In this month’s Home Value Forecast “Lessons from the Data,” we discuss results from an enhanced scoring system we have created to define and rank the market conditions of individual real estate markets on a CBSA, zip code, and even neighborhood level.
This ranking system is based on the same market indicators used in the standard “1004 Appraisal and Market Conditions Addendum,” including:
- Number of Sales
- Number of Active Listings
- Months of Inventory Remaining
- Median Sold Price
- Median Sold Days on Market
- Median List Price
- Median Active Listing Days on Market
- Median Ratio of Sold to List Price
We also include the ratio of foreclosure sales to total regular and REO sales as an indicator to measure distressed sales activity.
Our ranking system is based on the single family trends and magnitudes of the above indicators, most of which we have found from prior research to be highly predictive for the direction of future home prices. In particular, we determine the trend for each indicator and calculate how much it has changed from a year ago. These values will impact the overall ranking depending on their respective directions. For example, increasing sales activity or median prices are positive while increasing listing counts or days on market are negative.
The market rankings tell an interesting story which can be seen in the two charts below. Figure 1 shows the distribution of current market rankings for the top 200 CBSAs that we track.
As seen, most of the markets are currently in either a weak or soft status. This is due primarily to still-high levels of distressed (in foreclosure or REO) sales activity.
Figure 2 shows the distribution for the top 200 CBSAs of the net number of positive indicators from our above list. This chart is noteworthy for several reasons. First, the majority of CBSAs are showing more positive than negative internal market trends. Second, most of these indicators are forward-looking so they are forecasting improving conditions in a high percentage of the important CBSAs.
These results confirm our position that most U.S. real estate markets have been in a rebalancing phase for the past several years with home prices in most hard hit markets having hit their bottoms in early 2009. There is still a sizable amount of distressed inventory, which needs to be absorbed, thus many of these markets are still being defined as “weak” or “soft.” However, the underlying market dynamics are improving as evidenced by the positive bias of our leading market indicators. This will set the stage for a more meaningful recovery in home prices after the current bottoming process runs its course.
All Real Estate is Local
The above discussion has focused on CBSA or metro level results, which are interesting, but we have always felt are too broad to be really meaningful. In contrast, our focus has always been on more granular tracking of real estate markets such as by specific zip codes or neighborhoods. Our reasoning for this is that there can be wide variations in real estate market conditions within the same CBSA, county or even city. The thematic map below, showing our current zip code level market condition rankings for the San Francisco area, is an excellent example of this.
The 1 – 7 market condition scale above translates into the following real estate market descriptions:
The overall San Francisco CBSA currently has a “normal” market score, yet nearly all possible market conditions can be seen depending upon the location (with 1 corresponding to a distressed market and 7 to a hot one).
CBSA Winners and Losers
Each month we rank 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 trend. 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 in the Current Month
The top ranked metros in the current month appear to fall into two categories. First are a number in Florida which had both price bubbles and crashes such that current prices are close to where they were 10 years ago, offering very compelling values. The second category are markets which never became overpriced in the first place, thus did not experience a significant decline in values in recent years.
The Bottom 10 CBSAs in the Current Month
The bottom ranked metros appear to be markets that had good price increases up to their respective peaks in the 2006-2007 time period, but did not reach bubble proportions. These have been going through price corrections to varying degrees ever since.
In this month’s Market Update, we highlight the wide range of market conditions currently co-existing in the general San Francisco area. While the overall San Francisco CBSA is currently defined as a “normal” market, it is obvious in Figure 3 that there are weaker and stronger sub-markets.
In the case of the overall San Francisco market, the single family price/living increased by approximately 66.2 percent between 2000 and the peak in 2007. Over the same period, the Mission District (zip code 94110) saw its price/living increase by approximately 86.6 percent. Both markets have declined since their peaks in 2007; however, the overall San Francisco decline from the peak to current price has been approximately 16 percent while that of zip code 94110 has been approximately 10.5 percent. Thus, this zip code has outperformed the overall market on both the upside and downside of the most recent real estate cycle.
The lesser decline in home price of this zip code compared to the overall San Francisco market can be attributed to a number of factors including intensity of REO sales activity in the two markets. In the case of all of San Francisco, REO sales have been running at a rate of approximately 15 percent of total regular and REO sales in the past few years while zip code 94110 has seen percentages well below 10 percent.
Different current market conditions should lead to different forecasted home prices. One of the stronger markets at the present time in Figure 3 is zip code 94705, which is in Berkeley. Figure 5 below shows our current median home price forecasts for both the overall San Francisco CBSA and this zip code.
Not surprisingly, this stronger market condition for this zip code is translating to a more optimistic home price forecast over the next several years compared to the overall San Francisco market.
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 subscription to the service. A trial subscription is available upon request. Please visit the Contact Us page to reserve your trial.
To see how Pro Teck and Collateral Analytics can help your company with its valuation needs, please call 800.886.4949 or email firstname.lastname@example.org.