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Analyzing Multiple Indicators Vital to Determining the Health of a Real Estate Market

Each month, Home Value Forecast uses a number of leading real estate indicators to rank the single-family housing markets in the top 200 CBSAs.  This has been the basis of our reports for the last three years.

An important part of our ranking system is that we use a number of market indicators to comprise our score.  Much like when a doctor is making a diagnosis, we look at a number of real estate “vital signs” when making our ranking.  Some vital signs, such as foreclosure, are more important than others.

The number of foreclosure sales in an area (as a percentage of regular sales), is given more weight than the other eight market indicators used in our scoring algorithm.  Based on research, “tipping points” have been discovered when the foreclosure rate reaches pre-defined levels.  In some markets, no matter how “hot” other indicators are, the foreclosure percentage will have a negative impact on the overall health of the market, thus lower marks in our scoring algorithm.

This month, we decided to look at our ranking if we took foreclosure out of the equation.  This was done solely as an academic exercise, to see what areas might look better if only viewed through a few market indicators and not looking at the whole picture.

Florida

Florida real estate, by and large, is on the rise according to many positive trends and price appreciation.  However, the Florida markets have consistently been in our bottom ten rankings due the high number of foreclosure sales.  We thought it would be interesting to analyze how the markets would rank if we took out foreclosure from our scoring model.

Below is a listing of the Florida metros (CBSAs) we tracked for this month’s Home Value Forecast (HVF).  To the right are two columns that show HVF’s market condition “grade” — the first grade has had the foreclosure effect taken out of the scoring; the second is HVF’s overall market score.

February 2015 Home Value Forecast 1

Looking at the communities marked “strong” without the foreclosure score, including Fort Myers, Daytona Beach, Sarasota, Punta Gorda and Melbourne, all have had significant drops in active listings and Months of Remaining Inventory (MRI), and increases in sold price.  In fact, most of these Florida communities have improved market conditions without the foreclosure ranking.

Foreclosure Impact

Punta Gorda has a “strong” rating without the foreclosure penalty and Amarillo, TX has the same score.  Amarillo maintains its “strong” rating after foreclosures is returned to the algorithm (Amarillo’s 7.36% foreclosure as a percent of sales is near the historical average of 5%, Punta Gorda is at 33.43%).

February 2015 Home Value Forecast 2

Looking at the Collateral Analytics Home Price Forecast brings it all into focus: 

February 2015 Home Value Forecast 3

Home prices in Punta Gorda jumped from $80,000 to $200,000 prior to the crash.  Yet there is nothing “normal” about a recovery when prices have fallen by more than 50%.  And while our forecast shows steady gains in Punta Gorda, the forecast still does not show a return to pre-crash highs in the next five years.

Amarillo, TX on the other hand has shown steady, unspectacular growth from $110,000 to $145,000 range with expected growth to $160,000 range over the next five years.  The market is and has been driven by market fundamentals, thus our “strong” rating.

CBSA Winners and Losers

The tables below show the individual market indicators that 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.

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 that have the highest and lowest composite scores.

In this month’s update, we look at our top and bottom ten markets using our standard ranking methodology, and then again taking out the “foreclosure penalty” to see the difference, and discuss some metros where many factors show a “hot” market, but the foreclosure drag is still impacting the recovery.

February 2015 Home Value Forecast 4

California and Washington state account for six of our top ten this month – a continuing trend at HVF.  All of our top ten have fewer than 4 months of inventory and dramatic decreases in inventory, making it a seller’s market.

Without the foreclosure penalty five new entrants make our top ten – they are highlighted in yellow below:

February 2015 Home Value Forecast 5

Bottom 10

This month’s bottom 10 is still well represented by Florida, taking up four spots.

February 2015 Home Value Forecast 6

Taking out the foreclosure penalty brings eight new entrants:

February 2015 Home Value Forecast 7

Without foreclosure, the Florida markets move out of the bottom ten with the exception of Tallahassee and the bottom markets shift to smaller, more rural areas, where MRI shows a slow moving real estate market where the buyer has the control.