Buy-Sell Indicator Shows Upswing in Most Markets
January 24, 2013
The outlook for the residential real estate market in 2013 is quite different from a year ago. A number of important metros have experienced significant price increases in the past year, the available inventory of homes for sale has decreased by double-digit rates in in many markets and buyer sentiment has improved markedly.
As Home Value Forecast has noted, the conditions for a quick recovery have actually been in place for some time, due to the combination of very low levels of new construction over the past five years, very favorable price and affordability levels, and a very strong rental market in many parts of the country.
We have always felt that it should not be too difficult to predict the direction of home prices and sales activity since the real estate market is driven by very basic factors of supply and demand. On the supply side, there is the existing inventory of homes on the market for sale along with how many new homes are being built. On the demand side, the primary factors are population, household, employment growth and homebuyer affordability.
There are a number of useful shorter term indicators which can be used to both gauge market sentiment and help identify turning points in the real estate market One intuitive indicator is the Wells Fargo/National Association of Home Builders Housing Market Index, which includes data for prospective buyers. This series is shown in Figure 1 below along with the annual percent change in the median existing single family price.
Prospective Buyer Traffic info from Wells Fargo/NAHB’s HMI
As seen, this index has exhibited a good correlation with home price changes over the past 25 years and was particularly useful in predicting the top in prices in 2005, as well helping to identify the most recent cycle bottom in 2009.
While there has been a perception that 2012 marked the low point for home prices for the current cycle, in fact, as seen in Figure 2 below for the Boston CBSA, median prices in many important metros actually hit bottom in 2009.
The sharp recovery in the prospective buyer Index in the past year is particularly noteworthy and a very positive sign for the housing market. In fact, the most recent reading has put the Index at its highest level since early 2006.
We track numerous other market indicators which are used to forecast where home prices are headed and have created a number of proprietary ones to provide what can be used as “buy” and “sell” signals for individual markets. One that is based entirely on the slope of the home price series itself can be particularly useful for timing market entries and exits for individual metros, cities, ZIP codes or neighborhoods. Such “trend following” indicators work well for home prices because they typically exhibit a significant amount of momentum once they get going in a particular direction whether it is upward, sideways or downward.
Figure 2 below shows an example of this using the long term chart of the Boston CBSA median single family price along with our Buy-Sell Indicator. Arrows have been added to Figure 2 to help pinpoint the actual signals. As seen, our Buy-Sell Indicator (Figure 3) has done an excellent job in calling the market tops in 1989 and 2005 as well as market bottoms in 1983 and 1996. The most recent signal in early 2013 is another confirmation that an important cyclical upswing in home prices is underway.
CBSA Winners and Losers
Each month Home Value Forecast ranks the single family home markets in the top 200 CBSAs to highlight the best and worst metros with regard to a number of leading real estate market based indicators.
The ranking system is purely objective and is based on directional trends. Each indicator is given a score based on whether the trend is positive, negative, or neutral for that series. For example, a declining trend in active listings would be positive as will be an increasing trend in average price. A composite score for each CBSA is calculated by summing the directional scores of each of its indicators. From the universe of the top 200 CBSAs, we highlight each month the CBSAs which have the highest and lowest composite scores.
The tables below show the individual market indicators which are being used to rank the CBSAs along with the most recent values and the percent changes. We have color-coded each of the indicators to help visualize whether it is moving in a positive (green) or negative (red) direction.
Top 10 CBSAs
The top ranked metros in the current month include markets from all major regions of the U.S. Two of the top markets are in South Florida while another two are located in Texas. The Florida markets are among those that experienced bubble and bust conditions in the last real estate cycle and are now very appealing to both U.S. homebuyers and foreign investors. A number of Texas markets have been in the Top 10 list for a number of months and, as discussed in past Updates, did not need to experience meaningful price corrections since their prices never became extended in the first place.
An interesting development is that several of the top markets from previous months are no longer on the list because their year-over-year sales counts are down. However, the reason for this is that sales are being constrained by a lack of inventory rather than a decrease in demand. Note that all the indicators in the Top 10 list are colored green, which means that they are universally exhibiting positive trends. One thing that all these markets have in common is that they have all experienced significant declines in active listing counts over the past year. This has led to most of these currently having tight markets based on their Months of Remaining Inventory values.
Bottom 10 CBSAs
The bottom ranked metros also represent and interesting mix with two being in the greater New York-New Jersey-Connecticut area. As seen in the table, most have high single or double-digit Months of Remaining Inventory. However, our top and bottom ranked CBSAs are ranked on a relative basis. Thus, even the ones in the Bottom 10 list are showing a fair percentage of positive (green) trends. This is quite different from last year when the majority of the Bottom 10 markets had most (or all) of their indicators trending negative and colored red.
Our Market Condition thematic maps are a good way to visualize the differences in the top and bottom ranked metros. Figure 4 below shows the single family rankings for the Miami-Miami Beach-Kendall, FL area while Figure 5 shows the same for the Portland-Vancouver-Hillsboro, OR-WA CBSA.
Home Value Forecast has always said that real estate is local, and that local, regional and national trends matter little when trying to sell your home. Figure 5 does a fine job exhibiting that, seeing that even though the area ended up on our “Bottom 10” list, particular ZIP codes are showing “strong” (blue) market trends.
In this month’s Outliers, we highlight the Boston-Quincy, MA CBSA, which is currently in the list of the Top 10 metros. This CBSA did experience a decline in home prices since its peak in 2006, but it was much shallower than the hard hit “bubble markets” of California and Florida. As seen in the ranking table above, all of its important market indicators for the Boston-Quincy CBSA are showing positive trends on a year-over-year basis including declining inventory, declining market times and lower distressed sales activity to name a few.
Within the Boston-Quincy CBSA there are numerous sub-markets. On a ZIP code level, one of particular interest is ZIP code 02186, Milton, MA.
As seen in Figure 6, single family home prices in this ZIP code have held up better than in the overall Boston metro since the market peak. In addition, our home price forecast models call for this ZIP code to perform quite a bit better than the overall CBSA over the next several years.
There are a number of reasons for the historical and forecasted outperformance of this ZIP code, including the fact that homebuyers in this ZIP code have historically been better capitalized and, thus, better able to weather declines in home prices. The average loan-to-value (LTV) ratio in ZIP 02186 has historically been about 75 percent compared to approximately 80 percent for the overall Boston-Quincy, MA CBSA.
About Home Value Forecast
Home Value Forecast was created from a strategic partnership between Pro Teck Valuation Services and Collateral Analytics. HVF provides insight into the current and future state of the U.S. housing market, and delivers 14 market snapshot graphs from the top 30 CBSAs.
Each month Home Value Forecast delivers a monthly briefing along with “Lessons from the Data,” an in-depth article based on trends unearthed in the data.
HVF is built using numerous data sources including public records, local market MLS and general economic data. The top 750 CBSAs as well as data down to the ZIP code level for approximately 18,000 ZIPs are available with a corporate subscription to the service. A demonstration is available upon request. Please visit the Contact Us page to reserve your trial.
To see how we can help your company with its valuation needs, please call 800.886.4949 or email firstname.lastname@example.org.