	1,607	+3.9%	$104.28	$102.63	-1.6%
$400K to $800K	406	446	+9.8%	$154.00	$154.39	+0.2%
Over $800K	154	121	-22.4%	$279.92	$238.51	-14.8%

Voila! The problem jumps out at us. It's in the range over $800,000.
The average $/SF in the price range above $800,000 fell nearly 15%. This is very unusual. Sales volume also fell over 22%. The average sales price for homes listed over $800,000 fell nearly 20%. This drop in volume and price from the luxury home sector had a huge effect on the overall average sales price and the average price per sq. ft, but it had no effect on the median sales price. Remember that the median sales price is essentially immune to any changes in the luxury sector. In fact the median sales price improved because of the growth in the price ranges between $100K and $800K.
Let's home in on the price ranges over $800,000 and see if we can identify more detail about the price changes.

List Price Range	Sales per Month June 9	Sales per Month July 9	% Change in Sales per month	Monthly Avg $/SF June 9	Monthly Avg $/SF July 9	% Change Monthly Avg $/SF
$800K to $1M	44	49	+11.4%	$192.30	$184.16	-4.2%
$1M to $1.5M	51	37	-27.4%	$231.18	$236.26	+2.2%
$1.5M to $2M	25	24	-4.0%	$281.38	$243.26	-13.5%
$2M to $3M	18	8	-55.4%	$356.33	$365.48	+2.6%
Over $3M	16	3	-81.2%	$428.08	$451.17	+5.4%

Now we can see that average pricing for luxury homes did NOT really fall by 15%. In fact the monthly average $/SF in 3 of the 5 sectors went up. The main cause of the large fall in average $/SF was the huge drop off in sales volumes over $2M - down from 34 to 11. Buyers of high end luxury homes had been active during the spring and seemed to have stopped buying as soon as the hot weather set in. The sudden absence of 23 sales over $2 million has a huge effect on average price and $/SF measurements, not just on the luxury sector, but on the market as a whole. 

So where are we really?

Well from my perspective, prices aren't really going up or down much at all. They are still bumping along in essentially the same price range they have been in since October 2010. In situations like this, changes in the blend can make all the difference in whether the average or median goes up, down or stays flat. Our advice is not to pay too much attention to these movements. They will gain their rightful insignificance over time.

When a real price trend forms, we will know about it for sure, because all the price indicators will then be moving in the same direction with obvious momentum.  And when that happens you will hear about it here first.


Note: By the way, you may have noticed that we did not use median sales prices in reviewing price ranges. You may also be wondering why. It's because median sales prices offer no useful information at all when applied to a price range. The price range has already been limited by definition so all you will discover is that the median sales price is pretty much in the middle of each selected price range. It will stay in roughly the same spot no matter what happens to the market. Hence our advice is: don't waste any time calculating medians when dealing with price ranges. Averages are not much better. You really need to study the average price per sq. ft. (or median price per sq. ft.) if you want to derive useful pricing information about price ranges. An alternative approach is to create ranges by living space sq. ft. instead - if you do this then median price and average price become meaningful measures again.

Selling Your home? Waiting May Not Make Sense.

Courtesy of Keeping Current Matters/The KMC Blog
Posted: 18 July 2011

There have been some bright spots in the residential real estate market over the last couple of months. Several price indices have reported a stabilization of prices and some regions have even shown small levels of appreciation. This has led some to believe that we may have reached a bottom for home values. We must realize that what we are actually experiencing is a ‘window of opportunity’ as the banks are delayed in bringing certain inventories of distressed properties to the market. Let’s look at what others are reporting:

Bloomberg Businessweek

“The crux of Simon’s analysis is that the loose lending practices seen during the housing bubble allowed 5 million renters to become homeowners, and that the market is in the protracted process of evicting this group. He believes housing prices will decline 6 percent to 8 percent nationally, with 6 million to 7 million more foreclosures yet to come.”

Yahoo Finance

“The problem with the real estate market remains excess inventory. Based on Shilling’s research, there are 2 million to 2.5 million excess homes in the country — a supply that will take 4-5 years to work-off. The result: Housing prices will fall another 20% and underwater mortgages will balloon from 23% to 40%, he says.”

Housing Wire

“Both warmer weather and the drop in distressed sales percentage have contributed to recent home price improvements. However, given the disappointing pace in housing demand recovery, both factors may turn against us in the coming winter and push home prices lower again…
This supply-demand imbalance affirmed JPMorgan analysts’ estimate of a further 4% drop in home prices from the first quarter of 2011 to a new bottom next year.”

DS News

“Home prices have gotten a little bit of a boost in recent months thanks to a seasonal uptick in market activity. Most analysts, however, expect further declines to characterize the later part of the year and possibly extend into next year, largely because of the huge supply of foreclosures on the market.”

Bottom Line

If you are thinking of selling in the next twelve months, you would probably do much better if you sold your house sooner rather than later.