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Thursday, September 8, 2011

When Will Home Prices Rise?

Here is an article written by my friend Marcia Canady at Lone Mountain Development...

Have we hit bottom yet? When will prices RISE?






The two most common questions that all Real Estate Agents hear are:

"HAS THE ARIZONA REAL ESTATE MARKET HIT BOTTOM?"
and
"WHEN WILL PRICES START TO RISE?



NO ONE CAN PREDICT THE FUTURE....but we can take a look at Historical Data AND the Leading Indicators that help us to determine the state of the Arizona Real Estate Market.


Below is a Chart that shows THE PSYCHOLOGY OF A NORMAL REAL ESTATE CYCLE.



The next Chart shows how THE NORMAL REAL ESTATE CYCLE HAS CHANGED.

We had a DIP from 2010 - 2011, so we are in a bit of a pickle...instead of being in the "HOPE" area of the cycle, we digressed a bit. But read on..there is a light at the end of the tunnel!





The Chart below shows Average Sales Price per Sq. Ft. from January 2001 - August 24, 2011.



Although we were at the Top of the Market in 2005, in 2006 - there were NEGATIVE SIGNALS of the Leading Indicators (i.e. Increase in Inventory) that forecasted a drop in the market.

Right now - there are POSITIVE SIGNALS from the Leading Indicators outlined below.


LEADING MARKET INDICATORS THAT SHOW THE MARKET WILL GET BETTER:


**NOTE: # 1 - 6 have to be in a favorable position for Prices to Rise.


1. Cromford Report Index - this shows Supply & Demand.
2. Days Inventory - How long a home stays on the market before it is sold
3. Pending Listing Count - This is the number of Homes on the Market that have Offers and are due to close escrow. It is the best indicator of increased sales
4. Contract Ratio - 100 x (Pending Listings + AWC Listings (Home that has an offer but it is contingent on something)/Active Listings (contract ratio of above 50% is a "HOT" market)
5. Monthly Sales Volume Self-explanatory
6. Listing Success Rate - # of properties listed vs. # of properties that are actually sold
7. Pending $/SF
8. Sales $/SF


#1. CROMFORD REPORT FOR ALL OF ARIZONA - SUPPLY & DEMAND

**Michael Orr created the Cromford Index which measures Supply & Demand. It is adjusted seasonally and yearly.



SUPPLY & DEMAND: It's basic economics..when there are more Buyers (HIGH DEMAND) than Homes for Sale (LOW SUPPLY), PRICES RISE - SELLER'S MARKET.

When there are more Homes on the Market (HIGH SUPPLY) than BUYERS buying (LOW DEMAND), PRICES FALL - BUYER'S MARKET.


The Economy, Government, Interest Rates, the Ability to Secure A Loan, Emotions, Psychology of the Buyers/Sellers all affect Supply & Demand and therefore affect Price.

Each City/Area has a story..but overall, Arizona is in a SELLER'S MARKET.




THE GOOD NEWS: Supply is at 83% (LOW) and Demand is at 128% (HIGH) which computes to a Cromford Index of 154! It is at its highest since October 2005!


If we look at a more detailed Graph, we see that we have been in a SELLER'S MARKET since the beginning of 2011.


Prices don't start to rise for 12 - 15 months after there is a change in Supply & Demand. If we only look at Supply & Demand, prices will start to rise in January/February 2012.


NOTE: Prices dropped 12% in July 2010 because it was the end of the Buyer's Tax Credit.





#2. DAYS INVENTORY, - this is how many days it takes to sell a home. The calculation is: 365 x (Active Listing Count/Sales Per Year).


As we can see, the time it takes to Sell a Home has been decreasing at a very quick rate since October 2010...which coincides with the Cromford Report (Demand > Supply = Seller's Market).




#3. PENDING LISTING COUNT -


A good sign, Pending Listings are approximately 20% higher than 2010.




Below we are comparing Pending Listings of 2011 to 2004 & 2005 when the market was good...and 2007 & 2008 when the market was bad. Currently, we are way above 2004 & 2005...and sales in Arizona usually slow down during the hot summer months....but it looks like we are on a good trajectory.




#4. CONTRACT RATIO -

The Contract Ratio is how many homes on the market get offers vs. how many homes remain active.


The higher the number...the HOTTER the market.

