“Things never stay bad. They reach the point where nobody can take it anymore, and then the process starts in the other direction.”
–Vincent H. O’Neil
Happy July!
Let’s discuss what is happening in the market this week
by Lisa Kuhlman on July 8, 2022
The above quote is so fitting in describing where we are at in this current real estate market. If you listen to the media then you’re probably thinking the sky is about to fall or the bubble is bursting. This is why I so thoroughly enjoy sending these market updates out as often as possible. Emotions always lead where information isn’t available or correct. In reality this correction was exactly what we needed. Things may be a bit painful for 6 months or so but it could have gotten far worse. Like I said last week, REALTORS® are celebrating business finally being conducted fairly again. We work in the best interests of our clients, Not Wall Street!
Why do I keep mentioning Wall Street every week? While I don’t like to jump into the blame game or enjoy finger pointing, some things just are a reality. Every single time Wall Street starts investing massive funds into a market, that very market gets manipulated to the detriment of the market, and most often the general public. I caught onto the fact that something was not correct about the “housing market shortage” and I had my suspicions all along. People thought I was crazy! Now the truth is rising to the surface where we can start to see clearly what we have all just lived through. Looks like I wasn’t so crazy after all. Here is the link to an article that describes what I’m referring to. If that link somehow doesn’t translate via email shoot me a text or email and I’ll send it over to you.
Link to Institutional Investors article via Market Watch
Simply put, Wall Street only cares about profits. When institutional investors and iBuyers (which is Wall Street) buy up ⅓ of the active supply on a national level to hold for long term rentals what happens? It severely reduces the ability of the general public to realize the homeownership needs for themselves and their families or to build wealth. Don’t be fooled! iBuyers do sell their back stock to investors in chunks of units. If the goal is to build wealth, Wall Street will gobble up all of it and leave very little behind.
In the Glendale, Phoenix and Scottsdale markets that was 38% of the homes sold in the 3rd quarter of 2021 alone according to the Market Watch article above. Was it in the best interests of Wall Street to buy up massive amounts of single family homes from the beginning? Absolutely! Homeownership is one of the most important wealth streams there is. Why wouldn’t Wall Street enjoy keeping potential first time homeowners locked into renting long term? It’s filling investor pockets with rent at 100% interest to the tenant while driving the market into the “haves and have nots” arena. Had we stayed on this trajectory there wouldn’t be very many “haves” left and plenty of “have nots” while Wall Street would own most of the property. Oh, and most of the wealth. Then we all would pay dearly. If you remember 2008 you know what I mean. Wall Street got bailed out and a slap on the wrist while the general public had to rebuild everything.
Last week we discussed Wall Street and iBuyers canceling purchase contracts and backing off on their buying efforts. This truly has nothing to do with interest rates since Wall Street and iBuyers deal in Cash! It has everything to do with affordability for actual buyers with high interest rates affecting purchasing power to buy iBuyer owned properties leaving them with a surplus of inventory. For Institutional investors it’s because rental rates are becoming so unaffordable that household formation is shrinking. That means more people are moving in with others to be able to afford rent, not to mention everything else that’s over inflated in price. 42% of all rentals in Maricopa County closed below the list price. Once things calm down iBuyer activity will resume and Wall Street will get back into the game of buying up as much as they can. In the meantime the iBuyers and Wall Street are left holding a very heavy bag. See the slides below.
The only reason Wall Street backed out in the short term is because of profit. iBuyers can’t sell to institutional investors because they aren’t buying right now and rents have been pushed to their limit. For example a 1500-2000 sq ft home increased in value by 22% while rental rates increased by only 13% since January 2022. Rental supply is up 111% since September 2021 and up 47% since January 2022. Now we’ve discussed that the median household income is roughly $89,900. At the rental rates we are seeing, the same median household income would need to be $96,000 per year for rents to be affordable.
Now, why have so many rentals hit the market so quickly? Because one of the major institutional investors in the Greater Phoenix market released all of their vacant rental supply at once. You guessed it, these investors do in fact hold back vacant rental properties and only release a few at a time. It keeps rental rates going up while manipulating to a larger degree the current supply and demand for their own financial gain. Why wouldn’t they? I’ll refer back to the quote at the beginning of this update! Things have to go in the opposite direction. For everyone’s benefit!
