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March 2012 Update: Turnover Rate – A Powerful Leading Indicator of Home Price Trends

One of the most powerful and, yet, simplest leading indicator of the future direction of home price is sales activity. Our previous research has found that the leads can be anywhere from 6 to 18 months. The actual series which we use in our home price forecasting models is the Turnover Rate, which is the number of sales divided by the total housing stock.

The significant increase in distressed sales activity since the peak of the market in mid-2006 has led us to refine this indicator to be the number of Regular Sales (non-distressed sales)/total housing stock. The signals which we were getting from this indicator several years ago is one of the primary reasons that we felt prices had hit bottom in early-2009 despite many others predicting that home prices had much further to fall.

The below graphs for Los Angeles and Miami counties vividly show the bottom of the market being reached in 2009 and the subsequent start of a recovery.

1-LA-Home-Price-3.28.121

Figure 1

 2-Miami-Dade-615x477

 Figure 2

The idea of sales volume leading price is due to the fact that real estate sales activity is the most basic technical indicator of demand. As seen in the charts above, the peak in sales in these markets occurred in 2005 and approximately a year before the peak in prices. Note how sales then proceeded to drop sharply for the next few years until their low points in early 2009. Thereafter, Regular sales activity jumped sharply on a percentage basis and have been on an increasing trend ever since.

Our fundamental interpretation is that the significant decline in prices made home values so compelling that both new owner-occupant homebuyers and astute U.S. and foreign investors came into these markets. The new demand prevented further declines, creating the longer-term bouncing around the bottom in prices we are experiencing today.

Figure 3

The relationship between sales price and Regular Sales volume can be seen on many geographic levels, which is one way to see how useful this indicator actually is. The chart above (Figure 3) shows the relationship between the most recent peak-to-trough percent change in single family price per living area and the percent change in peak-to trough level annual Regular Sales for more than 250 ZIP codes in Los Angeles County. Note how well the percent declines in Regular Sales activity correlate with the percent declines in the respective ZIP code prices.

The Miami and Los Angeles markets are highly representative of what we foresee for most of the important coastal U.S. real estate markets. In particular, we see stabilizing and then gradually increasing prices over the next few years. 

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 This Month

The top ranked metros in the current month show a strong connection to states such as Texas and Oklahoma which directly benefit from the resurgence in U.S. oil exploration industries. In addition, most of these markets did not experience price bubbles during the mid-2000s boom period, thus never became overpriced in the first place.

Bottom 10 CBSAs This Month:

The bottom ranked metros include a number of areas which are still in the midst of price corrections from their 2000 to 2006 run-ups. At the same time, a number of these have experienced sizable declines in employment in the past several years. 

Outliers

In this month’s Market Update we highlight the Eugene-Springfield, OR CBSA, which is currently in the list of the Bottom 10 metros. Like some of the other CBSAs in the this Bottom 10 list, the Eugene-Springfield real estate market lagged the rest of the major U.S. markets with regard to when it hit its price peak in the most recent cycle.

Figure 4

Figure 4 shows the average single family sold price per living area for Lane County, OR (where Eugene is located) along with Maricopa County, AZ (where Phoenix is located). The latter has closely tracked the ups and downs of the major U.S. markets and, as seen, experienced a price peak in mid-2006 which was about one year prior to the peak in the Lane County and Eugene-Springfield markets. This lagging behavior is still playing out on the downside as the Eugene-Springfield market is still in the process of finding a bottom while the Phoenix and Maricopa County markets hit theirs some time ago.

Within the Eugene-Springfield CBSA there are numerous sub-markets. On a ZIP code level, one of interest is ZIP code 97408 which has seen home prices holding up better than the surrounding metro.

Figure 5 

As seen in Figure 5, our home price forecast models call for this ZIP code to perform much better than the overall CBSA over the next several years. One reason for the outperformance of this ZIP code compared to the overall CBSA is it appears that homebuyers have been better capitalized and, thus, better able to weather declines in home prices. In addition to being one of the higher priced markets in the Eugene-Springfield CBSA, the ZIP code has seen buyers make larger down payments when purchasing. The average LTV ratio here has been around 80% compared to approximately 86% for the overall metro.

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 HomeValueForecast.com 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 Pro Teck and Collateral Analytics can help your company with its valuation needs, please call 800.886.4949 or email sales@protk.com.