• Arizona Real Estate October 2022

    The real estate market hasn’t only cooled but it appears to be pretty frozen. What I’m looking at is the contract ratio. This essentially is the number of houses under contract divided by the number of active listings on the market. First, let’s look at October compared to previous Octobers going back to 2017. Houses under contract represent 36.5% of the entire inventory. It hasn’t been this low in at least 5 years.

    To put this in perspective, relative to the last couple of years, the peak was 332.4% of houses under contract relative to the number of active listings. Meaning, for every 3 houses under contract there was only 1 actively listed. This is a huge shift. But not only is this a huge shift it went from peak to trough at an alarmingly fast rate. This velocity is also relevant.

    The average monthly sales price has seen a huge decline from $305.96 at its peak to $279.06 this is a 9% drop. Which doesn’t sound that bad. Except it happened in only 5 months. Again, the velocity is alarming.

    Even more interesting is the average person who is selling a house is still listing their house at $326 per square foot. This means the average person who is listing a house for sale right now is overpricing it by 14.4%. This is leading the market to stagnate. Which will eventually cause a build-up in supply and then a huge drop in prices as people who “need to sell” their houses start drastically lowering prices. This will create a massive psychological problem for anyone who is actively trying to sell their house. Not to mention the buyers will see the accumulation of price cuts and know the price isn’t as advertised. There will be room to send out lowball offers. Which some will take, causing comps to adjust and spiral downward.

    Let’s talk about the listing success rate. These are houses that actually sold rather than expired or cancel. In October of 2022, this number dropped to 64%. We haven’t seen these numbers since 2011. Grant it, there is one day left in the month…

    This brings me to my final chart for Arizona, price cuts per week. This chart is how you know the market in Arizona is getting annihilated. 3,645 people cut prices on their listings last week alone. There are only 19,587 active listings. This means 18.6% of all houses active in Arizona cut their prices last week and it’s not only last week. This is what it has been averaging almost every single week since the end of June. Again, it’s the psychological impact that is by far the most concerning thing here. Buyers are not going to pay “retail” prices when they see price cuts across the board. No market functions this way.

    Let’s talk about the root cause of this. We all know because it’s been in the news. The Fed has had to raise rates to combat inflation. Which is 100% legitimate and far more dangerous threat to our economy. But I digress, mortgage rates haven’t been this high since 2001/2002. And let’s be clear the average buyer doesn’t care what they pay for a house. They care about their monthly payment.

    So, let’s take a look at the median sales price of a house vs. income per capita. This oscillator in my opinion is by far the best predictor of if houses are too high or too low. This is the chart to watch if you’re investing in real estate.

  • Only 15 days left for 9.62% I-bonds

    The new CPI report came out today. at a .43% monthly increase. This means I-bonds starting November first will only yield 6.472%

    October 28th is the last day to purchase I-bonds at a 9.62% APY. Here are some things you need to know.


    The 9.62% yield is only for the next 6-months. I-bonds get reassessed every 6-months. Therefore, to establish what your annual yield will be here is the simple math:

    Yield until the end of October – 9.62%

    Plus the yield starting in November – 6.472%

    equals 8.05% for the next year.

    More Complicated Yield

    There are a couple of things to know about I-bonds.

    If you cash out at exactly 1-year

    You lose 3-months of interest if you cash out before 5 years. So your effective yield will be 8.05% minus 3.236% divided by 2 (only half the year) then divided by 2 again to get the 3-month yield equals 1.618%. Making your effective yield if you cashed out in 1-year 6.432%

    More complicated formula

    I-bonds actually compound semi-annually. So your first 6-month yield will be 9.62%. Let’s say you invest $10,000 (the maximum). After 6-months you will have $10,481. So the second half of the year you’re actually earning 6.472% on $10,481 not your original base of $10,000. So the second 6-moths you would net $339.17 + $10,481 ( your initial investment plus the first 6-months interest) This gives you an effective return of 8.2%, not the initially calculated 8.05% from our first formula.

    Even more complicated

    There is something else to keep in mind about I-bonds. They don’t actually need to be purchased until the second to last business day of the month. This means you essentially get a free month of earned interest! Even if you buy an I-bond on October 28th it is technically just an October I-bond. The date is not relevant. So it will actually mature on October 1st of the following year. Not the original date of purchase.

