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The Foreclosure Inventory Flood that may Never Happen?

It is becoming widely accepted that real estate markets in many parts of the country are in a recovery mode.  In fact, the turn in many metros has been quite rapid and in a number, the transition from weak to good market conditions has been quite rapid.

One of the significant concerns in recent years has been the potential for a large inventory of distressed homes flooding the market, however, this has not materialized.  Figure 1 below shows a chart for San Diego County of estimates we have created for quarterly foreclosure sales, REO sales, and the number of bank-owned properties or the so-called “foreclosure inventory.”  As seen, the foreclosure inventory has been in a clear declining trend for the past several years and is currently at its lowest level since 2008.

San Diego County Distressed Sales and Inventory

Figure 1: San Diego County Distressed Sales and Inventory

With regard to this foreclosure inventory, there is a misperception that it is a problem for the entire market.  In fact, it is quite concentrated in specific cities and neighborhoods.  For this reason, potential buyers who have been waiting for bargain prices in desirable neighborhoods are being disappointed.  This is another reason why it is so misleading to follow, not only, nationwide but also state and metro level real estate statistics.  The aggregated numbers may be correct but they are often meaningless since the assumption is that the trends and counts are evenly distributed across all sub-markets and neighborhoods, which they are not.

One of the reasons which we are mentioning the San Diego market is that it is one of four Southern California real estate markets which appear in our list below of Top 10 CBSAs this month.  Figure 2 shows a 20-year history of the more traditional Months of Remaining Inventory (MRI) trends for homes listed for sale for the largest three of these CBSAs.  As seen, current readings are now the lowest they have been since the market peak in 2005-2006.

Southern California Single Family Months of Remaining Inventory

Figure 2: Southern California Single Family Months of Remaining Inventory

In addition, the current overall Remaining Inventory for all three counties is below 5 months.  This is significant since, in the case of Los Angeles over the past 25 years, whenever this indicator was below 5 months, the median single family price increased by 18.9 percent in the following year.  It remains to be seen if the same happens this time but all Los Angeles market indicators are moving in a positive direction.

While all three counties exhibit low overall remaining inventory numbers, there is actually a fairly wide dispersion of these values when viewed by home value expressed on a price per square foot of living area basis.  Figure 3 shows the MRIs by price/living range and, as seen, the lowest priced areas are currently showing the tightest inventory levels.

Southern California Single Family Months of Remaining Inventory Price

Figure 3: Southern California Single Family Months of Remaining Inventory

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.

Top 10 CBSAs

top 10 performing cbsas september

The top ranked metros in the current month represent an interesting mix of U.S. real estate markets.  As discussed above, four of the top ranked CBSAs are located   in Southern California.  In addition, there are four Texas markets in this list including Houston and Fort Worth-Arlington.  Note that all the indicators in the Top 10 list are colored green which means that they are 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

bottom 10 performing cbsas septemberFigure 4

In contrast, a high percentage of the bottom ranked metros continue to be located in the Northeast.  Most have double digit Months of Remaining Inventory.  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 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 Los Angeles area while Figure 6 shows the same for the New York Metropolitan area

Figure 5: Single Family Rankings – Los Angeles

Figure 6: Market Conditions Single Family Rankings – New York

Outliers

In this month’s Outliers, we highlight the San Diego-Carlsbad-San Marcos, CA CBSA, which is currently in the list of the Top 10 metros.  All the top ranked California 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 first quarter of 2006 and the median single family price has since declined 39.3 percent.  Like any market, bargain prices will bring out buyers and this is clearly happening in the San Diego CBSA.  As seen in the ranking table above, 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 San Diego CBSA there are numerous sub-markets.  On a ZIP code level, one of particular interest is ZIP code 92024, Encinitas, CA.

Figure 7: CBSA – San Diego-Carlsbad-San Marcos | ZIP 92024, Encinitas, CA

As seen in Figure 5, single family home prices in this ZIP code have held up better than in the overall San Diego metro  and are currently down only 12.8 percent from the market peak.    In addition, as seen in Figure 5, 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 92024 has historically been about 72 percent compared to approximately 80 percent for the overall San Diego CBSA.

About Home Value Forecast

Pro Teck’s 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 sales@protk.com.