The U.S. housing market has entered what should be a sustainable period of improving conditions led by very low mortgage rates, stable to rising home prices, declining unemployment, declining housing inventories and a strong rental market. This has positive implications for the overall economy since the real estate market has historically been one of the most important leading indicators of economic activity.
This is particularly true for the new home market. Even though new homes represent only a small percentage of the overall housing market, they have a disproportionate effect on the economy since data shows that on average, three new jobs are created for a year for every new home built.
In recent updates we have highlighted the fact that there are very low levels of existing homes listed for sale. As seen in Figure 1, the same is true for the new home market. The most recent value of 4.5 months is close to the lowest levels of the past 50 years.
The benefit of working with new home inventory data is that more history exists, which allows us to trace its relationship with home prices over more real estate cycles. In fact, Figure 2 below shows the inverse correlation between the inflation-adjusted median single family price annual percent change and new single family Months of Remaining Inventory (MRI) back to 1972. What is of note is that low MRI levels, as is currently the case, have always been associated with significant home price appreciation in the following year.
The primary reason for the low new single family MRI values is the historically low number of new homes for sale. Needless to say, the recent “Great Recession” has significantly reduced new home construction. This shows up in monthly housing starts data and correspondingly in new homes for sale. Figure 3 shows these numbers back to 1964 and, as seen, new housing supply has been running in recent years at the lowest levels since the 1960s.
This is significant for several reasons. It is common knowledge that there are many distressed homes for sale in parts of the country. However, moving these through the pipeline is not a straightforward process in numerous cases. Many potential buyers of these homes become frustrated with the elongated acquisition times in the short sale and foreclosure sale markets and turn to the new home market, if possible, where they know they can transact a home at a well-defined closing time and price. The problem is that the number of homes available in this channel is typically far below normal levels, which puts added pressure on what new inventory is for sale.
So it should not be a surprise that nationwide, new home prices have held up much better than existing home prices (Figure 4).
While the two series have tracked one another quite closely since the 1960s, there has been a more notable divergence in the recent down-cycle. As can be seen, the most recent monthly median new single family price of $256,900 is down less than 1 percent from the peak reached in 2006. In contrast, the nationwide median existing single family price of $183,900 is down 20 percent from its July 2006 peak. Clearly, nationwide median prices such as these are being distorted by the geographical distribution of where the new sales have been occurring, however it is a fact that the new and existing home markets have performed quite differently in recent years due to the underlying supply-demand situations.
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 would 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
The top ranked metros in the current month represent an interesting mix of U.S. real estate markets. Four of the top ranked CBSAs are located in Texas and one is in Oklahoma, which confirms the strength of the real estate market in this part of the country. Note that all the indicators in the Top 10 list are colored green which means that they are universally exhibiting positive trends. 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 having balanced or tight markets based on their Months of Remaining Inventory values.
Bottom 10 CBSAs
In contrast, the bottom ranked metros are spread around the country with no apparent geographical pattern. This suggests that local and not regional economic issues are having the largest influences in these metros. Most have high Months of Remaining Inventory with several being in double digits. However, our top and bottom ranked CBSAs are ranked on a relative basis. Thus, even the ones in the Bottom 10 list are showing a fair percentage of positive (green) trends. This is quite different from last year when the majority of the Bottom 10 markets had most (or all) of their indicators trending negative and colored red.
Our Market Condition thematic maps are a good way to visualize the differences in the top and bottom ranked metros. Figure 5 below shows the single family rankings for the Seattle, WA area while Figure 6 shows the same for the Portland, OR metropolitan area.
Note that while Seattle is a top ranked market, there are pockets of distressed and weak neighborhoods.
Alternatively, Portland is a bottom ranked market but shows pockets of neighborhoods ranked as good. This is consistent with our philosophy that all real estate is local and while regional and national trends are of interest the primary influence on any given home’s value are the neighborhood trends impacting it.
In this month’s Outliers, we highlight the Seattle-Bellevue-Everett, WA CBSA, which is currently in the list of the Top 10 metros. While the Seattle CBSA did experience a decline in home prices since its peak in early 2007, the magnitude of the drop has been much shallower than those of other western states such as California, Arizona and Nevada. One result of this is that distressed sales activity has been much lower in the Seattle metro than in these other states. As seen in the ranking table above, all of the important market indicators for the Seattle CBSA are showing positive trends on a year-over-year basis including declining inventory, declining market times and lower distressed sales activity.
Within the Seattle CBSA there are numerous sub-markets. On a ZIP code level, one of particular interest is ZIP code 98005, Bellevue, WA.
As seen in Figure 7, single family home prices in this ZIP code have held up better than in the overall Seattle metro since the market peak. In addition, our home price forecast models call for this ZIP code to perform quite a bit better than the overall CBSA over the next several years.
There are a number of reasons for the historical and forecasted outperformance of this ZIP code which include the fact that 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 98005 has historically been in the low to mid-70 percent range compared to approximately 80 to 83 percent for the overall Seattle 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 firstname.lastname@example.org.