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Hardest Hit Markets Overshoot On The Downside; Why Markets Like Phoenix Are Offering Bargains For Buyers: Monthly Market Update

One of the most basic definitions we use in categorizing U.S. real estate markets is whether they are coastal or interior. Coastal markets like Los Angeles, San Francisco, Boston, New York and Miami are characterized by limited developable land, faster growing economies and being global in nature (i.e. they also appeal to foreign investors). Interior markets like St. Louis, Denver and Columbus are characterized by abundant developable land, slower growing economies and domestically-based buyers.

Phoenix provides a good case study of a market which has been in transition over the past year and is a hybrid of our two basic types. While it is clearly an interior market from a geographic point of view, it is one of the faster growing metros in the U.S. and it also has been a focus of foreign investor interest, primarily from Canada.

One of the themes that we have been suggesting is that home prices in some of the hardest hit markets have actually overshot on the downside. We say this for a number of reasons, including what two of the more traditional appraisal methods for valuing real estate (replacement cost and income capitalization) suggest – that home prices in these markets are selling at significantly below their replacement costs and the rental yields generated on these homes are far above historical levels.

To help answer the question of how much a market has overshot on the downside, we turn to the home price forecast models we have created for each metro. These models are based on the two primary drivers of home prices; employment growth and affordability.

Figure 1 shows the historical employment series and median single family price for the Phoenix CBSA back to 1985. Notice the correlation up to 2004 at which time home prices went into bubble mode and became completely detached from market fundamentals.


Figure 1: Phoenix CBSA Median Single Family Price and Employment

After the peak of the market in 2007, the median price began to revert back to a more sustainable level such as what would be suggested by the employment series. However, as is typically the case with bursting bubbles, Phoenix home prices declined not only to the economically supportable level, but significantly below it. Since home price cycles are measured in years not months, it isn’t surprising that the Phoenix market (and other bubble markets) have spent the last several years in a bottoming out process before they began to revert back to their fundamentally driven values.

The recent data from Phoenix shows that this overshooting in price is now rebounding back towards a more reasonable long term value. Figure 2 shows single family sale prices for a number of the larger cities in the Phoenix CBSA on a per square foot of living area basis.


Figure 2: Phoenix CBSA Single Family Price per Living Area

As seen, the price increases all date back to the third quarter of last year. The fact that the price increases are broad-based across all the major cities suggests that late 2011 will mark the low point in overall Phoenix home prices for the current cycle.

Our optimism for the Phoenix market is supported by a number of market condition indicators which we follow on a regular basis. Figure 3 shows the count of total active single family and condominium listings for the past four years for all of Maricopa County.


Figure 3: Maricopa County Active Listing Counts

As seen, it has been in a clear downtrend with the most recent reading down 39.4 percent from a year ago. Anecdotally, this trend is being confirmed by brokers in Phoenix who are now saying that their biggest challenge is finding enough inventory to sell.

One of the best leading indicators of home prices is Months of Remaining Inventory (MRI).

Figure 4 shows the current distribution of single family MRI for all of Maricopa County by price range. As seen, the market is quite tight up to the $650,000 level where it starts to soften.


Figure 4: Maricopa County Single Family: Months of Inventory Remaining by Price

The sharp decline in available inventory coupled with a solid level of home sales over the past few years has pushed the overall Phoenix single family level down to 2.5 months. This is a very low number and historically such low MRI leads to significant price increases.

A lingering concern in Phoenix and other “bubble markets” is that there is still a large number of distressed properties in the pipeline (a subject we wrote about in January’s, Measuring the Size of the Inventory of Distressed Real Estate: The Drain Is Still Clogged). This may be true, but we feel that the key here is how much comes on the market at any one time and how much of it will be absorbed by large buyers via bulk purchases (i.e. investment funds).

One series which we closely watch is the number of REO sales (bank owned) as a percentage of all sales. Figure 5 shows this series back to 2000.


Figure 5: Single Family: REO Sales as a Percentage of Total Sales

While still high, the latest readings are far below the levels of 2008-2010.

Finally, a ZIP code level map of our most recent Market Condition scoring system for the Phoenix CBSA is shown in Figure 6.


Figure 6: Phoenix CBSA: Market Conditions by ZIP Code

Our ranking system is totally quantitative and is based on the trends in a number of important leading indicators such as sales activity, MRI, sold and active market times, sold-to-list price ratio, REO percent of total sales, etc. As seen, nearly every ZIP code in this metro is currently classified as being “Good” or “Strong,” with darker blue representing stronger markets.

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.

The Top 10 CBSAs in the current month:


The top ranked metros in the current month represent an interesting mix of U.S. real estate markets. Not surprisingly, our case study Phoenix market is one of the strongest, as are other southwest U.S. markets such as Dallas, Houston and Oklahoma City. New additions this month include two Southern California markets – Los Angeles and Santa Ana (Orange County). 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 showing balanced or tight markets based on their Months of Inventory Remaining values.

The Bottom 10 CBSAs in the current month:


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 the same bargains as the top ranked ones with regard to compelling prices and high rental yields.


In this month’s Outliers, we highlight the Los Angeles-Long Beach-Glendale, 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 fourth quarter of 2006 and prices have since declined 42.4 percent. Like any market, bargain prices will bring out buyers and this is clearly happening in the Los Angeles CBSA. As seen in the ranking table above, nearly 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 Los Angeles CBSA there are numerous sub-markets. On a ZIP code level, one of particular interest is ZIPcode 90266,Manhattan Beach, CA.



Figure 7: CBSA – 31084 | ZIP 90266, Manhattan Beach, CA

As seen in Figure 7, home prices in this ZIP code have held up better than in the overall Los Angeles metro since the market peak, having declined only 19.3 percent. In addition, as seen in Figure 6, our home price forecast models call for this ZIP code to perform better than the overall CBSA over the next several years.

In addition to being very conveniently located relative to Los Angeles’ business districts, LAX Airport and the beach, 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 31084 has historically been well below 75 percent compared to approximately 82 percent for the overall Los Angeles 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