Hello this is Tom O’Grady, Chief Executive Officers of Pro Teck Valuation Services, and I’m here to talk to you about our Home Value Forecast April 2013 update.
In our April update we discuss how distressed property investors continue to drive the increase in home prices, and we look at common traits in historical real estate cycles that indicate we are in the early stages of a multi-year improving trend for home prices. Our thinking at Home Value Forecast a year ago was that the residential market would turn faster than most expected, due to the lack of supply and increase in demand. Supply would be restricted for two reasons: the number of homes being built had been running at historically low rates, and the significant decline in us housing put many homeowners underwater, taking away their option to sell. On the demand side, historically low home prices on an increasing supply of REO and distressed inventory, coupled with strong rental rates, would lead large investment funds to purchase and rent out these homes.
In looking back at positive real estate cycles, we see a consistent pattern in that some type of catalyst starts the cycle, and once started, higher sales drive higher prices, which attract more buyers to the market, these higher sales create a shortage for inventory. The current market is being further helped by very low mortgage rates and historically high levels of affordability.
In our April update, we look at the Collateral Analytics Leading Real Estate Index. It is shown here for the overall Los Angeles metro. This index is based on a number of factors, including housing affordability, employment growth, home sale activity and new building permits. The index creates a so-called diffusion index from these components that effectively measure what percent are moving in a positive or negative direction at each point in time. The index values range between 0-100. A buy signal is given when the index moves above 50 from below, while a sell signal is given when it moves below 50 from above. These signals have been highly predictive over the last 30 years, with buy signals in late 1983, late 1996, and most recently in the third quarter of 2012, and sell signals in late 1990 and early 2007.
Similar well-timed signals were given over the years in most other major real estate markets such as Atlanta, seen here. One of the primary conclusions from this is that these signals typically occur years apart, which suggests that the current upcycle is currently in its early stages.
Our monthly market updates include a ranking of the top and bottom ten markets in the country. A new entrant to the top ten list this month is the Warren/Troy/Farmington Hills, MI CBSA. This market was hit hard in the recent recession, but is now showing strong improvement, the recession saw such a significant decline in home prices in this market that it now has some of the most affordable home prices in the country. Like Phoenix and Sacramento before it, this market is showing very compelling rental yields, which is attracting both institutional and individual single-family home investors.
We hope you’ll visit Home Value Forecast at www.proteckservices.com/homevalueforecast. There you can view the full April update, as well as trending charts for 30 major metros, and read our past updates and commentary on the U.S. housing market.