Read enough about the Phoenix (or elsewhere) real estate market, and someone will start spouting statistics. And while market stats are important to understand, one must exercise extreme caution in interpreting them, or listening to other’s interpretations (mine included!).
Let’s take a look at “Days on Market” (DOM), or “inventory”, or “months supply”. Whatever you prefer to call it, it is an oft cited indicator of overall market conditions. And generally speaking, it’s not a bad indicator. The supply of homes available for sale is a key component in understanding the overall real estate market conditions.
It is important to understand a few things though:
- Our current market really consists of three major categories of inventory: 1) Bank/lender owned homes (also known as REOs); 2) pre-foreclosure/ short sale properties; and 3) “normal” properties (homes that are owner/investor owned and not in a pre-foreclosure status).
- Real estate is local. And the Phoenix metro area is a BIG place. Any time statistics or price indexes are quoted for the entire Phoenix area, you have to understand that conditions across the Valley can vary dramatically. Even within a suburb, conditions can vary from subdivision to subdivision. Within a single large Master Planned Community, conditions can vary from neighborhood to neighborhood.
The supply of homes is a perfect example. The general consensus in the real estate industry is that a six month supply of homes is considered a “balanced market”. Less than a six month supply means we are in a seller’s market and more than a six month supply is an indicator that we are in a buyer’s market.
At this moment in time, if you look at all the available inventory of homes across the Phoenix metro area, there is a 5.2 month supply of homes.
Months Supply of Homes: All areas and types:
If you’re a seller, you may be thinking, “Halleluiah! Phoenix is a seller’s market!” and if you’re a buyer you may be thinking, “Crap. I should have bought a home a couple of months ago when it was a buyer’s market and I would have had more negotiating power.”
Not so fast.
Let’s look at the categories of inventory that make up this number”¦
If you extract the data for just lender owned properties, you’ll see a much different picture.
Months Supply of Homes: Lender owned properties only:
Wow, there is only a 1.3 month supply of foreclosed homes. That indicates a very strong sellers market for foreclosed homes. A close examination of the data above shows you that foreclosure inventory is down, sales are up and pending sales (those homes under contract but not yet closed) are also up.
OK, so now you need to understand why these numbers are what they are. And sometimes the numbers alone won’t tell the whole story. Nothing in the chart above tells you that some large lenders and the Government Sponsored Entities Fannie Mae and Freddie Mac imposed moratoriums on foreclosures that are in the process of being lifted. Nothing in the numbers above tell you that there is still a lot of short sale/pre-foreclosure inventory ”“ much of which slips into the lender owned category when it doesn’t sell on the open market.
Months Supply of Homes: Pre-foreclosure / Short Sales only:
Almost 12,000 homes listed in a short sale position. ((Short sale: a sale in which the owner can not sell the property for what they owe. Banks always have to approve short sales. After all, they are the ones who are not getting the amount they loaned.)) And it would take 15.2 months to sell all the existing short sale properties ”“ if there were no more properties placed on the market.
The simple fact is, no home lasts for 15 months in a short sale position. The lender will foreclose long before that time period expires.
And what if you are a “normal” seller? Just the guy who owns their home and wants/needs to sell it. You aren’t in trouble with the payments, and you’ve got enough equity to sell at current values and repay your loan (and hopefully pocket a little cash at close).
Months Supply of Homes: Not lender owned or pre-foreclosure:
You my normal seller are still looking at a strong buyer’s market. Yes, sales and pending sales are trending up, but they are nowhere close to what they were last year and the year before. On average, you can expect it to take almost a year to sell your home. And guess what? You also get to compete with that foreclosed home across the street. The seller there is a bank that has probably already taken it in the shorts, they have no emotional investment in the home, and they’ve priced it very aggressively to get it off their books.
The Bottom Line
Not all statistics are as they appear, nor does any one stat tell the entire story. Consolidating all types of listings across an area the size of Phoenix metro into one number is usually very misleading. Look closely at all real estate stats, keeping in mind that the variations across market segments and location can swing wildly (and change quickly). You should try to understand what the real estate market is like in your location, for your type of home in your situation. Just keep in mind that it is very easy to generalize and misinterpret real estate market stats, particularly the data that aggregate large areas of completely different property types.
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Tables from CromfordReport.com using data from public records and data licensed from the Arizona Multiple Listing Service (ARMLS). Cromford Associates LLC, ARMLS and yours truly, Jay Thompson, expressly disclaim and make no representations or warranties of any kind ”“ express, implied or statutory ”“ as to the accuracy of the data, nor its merchantability or fitness for any particular purpose.
In other less legal-like words, if you use this data to make personal, business or investment decisions and something blows up, it’s not our fault and you can’t sue us.
The Phoenix Real Estate Guy was started by Jay Thompson, and I have a little blogging problem... he liked to say...
Living here in the Dallas area our markets are about the same. You really have to dig into the numbers to get the answers. I think we are still in a buyers market here, but we don't have the prices that you guys do out there. Nice blog, BTW, do you have a twitter ID, I would like to follow.
