The lens we use to interpret data matters, especially how closely we look at the info. Real estate is national and hyper-local at the same time. National influences what happens locally.
Let’s start with the 30,000-foot view.
In the second quarter of 2020, the total number of closed residential real estate transactions was down 17.8% year over year. This is because April and May were very low contract writing months. June was up. July even more so. (NAR) The drop in transactions is reflected in the Q2 2020 earnings reports from the major publicly traded real estate firms. Only three had year over year revenue gains.
Second-quarter 2020 earnings:
- Zillow: year over year revenue increased by 28%. Hit a site-traffic record of 2.5 Billion visits.
- iBuyer acquisitions dropped to the lowest levels since Q2 2018.
- eXp World Holdings: year over year revenue increased by 33%. Much of the growth is credited to headcount growth.
- Redfin: year over year revenue increased by 8%.
- RE/MAX: year over year revenue dropped by 24.2%.
- News Corp, parent company of Move Inc which owns Realtor.com: year over year revenue declined by 6%.
- Realogy, parent company of Coldwell Banker, ERA, Sotheby’s, Century 21, and Better Homes & Garden: year over year revenue decline of 27%.
- Keller Williams: closed transactions were down 15.4% and sales volume was down 15%. (Privately owned company and shares limited data)
Softbank Vision Fund, the primary source of funding for companies like Opendoor and Compass Real Estate posted profits in Q1 2020 after three quarters of billion-dollar losses.
Big data rules real estate as it does every other aspect of our lives. Look at the market caps for these publicly traded companies.
Zillow is clearly the dominant player. They are spending money, creating new niches, and building an even larger following. Much like Amazon did 15 years ago. Let’s compare Zillow to the market caps of the major big data companies.
Many have speculated over the years that Amazon may get into real estate. Based on its business model that would only mean through acquisition. I always imagined it purchasing an established brand like when Berkshire Hathaway bought Prudential. Definitely an interesting thought to consider. For more on this theory https://www.inman.com/2020/08/11/is-zillow-the-next-amazon/ (Jim Dalrymple, Inman)
- Goldman Sachs predicts the Fed will not raise rates until as late as 2025. At least for the near term, keeping inflation low.
- The Big 10 stands to lose a lot. In 2018 (the most recent available data) football brought in roughly $1 Billion to the 14 participating schools.
- New unemployment claims dropped below 1M for the first time since the onset of the pandemic in March. 963,000 new claims were filed last week.
- Continuing unemployment claims decreased by 604,000 to just under 15.5M
- During July 1.8M new jobs were added bringing us down to a 10.2% unemployment rate.
- The jobs added were mostly in leisure and hospitality, government, and retail (US Department of Labor)
15,000 Foot View:
Commercial Real Estate:
- As commercial real estate continues an uphill battle, residential real estate plows forward reaching even greater price peaks. Today residential real estate includes our homes, offices, and now classrooms.
- Lawsuits are flying. Landlords are suing their retail renters, looking for loopholes to get out of prior commitments as commercial real estate investment slows. Industrial is the only commercial shining star. (Bisnow)
- As industrial real estate continues to grow developers are looking to retrofit existing retail spaces into industrial spaces. For example, major retailers that are defaulting like the Gap, Neiman Marcus, JC Penney, Cheesecake Factory, and others may be converting to industrial while still surrounded by existing retail. (Bisnow)
- Commercial investments are plummeting, according to CoStar, Q2 2020 saw investments drop by nearly 70% year over year.
- According to the National Multifamily Housing Council’s rent payment tracker, August payment collection outpaced July’s by the 6th day of the month and is only down 1.9% year over year.
Residential Real Estate:
- Over 50% of contracts written by Redfin agents in July had competition. (Redfin) 56% for single family houses, 54% for townhouses & 42% for condos.
- During Q2 2020 51% of property searches by urban residents were looking at suburban listings in the same region, the highest rate since they started tracking this data in 2017. (Realtor.com)
- Despite data showing homebuyers are looking to get out of major cities, 96% of cities saw price appreciation in Q2 2020. (NAR)
- Inventory remains low nationwide, driving prices up.
- The US Census Bureau changed its methodology for collecting homeownership data due to the pandemic. Rather than knocking on doors to collect the information, they are making phone calls, be cautious on relying too heavily on this data.
- Homeownership Rates hit an all-time high of 69.1% in 2005. It then steadily dropped, after the bubble burst, and bottomed out in 2016 at just under 63%, matching rates that had not been seen since 1965.
- In Q2 homeownership rates spiked from 65.3% to 67.9%, representing the largest quarterly jump on record, since data collection started in 1890.
- Looking at the homeownership rates by age, we see that younger households are growing the fastest.
- Matthew Gardner, Windermere Chief Economist said, “As we move through the current COVID-19-impacted economy, the ownership rates of lower-income households are significantly below that of households with higher incomes and, as the pandemic has had a disproportionate impact on lower-wage jobs, the likelihood of any significant growth in foreclosure activity is likely to be muted.”
Mortgage & Forbearance:
- Again, for the 8th week in a row mortgages in forbearance decreased. Now at 7.44% from 7.67% the previous week. This is roughly 3.7 million mortgages (Mortgage Bankers Association)
- Remember only about 1/3 of mortgages in forbearance are past due and of those 90% have at least 10% equity. (KCM)
- Fannie Mae and Freddie Mac instituted a 0.5% refi fee for FHA and VA refinances. Adding on average of $1400 to the borrower’s closing costs.
- Mortgage interest rates reached record lows for the 8th time this year. (KCM)
Further into Unemployment:
- Despite the significantly high unemployment rates, the likelihood of a foreclosure wave is unlikely. In order to have a foreclosure wave both an economic hardship and low or negative equity are necessary. (First American)
- The average American homeowner has $177,000 in equity. (KCM) This means that a financially burdened homeowner does not have to go through a foreclosure or short sale in order to sell the property.
- Odeta Kushi, a First American economist said, “This current recession is also more sector-driven, as well and therefore disproportionately impacting renters. The service industry has been the hardest hit by COVID-19’s economic shockwaves, which employs mostly younger and less-educated workers.”
1,000 Foot View:
The AZ Market:
Cromford Market Index (CMI): Is the best leading indicator available (balance is 100, above 100 is a seller’s market, below 100 is a buyer’s market, prices rise at 110, and drop at 90). Last week it was 332.5, the pre-COVID peak was 241 and bottomed out on May 15 at 145.2, we blew past the previous record set in 2005 at 312.9.
Supply: The available inventory continues to stabilize; it just happens to be at an extremely low level. As of last week, our inventory is nearly 64% below normal. Active listings excluding under contract accepting backups (UCB) are down nearly 41% year over year and over 8% month over month.
Demand: Pending sales are up nearly 19% year over year, which is significant given how much lower our inventory is today. Our demand is over 20% above normal.
Sales & Prices: Phoenix metro area closed sales are up over 10% month over month and up 15% year over year. The median sales price is $319,490, up 3% month over month and 12.5% year over year. Healthy appreciation is 3% annually.