Sharp Drop in Demand Following Expiration of Tax Credit

In my last post I said the housing market was juiced by the federal tax credit.  It appears as though my analogy is more accurate than I thought.  New single-family housing starts were down last month 17.2% and new mortgage applications were at their lowest level since 1997.  What does this mean for the Phoenix housing market?  Mike Orr of the Cromford Report discusses the issue below.

By Mike Orr of the Cromford Report, 6/21/10

The government incentive tax credit for house purchases required that the contract be signed by April 30, 2010 for the buyer to be eligible. The resulting sale could close any time up to June 30, 2010 and it now seems very likely that this deadline will be extended. This will particularly help those involved in short sale situations.

Sales numbers will not be affected immediately by the loss of this incentive. By April 30 we had seen a big build up of buying interest and therefore very high levels of both pending listings and AWC (active with contingent contract) listings to generate closed sales during May and June. So we have seen only very modest sales volume declines over the following two months. However the fall-off in pending and AWC listings during June has been more dramatic, as can be seen in the Weekly Pending Listing Chart. This means two things:

  1. Sales volumes will probably drop lower for the third quarter.
  2. A change in market balance with demand likely to fall below supply for the first time since May 2009 making the situation less favorable for most sellers than it has been for the past year.

Looking at the various cities we see the following:

City Pending 4/30 AWC 4/30 Pending 6/21 AWC 6/21 Under Contract Change
Anthem 117 82 77 68 -27.1%
Apache Junction 142 65 94 61 -25.1%
Arizona City 63 15 44 15 -24.4%
Avondale 332 179 267 189 -10.8%
Buckeye 381 234 346 177 -15.0%
Carefree 9 5 8 9 +21.4%
Casa Grande 188 77 148 66 -19.2%
Cave Creek 93 66 67 80 -7.5%
Chandler 638 392 483 398 -14.5%
Coolidge 64 21 58 23 -4.7%
El Mirage 179 121 143 98 -19.7%
Eloy 14 8 11 6 -22.7%
Florence 98 42 80 33 -19.3%
Fountain Hills 73 25 63 22 -13.3%
Gilbert 795 520 659 538 -14.9%
Glendale 729 353 582 339 -14.9%
Gold Canyon 58 28 44 19 -26.7%
Goodyear 348 217 260 207 -17.3%
Laveen 266 176 214 157 -16.1%
Litchfield Park 136 77 108 82 -10.8%
Maricopa 410 275 305 265 -16.8%
Mesa 1,086 564 816 505 -19.9%
New River 34 25 27 20 -20.3%
Paradise Valley 40 31 48 28 +7.0%
Peoria 577 327 472 341 -10.1%
Phoenix 3,115 1,476 2,349 1,380 -18.8%
Queen Creek 790 485 564 442 -21.1%
Rio Verde 9 1 6 3 -10.0%
Scottsdale 690 417 614 395 -8.9%
Surprise 645 404 545 363 -13.4%
Sun City 149 46 100 51 -22.6%
Sun City West 116 20 49 12 -55.1%
Sun Lakes 44 11 22 10 -41.8%
Tempe 167 107 139 89 -16.8%
Tolleson 214 100 174 87 -16.9%
Waddell 47 18 40 22 -4.6%
Wickenburg 20 3 9 4 -43.5%
Wittmann 23 5 17 3 -28.6%
Youngtown 25 22 24 18 -10.6%

What can we deduce from this table?

The largest declines were in the 55+ areas, but this is mainly due to a special seasonal effect which is unique to these types of communities and happens every year. Summer is always a very quiet period in these communities. This year the effect is even more pronounced.

The outlying areas were also disproportionately affected: Anthem, Apache Junction, Arizona City, Casa Grande, Eloy, Gold Canyon, New River, Queen Creek, Wickenburg and Wittmann all showing a fall in listings under contract of over 20%. What do they have in common? They are a long way from downtown Phoenix. Not every distant community was affected however; note Coolidge, Florence, Rio Verde and Waddell.

Note that two areas had an INCREASE in listings under contract: Carefree and Paradise Valley, the two most expensive cities in the valley. Clearly the end of the tax credit had no negative effect here. In fact the top end of the market continues a improving trend in demand that has been in place for over a year now.

The Cromford Market Index™ has so far only dropped from 110 on May 22 to 103.4 on June 21. But the rate of decline is quite steep and it is almost all due to loss in demand rather than the small increase in supply over that period. What we don’t know is whether this downward trend will continue or stabilize but at the moment we can only observe that it is significant.

Clearly the incentive brought forward sales into the spring which would otherwise have either not happened at all or have happened later. It is also possible that demand has fallen due to other factors, although it is difficult to measure this since the effect of the incentive is currently overwhelming other market factors. It is too early to tell if the underlying demand has fallen very much if at all. However, even with the steep fall, pending listings remain at a high level compared with all prior years except 2009.

Will this drop affect pricing? Not in the short term. Sales pricing is very much a trailing indicator and at the moment pricing is hitting a short team peak around $93 per sq. ft. However the mix of homes among the pending listings has changed and this changing mix will probably cause average pricing to fall over the next 30 to 45 days to around $89 to $91 per sq. ft. This is mainly because the pending sales contain an unusually large proportion of short sales (37.2% compared with 31.8% a month earlier) and fewer normal sales (25.0% versus 29.7%). In addition August is usually a very weak month for pricing, so we anticipate price declines throughout the next 60 days.

Which direction we go after August will depend on what the market balance looks like after the effects of the tax credit have worn off. If the Cromford Market Index™ falls below 90 and stays there then we can expect sales pricing to weaken. If remains above 90 and/or starts moving upwards again, the pressure on sales pricing will probably remain neutral to positive as it has been since April 2009.

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