Frisco – Thanks! You can follow me on Twitter @PhxREguy. There is also a link in the blog header on the right side (and no, that wasn't there when you wrote this comment!
Just testing a reply to a reply. Sorry for the interruption…
I love the inventory breakouts.
You keep it real Jay-there has been plenty of negative info about Phoenix in the past week, but you offer the true perspective.
Thou doth rock.
Well done!
**John Wake´s last blog post..Phoenix Case-Shiller Home Price Index, February 2009</abbr></abbr>
Jay, you have a way of communicating the real story. Thanks for the insights and clarification of real estate sales in the greater Phoenix metro area.
Thank you for the excellent analysis – shows the real picture of our current market – REOs are selling quickly, short sales are in abundance, and FMV listings will take almost a year to sell. If you don't look beyond the summary data showing 5 months of homes on the market, you would not "get" what is happening here.
Yeah – I am sick of hearing the bad press about Phoenix. I love the area! Your article is wonderfully educational … and glad to note that I look hard at DOM figures.
I want to be a west-coaster again and the bay area, even capitola valley is still pricey. I did dig in my pocket last week and picked up a ticket for a house being raffled off in SF… ha! here's hoping.
But I fell in love with the climate and the people in Arizona. And you're right — I never realized that Phoenix was such a large city till I started sifting through the market last month.
The breakdown is excellent. This type of statistical information reflecting real estate sales would be useful in all areas to reveal the ture picture.
Absolutely correct which is why people need to have a local professional that knows the market they are working in and knows how to interpret the stats into a meaningful way for their buyers/sellers.
I just blogged about this very subject Jay. It is so important for people to understand that real estate is hyper-local. In our city the average days on market is 120, but there some neighborhoods where the average days on market is only 30. It really depends on the price point and neighborhood characteristics. In some neighborhoods it is a great time to sell and others no so much. This reinforces that fact that it is so important to work with a real estate professional.
**Ryan´s last blog post..Bellingham Roller Betties ~ Flash vs Hellbound Homewreckers</abbr></abbr>
I like it. You have put to pen the numbers what I have only been talking about without the work to back it up. I wish I had followed up on my gut instinct and provided the data. But, I don't think I could have said it as well as you did. Thanks for giving us the true picture.
nice article, I never thought of this before, i'm looking @ my local area now.
Thanks
Great Job!…. Very clear and convincing prospect.
**Mike´s last blog post..Foreclosure Process</abbr></abbr>
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You hit it on the head; stats can be so great to have on hand, so long as you remember to dig and take a look at all the factors that are producing those stats! Great explanation of how stats can look like a buyer's market, yet the market truly is still a seller's-thanks for sharing!
Just goes to show how important having a real estate expert for your local area can be! Stats can be great, but if you don't know how to look at them, you can completely miss the info-esp with real estate where everything is so super-local! One neighbourhood might be fantastic for selling, and another might not be-but you wouldn't know from looking at area stats-great point to make!
The numbers up in Portland (where I am at, for now) are just as misleading. Its also good to show the difference between Average DOM (or whatever stat) and the Median. I had an agent do a bpo for a listing that used the Average price per square foot in stead of the median, which was $18 per square foot less. Needless to say, the bpo was off by over $30k.
Stats are so great, but you do have to be careful and make sure you know what you are looking at because they can be easily twisted or missunderstood.
**Margaret Safford-Metro Atlanta Real Estate´s last blog post..Does the Metro Atlanta Real Estate Market Mimic the New HGTV Shows?</abbr></abbr>
Just another great reminder that stats, while great, should always be carefully looked at so you know WHY the stats are giving the info they are giving. Thanks, Jay!
Sure you've heard, there are "Lies, Damned Lies and Statistics" and while these type stats are sound to tell you where the market has been and how it performed in the main, their predictive utility on a particular house is just not there. And Averages as you point out vary from sub-market to sub-market, but it is worse that that!
2 Examples- the first is Days On Market. If the average DOM is 120 days and you are showing property that is on the market say 7 days, often a buyer assumes because the average DOM is 120, they have time to make their decision on this house, thinking, "after all its only been on the market 7 days."
That thinking is a misunderstanding because the 120 day average is composed of many great homes, offered at good prices that sell in 1-10 days, and many others that don' sell for 6-8 months or more, and once they've sold, and they are averaged together, you see a 120 DOM average.
About the time you wrote this I had a buyer interested in buying several new townhouses in a very nice new community, top 5 % for the area. However, he was watching area average cost per square foots on Cyberhomes, so of course he was coming up with prices that were ridiculous for these townhouses.
I explained, showed him comparable sold property, and explained again, and he never could understand that looking at an average is useful to compare it to other neighborhoods, or see trends over time, but offers little predictive power on a particular house at some time in the future. All of the townhomes sold well above average square foot price, but still at great prices, and he missed out on all of them.
Using Median numbers is better, but you must also know the range, the highs and the lows, and how to apply them to come up with useful numbers.