Do you see how Wall Street actually controls the entire market? If they are buying up homes in droves, pushing sales prices so high that no one can afford them except cash buyers and renters can’t even afford rents everyone pays and Wall Street hurts itself yet again because their profits decline when affordability declines. You would think they would be smarter right? Pride comes before a fall right? With this pause the market can get cleaned up and back on track.
Now for the good news!! Interest rates are in the high 5% range but we’ve seen a very small bit of easing over the last week. Supply has increased 197% in just 4 weeks and is getting back to 2019 levels. 2019 was a good year for real estate!!! Things have just gotten so crazy over the last 2 years no one remembers what normal is anymore. This is very good.
We are 13% below normal in demand but still 48% below normal for supply so we are still in a sellers market. In my last update I said we were in a hot sellers market. Well, we knew it was coming but not quite this quickly. We sailed right past a hot sellers market and straight into a warm sellers market. Expect that we may be headed into a balanced market and then potentially a buyers market soon after. Just to clarify so no one panics, a short term buyers market isn’t necessarily a terrible thing. It just means you won’t see any property appreciation during that time. As long as it’s a short term buyers market we will recover quickly and onward and upward we go. Remember we discussed that when things get this far out of balance a correction must occur in order for things to get back to normal. Let’s look at where we have been over the last 22 years, where we are at currently and where all of this extra supply is coming from all of a sudden. See below…
In 2006 we entered into a buyers market, not 2008 like everyone thought. We just didn’t feel it until 2008. That was 2 years of insanity that hurt very bad after it was over. Many lost everything because no one saw the reality back then nor did they stop the illegal activity happening mostly in Wall Street. Here’s my question…how did we have almost no supply in 2005 (leading into one of the worst financial crises to hit the US) but our demand levels have stayed fairly close to the same across the board from 2000-2018 except between 2006-2008? The small spikes right after the crash can be easily explained. It doesn’t appear that our population all of a sudden grew massively and was demanding so much more from the supply side like the media was reporting. It’s supply that’s suffering a rollercoaster ride and can’t seem to stabilize. Why?
In 2020 and 2021 there were heavy iBuyer purchases met with massive losses to mostly Zillow and Open Door. Zillow lost somewhere in the ballpark of $900 million and Open Door lost in the ballpark of $661 million both in 1 single year, 2021. By the way, Open Door wasn’t in business until 2014, OfferPad in 2015 and Zillow in 2018. Look what happened after that. All 3 of them, starting in 2019, together drove the market into a frenzy and on to insane very quickly. They’re all backed by Wall Street since that’s where their funding comes from. You can’t sustain those types of losses unless you have deep pockets backing you.
You can also see we had a very small buyers market in 2010 for only a few months due to the First Time Homeowner Credit failing its attempt to correct things like always when the government gets involved, and a balanced market in 2014. Interest rates shot up to the high 4% range in 2018 and slowed things down and went back down to the high 3%-4% range in 2019. Take a look at COVID also. Interest rates were just under 4% then. This time around the breaking point was 4.4% interest to shift everything around on a dime and end the frenzy and insane market we came out of. It seems like the sky is falling and a bubble is bursting if you listen to the wrong people. It’s not in the numbers so our market is fine. We do need to get back to normal though so take a deep breath! It will balance back out. This time around we saw it coming. Keep your eye on Wall Street though. When things seem too good to be true they normally are and there’s a hefty price for the general public to pay because of it. Now that they’re out for the short term we can balance.
You can clearly see new home construction sales are suffering along with institutional investors and some second home owners. Pay close attention to when 23% of the homes were purchased, the 2nd half of 2021 into the 1st half of 2022. That is investor activity! These are live listings and only 46% of them are actual people, not an institution, builder or investor of some sort. 54% of market share owned by institutions should be concerning to all of us. Only 13% of that 54% are builders. It doesn’t start and stop in one place, it grows and takes over the whole landscape. If you haven’t read that article I attached please do! As far as builders not being able to keep up with buyer demand I’ll let you look at the numbers and decide for yourself.
