COVID-19 continues to impact all facets of the economy, and real estate in Scottsdale and Arizona is no exception. The question many are asking is: what happens after we get through the pandemic to the real estate market here in Arizona? Below is some insight based on our observations, conversations with other local agents, and experts in the real estate industry.
A good starting point for this discussion is where the market was right before everything changed. The inventory of available homes listed for sale in the area for the week ending February 29, 2020, served by the Arizona Regional Multiple Listing Service (ARMLS) reached its lowest level in the past five years.
Another way to look at housing inventory is Months Of Supply, also known as the absorption rate. This calculation projects how long, at the current rate of sales, it will take to deplete all of the housing inventory if no more homes come onto the market. That number reached an all-time low of 1.2 months for our market. As a point of comparison, during the same period in 2019, there were 3.3 months of supply.
A third measurement is the contract ratio, which is calculated by taking the number of homes under contract and dividing it by the number of homes listed. The chart below compares the contract ratio for the months of February and March going back to 2013. This year we had the strongest market in many years with a contract ratio that pointed to a seller’s market. Keep in mind this is the entire ARMLS market; some areas had stronger demand than others. For example, Scottsdale was slower, but some markets, like Tempe, were in a full-fledged frenzy.
All of this data tells us that our real estate market pre-COVID-19 was extremely healthy and going strong. Demand across all price points was high and at some price -points we were seeing multiple offers, and homes that were going under contract the day they were listed.
Then COVID-19 Impacted The Scottsdale Real Estate Market
This market now looks quite different, and COVID-19 has impacted the Scottsdale real estate market. The listings under contract dropped precipitously, and the number of homes that fell out of contract rose dramatically in late March. You do not need to be a Futurist to have seen this coming. The contract ratio in April also dropped nearly 30 percent from the month of March.
COVID-19 IMPACT ON SCOTTSDALE REAL ESTATE SALES
We expect sales to be slow right now, and in a year-over-year comparison, sales in March did fall off a cliff with the steepest decline in recent history. It was even steeper than the real estate market’s historic crash in 2008. This does not mean that interest in the market is not there, but uncertainty and fear around what we are currently facing has temporarily reduced sales and, in some cases, transactions that were in the process of moving through escrow to close, were canceled for a variety of reasons.
Closings are continuing but slowing, and as expected, closings happening now have most likely been in escrow for at least 30 to 45 days. Our shelter in place order in Arizona started at the end of March but some people were staying home before then and few people were coming here from other states. The graph below shows closings since January 1st of this year.
COVID-19 IMPACT ON SCOTTSDALE SHOWING ACTIVITY
The number of showings is the leading indicator of where sales are going and showings since February have been down significantly, highlighting COVID-19 impact on Scottsdale real estate. Many homes, especially occupied homes, were taken off the market, reducing the number of homes available to show. Without significant traffic from other states due to travel restrictions, as well as social distancing, we expected showings to drop significantly. So while real estate is considered an essential service here in Arizona, many people don’t feel compelled to go house hunting during this pandemic.
The charts below show activity since Mid-February for all homes priced above $250,000 in Scottsdale, as reported by Showingtime, which is used for scheduling about 95 percent of all showings in the market. The bottom chart shows the same for homes priced above $1,000,000. As you can see, there has been a gradual uptick in overall market activity that is starting to show up in the moving averages.
Again, in the luxury segment of the market, the drop has been more dramatic and is not coming back quite so quickly, as illustrated in the graph below, but it looks like it may be starting to have a small increase.
There is some bright news. After the steep drop in homes going under contract and increase in homes falling out of contract, the numbers started looking up these past couple of weeks. The two charts below show homes that have gone under contract and those that have gone back on the market after falling out of contract since January. For the past three weeks in the market below $1,000,000, homes going under contract are on the rise and the number of deals falling apart has started to decline. This data will start showing up in the closings occurring in the next 30 to 45 days.
The numbers have not yet reversed in the Scottsdale luxury market. In fact, at one point in mid-March, the number of luxury homes (>$1,000,000) going under contract was eclipsed by those falling out of contract. This all makes sense on several levels. Many luxury home buyers come from other markets, and while close to 50 percent are sold for cash, the balance are financed in some way. Right now, the Jumbo loan market has become very challenging with only the big banks offering them. Mortgage brokers who use multiple funding sources have few resources on where to place these loans.
COVID-19 IMPACT ON SCOTTSDALE REAL ESTATE – WHAT HAPPENS NEXT
The important question is: what is going to happen when we get past sheltering in place? I am an optimist and hope we will be able to carefully and thoughtfully resume business and personal activity. I also think that our housing market here in Arizona is going to return to pre-COVID-19 levels fairly quickly, and our real estate market is likely to be hotter than ever. There is a glimmer of hope this week that things may be slowly starting to improve in some sectors of the market.
I think our market is going to take off because of several key factors. First of all, we have a great climate in numerous ways. Our 300 days of sunshine each year has always been a big draw. There is also our business climate since Arizona is certainly a much more friendly place to grow or expand a business than many other states. Last year 274,000 people moved here from other states, and nearly 69,000 of those were from California.
I expect the desire of people in states that have always been drawn to Arizona will increase to an even greater level after the pandemic has quieted. Realtor.com does a great job of tracking where searches are coming from, which projects where demand is coming from. In the fourth quarter of 2019, 42.3 percent of searches in the Phoenix-Scottsdale-Mesa market were from other states with nearly 25 percent of the searches coming from California.
This chart shows the top ten markets that fed our market in the fourth quarter.
You can see how this compares to the San Francisco and Los Angeles areas in the charts below.
One thing that living in a pandemic situation has proven is that many jobs that once required going to an office every day can successfully be done remotely. With the many positive attributes Arizona offers companies that embrace this style of work as the new normal may find some of their workforce deciding to move to our more favorable location.
I do not have the same confidence in other markets coming back as quickly as ours. Places like New York City and Los Angeles may see a decline in demand for some time to come. One unknown though is that we don’t yet know the impact of the economic cratering on people’s appetite to move to a new home.
When we look at the overall real estate market in the US, it is likely that each city and region’s recovery will be dramatically different. This is well illustrated in the interactive graph below. The graph shows how COVID-19 impacted the listing rates in different cities comparing this year’s listings to last year. As you can see from this graph, the Phoenix market is down.However, by comparison to other cities, we have fared far better than some. The same thing is likely to happen on the other side of the pandemic.
The data was compiled by Mike DelPrete a global real estate tech strategist, and a scholar-in-residence at the University of Colorado Boulder. If you are interested in seeing specific cities that you would like to compare, other than those shown, go to the bottom of the graph and you can select any cities you choose. You can learn more about Mike and his work on his web site Link to website. We appreciate his permission to use it here.
If you would like to read our previous post about COVID-19 impact on Scottsdale real estate you can read it here.