A Normal Ratio is 30 - 40. Currently, the Arizona Market is at 95 and has been in a HOT market since March 2011. It doesn't SEEM like we are in a HOT market, right? It is because there was such a huge inventory of homes AND, most of the homes being purchased are at the lower end of price scale (i.e. foreclosures/short sales etc.). Again...it takes 12 - 15 months from the change in Supply & Demand (January 2011 is when we stepped into a Seller's Market without dipping back down to a Buyer's Market) for prices to increase.




#5. MONTHLY SALES VOLUME -

If we compare 2003 to 2007, we see that Sales Volume rose to record levels in 2004 & 2005 and dropped in 2006 & 2007.



Sales Volume was down at the beginning of 2008, but rose to 5,000 by the end of the year.

The beginning of 2009 and 2010...volume reached a high of 9500 and didn't drop below 6500 the rest of each year.





In 2011, we are at around the same volume as we were in 2004 & 2005. We dipped below 2004 levels during the summer...but all indicators say that we should hold steady.






#6. LISTING SUCCESS RATE - this is the number of homes that are listed by a Realtor and then Sell.

As you can see, in 2008, only 1 in 4 homes sold that were listed. TODAY, 3 in 4 homes (approx. 75%!) are selling.

The historic norm is 65%!

People "in the know" are Buying in Arizona. They know we have reached the bottom and prices will start to rise soon.





#7 PENDING PRICE/SQ. FT. - this allows us to forecast sales about 30 days ahead with reasonable accuracy.




WHAT? PENDING PRICES/SQ. FT. HAVEN'T RISEN AND IT LOOKS LIKE THEY ARE FALLING????

Let's RE-CAP:

1. There are More Buyers than Sellers. HIGH DEMAND + LOW INVENTORY = Seller's Market

2. The Number of Days it takes to sell a house is way down

3. Pending Listings are 20% higher than 2010

4. The Contract Ratio is at 95%....a hot market is above 50%!

5. Sales Per Month are at the same levels as 2004 & 2005

6. 3 out of 4 listings are selling compared to 1 out of 4 in 2008...


So why haven't prices risen?


It takes time for the market to recover...just as it took time from the top of the market...and negative indicators in 2006 - for prices to hit bottom. Again, most of the homes being purchased are the lower priced homes..plus the foreclosures and short sales need to be bought up.

Currently, there are approx. 4,500 foreclosures on the market and 8,000 Pending Foreclosure Sales. In a normal market, there are approximately 1,200 foreclosures at any one time....so we are not far off from Normal!

Prices are at the lowest level ever. Investors know this and are Buying up the market (35-42% of Buyers are CASH Buyers)....

All indicators say that the Arizona Real Estate Market is recovering and prices start to rise in early 2012, so if you are thinking of
BUYING... THE MESSAGE IS:

BUY NOW!


All of the information presented above focuses on Maricopa County.

Scottsdale is one City that has held its prices better than other Cities. Its Cromford Index is at 166.9 (indicating a Seller's Market)..much higher than the 154 for Maricopa County.

So, if you want to Live in Scottsdale....BUY NOW!







FROM MICHAEL ORR OF THE CROMFORD REPORT (AUGUST 16, 2011)

The Main Trends we currently see are:

* Banks have increased their asking prices for REOs (Lender Owned Properties) as they become scarcer

* Short Sales are getting cheaper and easier to close, though far fewer remain Active without an Offer

* Normal sales include a higher proportion of "flips" rather than owner occupier sales and therefore Average Prices are falling

* HUD homes are selling like hot cakes (which also brings pricing averages down)

So we shouldn't expect to see good news from pricing numbers for a while yet (i.e. January 2012). For those who would like some good news here is a selection:

* Pending Listing counts dipped after the Spring Peak but remain strong for the time of year
* Expiry and Cancellation rates are very low
* Active Listing Counts are moving sideways whereas they would normally be increasing at this time of year
* The Supply Versus the Annual Sales rate is lower than at any time in the recent past with the exception of the bubble years 2004 and 2005.

Blog Post Created by:

Marcia K. Canady
REALTOR®
Lone Mountain Development, LLC

Tel: 602.515.1161
Email: Marcia@MKCLuxHomes.com
www.MKCLuxHomes.com

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