This is fantastic news for buyers, however! New home builders are willing to work with Realtors again and actually pay them. They are also giving tons of incentives to buyers. Investors got caught in their own scheme and will take a loss. Now buyers can buy not only the home they can afford, but a home they will actually like. The argument about buyers not being able to buy due to interest rates isn’t necessarily the case. It can be if they’re not informed properly or can’t buy at current prices. Realtors that educate themselves and network with industry professionals have options available to buyers that many buyers aren’t aware of yet.
Interest rates can be buffered! This is a very important point that every buyer needs to understand right now. Everytime there is hardship there is always a solution to bridge the gap, and it doesn’t come from the Government! You simply have to know what your options are to beat them at their own game. I can promise you that once the market balances back out we may find ourselves back in a frenzy again as Wall Street continues to absorb wealth for itself. Don’t wait until that happens and get left behind again! Let me know if you want to know more about buyer interest rate options! You’ll probably be very excited.
Buyers are up against one hurdle, however. Prior to COVID our mortgage credit availability was good! Buyers have the highest credit score in history and many have down payments squirreled away. Once COVID hit lending institutions tightened their belts out of fear of what the market might do. Understandable since so many people were being laid off or furloughed. Once things got back to normal and people got back to work the lending institutions failed to open up the mortgage credit availability. Sadly we are still not back to pre-COVID freedoms. For buyers to freely buy some of the things lending institutions enacted during that period of time need to go back to normal. I don’t mean back to 2006 which you can clearly see was a problem! I mean 2019. Take a look at March 2020…
Sellers, I have 2 ways to advise you right now.
#1, if you need to sell you’re okay! This is where strategy comes into play. You can still sell your home for the most amount of money in the least amount of time based on the market. Remember though, what worked over the last 2 years will not work today. You have far more competition and those cash investors are not buying up all of the inventory anymore, inflating the market. That’s where an experienced Realtor comes into the picture. Strategy and willingness to be realistic to the current market conditions is the way to go.
#2, if you don’t need to sell then wait it out and things will eventually get back to normal. You’re not losing anything by waiting. Just make sure that when the market starts to pick up steam again listen to the advice of an experienced Realtor that actually knows what is happening in the NOW. I can’t tell you how many Realtors I have personally spoken with in the last few weeks that haven’t caught up with the market shift yet and are oblivious. It might take them a while to in fact catch up, costing everyone time and money.
Recession: a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. The numbers for the last 2 quarters have already been released and they have been in the negative for 2 consecutive quarters. The FED won’t probably fess up to it until roughly September. They don’t want to panic the public. Remember what I’ve told you. We will always bounce back after a recessionary period. Take a look at interest rates going back to the mid 1970’s all the way to today and what happened after every recession. You’ll also see the truth about why interest rates are still very low in comparison. Pay particular attention to 2018 and 2019 which may be where we are headed before continuing on to possibly a 2014 reminiscent market with a possible few weeks at a buyers market.. That means a balanced market that appreciates at the rate of inflation (currently 8.6%) per year and a buyers market that doesn’t appreciate but doesn’t necessarily lose value if it’s a short stopover.. See below…
In summary, our market has cooled down significantly! We are still in a warm sellers market for now but expect that we will be moving into a balanced market and potentially into a short term buyers market in literally a few weeks. This had to occur! Our median sales price went from $480,000 in May to $476,250 in June. Our appreciation decreased by 2.4% going from 21.9% in May to 19.5% in June. Sales over asking price went from 55% in May to 43% in June with median over list price down from $20,000 in May to $12,000 in June. Just in case you’re still worried about the state of our real estate market, here are a few closing slides to show you where the risk sits at this point in time and the difference between now and the market crash…
I hope you enjoyed this week’s market update as much as I’ve enjoyed presenting it. It’s always better to be informed so you can make the best decision for you and your family. Please feel free to reach out to me directly with any questions! If you couldn’t tell, I love talking about Real Estate.
P.S. Remember to read the Article from Market Watch. It’s very insightful rearding who gets hurt first. When any portion of our market gets hurt it will eventually hurt the rest of the market. Wolves attack the most vulnerable first but the rest aren’t safe either because the wolf will always be hungry.
Here is that article link again.