    So the math for calculating this is just our original 8.2% divided by 12 to get our monthly yield of .68%. You can then multiply this by 12 and divide by 11 to determine the actual yield after 12 months given that you only invested for 11 months. This works out to be 8.95%

    Can’t you only purchase $10,000 in I Bonds per year?

    Yes, but no. Most people believe that you can only purchase $10,000 in I Bonds per year. This is in fact true. However, most people also do not realize or take advantage of the fact that LLCs can own and purchase $10,000 of I bonds per year. There are multiple references to I-Bonds being owned by LLCs on their website. In Arizona, it takes 5 minutes and $50 to set up an LLC.

    Questions and Answers about Series I Savings Bonds

    Treasury Direct entity accounts

  • You house isn’t worth what you think it is.

    As I look over the real estate numbers in Arizona this week, I noticed that people are asking on average about 15% more than what houses sell for. In fact, we had 4,427 price cuts last week alone. This is 23% of the 19,225 houses available for sale.

    You can see from the average sales price houses are selling for $277.51 they peaked in May at $305.96. So they are currently 9.3% off from their high.

    Now here goes the issue. The average price people are listing their house for sale for is $325.15 or about 14.7% too high.

    So what do they do? They slash prices. 23% of house prices were cut last week alone. This leads to the next problem. Buyers now know the sellers are “desperate” or at least willing to reduce their price. So they no longer want to pay the asking price. They know they can offer less. This is why we will continue to see prices going down and inventory going up. So there is the main driver of low prices, the FED raising rates, and the secondary driver, psychology.

    To confirm you can see the listing success rate is plummeting. It is now back to levels we have not seen since 2010.

    Listing Success Rate is the percentage of listings that closed with a sale rather than expiring or being canceled. It compares the number of listings sold This Month with the number of listings that were sold, expired or canceled in the same period. This percentage gives a useful indication of what percentage of terminated listings closed successfully.
  • House prices may have peaked in May but mortgage payments are still at all time highs

    The real estate market continues to get wrecked by the FED rate increases. From a valuation perspective. But most people I would argue don’t care about the price of a house as much as they do about the monthly payment. This is a combination of price and interest rate. So I wanted to create a dataset that shows the average house price with the median sales price. This will tell you what the average person’s monthly mortgage payment is.

    So here goes. The current average 30-year mortgage rate is 6.29% as of September 22, 2022.

    We can take that and use Google Sheet’s formula to determine the monthly payment. It looks like this.

    =-PMT(INT RATE/12,30*12,SALES PRICE)

    I’m assuming zero down payment simply to hold this variable constant. What you can see here is the monthly payment currently is $2,728. This actually tops June’s monthly payment of $2,714. This means monthly mortgage payments adjusted for increased interest rates have not actually fallen at all. They are at their highest level ever.

    This data is for Arizona specifically.

    So while house prices are actually down 20% from their $480,000 median peak. Mortgages are actually higher.

    The entire dataset, worksheet, and formulas can be found here.

    So where do I think prices go from here?

    If you look at the current 1-year average in mortgage payments the amount is $2,353. If we reverse the equation we used above with current rates then houses would need to be $381,00 just to revert back to the 1-year mean. This would mean we would need a 13.6% drop from this month’s current median sales price of $441,125 or a 20% drop from the peak price of $480,000 in May. Remember this is simply to get back to the 1-year average mortgage payment price. Market’s oversell and overshoot to the downside. The psychology of sellers with over 4,000 price cuts a week could mean things will get brutal.

  • Arizona Real Estate update 8.8.2022

    Price cuts last week just went to their highest level in years. This is a horrible sign for things to come in Arizona. But it gets worse…

    Active weekly listings are also at their highest level in years. In 2019 there were 18,562 houses for sale. We now exceeded that with 18,605 last week. Meaning there is a huge supply.

    We are now 8% off the peak average sales price of $305.97/sq ft. Last week’s average sales price sat at $282.41/sq ft

    What I think is more interesting is the average weekly list price is down 20% off its peak. Currently, it sits at $324.73/sq ft with the peak hitting $401.47. With the average sales price per sq ft at $282/sq ft and the average list price at $324/ sq ft there is a huge disconnect between people listing their houses for sale and what they are actually selling for. The average seller has to reduce their price by 13%. This is sure to get worse once the FED’s latest rate increases from last week take hold.

    The listing success rate hasn’t been this low since 2014. Two more percentage points and we’re back to 2011 levels.

    It appears a lot of sellers who “don’t need to sell” have just given up trying.

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