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Despite Low Demand for Houses...Market is Still HOT!

All but 3 cities now see their Cromford Market Index falling with Paradise Valley and Cave Creek notable exceptions and Tempe just squeaking out a gain over the last 4 weeks. As a refresher...the Cromford Market Index (CMI) is a value that provides a short term forecast for the balance of the market. It is derived from the trends in pending, active and sold listings compared with historical data over the previous four years. Values below 100 indicate a buyer's market, while values above 100 indicate a seller's market. A value of 100 indicates a balanced market.

The reason for the decline is a significant drop in our demand readings. Many cities now have a Cromford® Demand Index below 100, meaning demand is below normal. Tell that to a buyer facing multiple competing offers and they will not believe you, but it is still true. The vast majority of people are unable to distinguish between a hot market because demand is high and a hot market because supply is low. The Greater Phoenix market is hot because of extremely low supply. So low in fact that fluctuations in demand is almost irrelevant. The heat is generated by the difference between supply and demand. Demand could drop in half and it would still vastly exceed the available supply.

If local people are deciding not to move, then this reduces demand and supply at the same time, because they do not list their home for sale. However incoming people from out of the area generate demand without adding to the supply. The top end of the market is still heating up because so many buyers are from out of state.

It is quite understandable for some buyers to drop out of the market because prices are rising beyond their reach. This is one way rising prices re-balance the market. However with all 17 cities over 395, we still have some very large price increases ahead of us. A lot more buyers will have to drop out before prices start to stabilize. By the time prices stop rising, they will be at a yet more unaffordable level. Unless supply starts to recover dramatically, this could be many years away.

A sharp rise in active listings would be the main signal to watch for over the next 12 months.


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