Providing insights into the current U.S. housing market and commentary on future trends.

Sacramento: Our Pick as the “Next Phoenix”

August 9, 2012

In our previous Market Update: Hardest Hit Markets Overshoot on the Downside, we discussed the Phoenix real estate market and its dramatic improvement this year.  As seen in the “Top 10 CBSAs” table below, the median single family sold price is up a remarkable 31 percent compared to a year ago.  This increase is so large for several reasons.  First, it is coming off a very low base which makes a moderate dollar increase a large percentage change.  Second, median prices are always dependent on the mix of homes sold.  A better measure is price per square foot of living area, which is up 17 percent.

The outstanding performance of the Phoenix market leads to the obvious question of what other hard-hit metros might be next to exhibit significant price increases.  Our latest list of Top 10 CBSAs is a logical place to look and several markets are good candidates.

With regard to other previously hard-hit CBSAs exhibiting significantly improving trends, two that stand out are Orange County (Santa Ana) and Sacramento.  Sacramento is particularly interesting because, like in Phoenix, home prices overshot on the downside after the market peak in 2006.  As seen in the Top 10 CBSA table, all nine of Sacramento’s market-based indicators are exhibiting positive changes from a year ago.

To help predict the longer-term cyclical turning points of real estate markets, we developed a Leading Real Estate Index (LREI) shown below in Figure 1 for Sacramento along with its median single family home price back to 1991.

Figure 1 – Sacramento CBSA Median Single Family Price and Leading Real Estate Index

This Leading Index is based on a number of fundamental factors which drive real estate markets such as employment growth, home sales activity, the unemployment rate, housing affordability index, new building permits, etc.  It was constructed to be a so-called “diffusion index” which measures how many of the components of the LREI are moving in a positive direction at any point in time.  We have found that the LREI passing up through a value of 50 from below is a good precursor of a pending increase in home prices while a move down through 50 from above is a good signal of flat or declining prices.  A value of 50 means that half the components are moving in a positive direction relative to their historical performances.  The arrows in Figure 1 denote the signals since 1991 and, as seen, all have been quite accurate.

One of the other important factors which will be supporting Sacramento home prices is affordability.  As seen in Figure 2 below, the Sacramento CBSA Housing Affordability Index is currently at its highest level of the past the past 30 years.

Figure 2 – Sacramento Affordability Index

Finally, a ZIP code level map of our most recent Market Condition scoring system for the Sacramento CBSA is shown in Figure 3.  As can be seen, nearly every ZIP code in this metro is currently classified as being “Normal” or “Good.”  This is dramatically different from a year ago when most of the map was exhibiting various shades of red (distressed/weak market).

Figure 3 – Market Condition Map – Sacramento, CA

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

Top 10 Performing CBSAs of August

The top ranked metros in the current month represent an interesting mix of U.S. real estate markets.  Not surprisingly, our market of interest, Sacramento, is one of the four California CBSAs in the top ten.  New additions this month include Seattle WA, Richmond VA, and Grand Rapids MI.  One thing that all these markets have in common is that they all have experienced significant declines in active listing counts over the past year.  This has led to most of these currently having balanced or tight markets based on their Months of Remaining Inventory values.

Bottom 10 CBSAs

Bottom 10 Performing CBSAs of August

In contrast, a high percentage of the bottom ranked metros continue to be located in the Northeast.  All have double digit Months of Remaining Inventory.  Prices in these metros have held up much better since the market peak in 2005-06 compared to the current top ranked markets.  This helps explain the relative rankings in that the bottom ranked metros are not offering same bargains as the top ranked ones with regard to compelling prices and high rental yields.

Outliers

In this month’s Outliers, we highlight the Santa Rosa-Petaluma, CA CBSA, which is currently in the list of the Top 10 metros.  As discussed above, most of the top metros have experienced significant price declines since the market peak in 2006, and this metro is no exception.  In fact, the price peak in this overall metro occurred in the first quarter of 2006 and prices have since declined 47.4 percent.  Like any market, bargain prices will bring out buyers and this is clearly happening in the Santa Rosa CBSA.  As seen in the ranking table above, all of its important market indicators 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 Santa Rosa CBSA there are numerous sub-markets.  On a ZIP code level, one of particular interest is ZIP code 94923, Bodega Bay, CA.

CBSA ZIP Forecast Santa Rosa Petaluma ZIP 94923 Bodega Bay CA

Figure 4: CBSA – Santa Rosa-Petaluma | ZIP 94923, Bodega Bay, CA

As seen in Figure 4, home prices in this ZIP code have held up better than in the overall Santa Rosa metro since the market peak, having declined 32.9 percent (versus 47.4 percent for the CBSA).  In addition, as seen in Figure 4, 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 which include the fact that homebuyers in this ZIP code have been better capitalized and, thus, better able to weather declines in home prices.  The average loan-to-value (LTV) ratio in ZIP 94923 has historically been well below 70 percent compared to approximately 82 percent for the overall Santa Rosa 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 sales@protk.com.

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