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Why the Rate of Recovery Is Different in Today’s Local Housing Markets: Exploring the Market Trends in Phoenix vs. Cleveland

As 2013 fades further in our review mirrors, the nation continues to experience an improved housing market.  In 2014, median home prices have risen in many markets and the number of underwater homeowners has declined. But there are still stark differences in local markets across the country.

As we drill down from a macro to a micro level, there is an evident mix of “hot” and “cool” real estate markets. Two example metros that highlight this are Phoenix, AZ, and Cleveland, OH.  Recent research from Deutsche Bank looked at the top metropolitan areas to assess whether they were buyers’ or renters’ markets.  Deutsche Bank cited Cleveland as top metropolitan area for buyers and Phoenix as one of the top areas for renters.  Although we do not disagree with their findings, we take a slightly different view of the market conditions in those metros.

Based on the past, current and predicted housing market trends which appear in Home Value Forecast, the Collateral Analytics five-year forecast for Phoenix looks fruitful and faster-moving, while the one for Cleveland (although it may be a buyer’s market to some) overall recovery is more complicated and sluggish.  Here’s why:

A Strong, Recovering Market

In 2012, after overshooting on the downside, Phoenix’s housing prices rebounded strongly and the metro was fast on the mend.  During this time, Phoenix attracted foreign and large US investor interest and quickly worked through its foreclosure inventory, turning many into rentals for the recently displaced foreclosure victims.  This triggered historically high rental yields and generally inspired confidence in the housing market’s trajectory at the time.

Phoenix Snapshot:

Phoenix AZ housing market trend

Today, the frenzy in Phoenix has subsided but housing appreciation is still positive, just returning to long term fundamentals and a more sustainable, long-term growth trajectory.  Employment rates are even, jobs are growing and single-family home prices and listing prices are all rising proportionately.  Most importantly, the foreclosure sales that dominated this market during the housing crisis have been cleared allowing Phoenix to recover a great amount of what was lost.

REO Sales Percentage Total Sales Phoenix

In Phoenix, demand remains high and market fundamentals are strong.  A healthy 5.99 Months of Remaining Inventory supports this, as do prices for active listings and sales, which are respectively up by 27 percent and 15 percent from a year ago.  Phoenix has returned to a more stable and healthy housing market with a positive five-year forecast.

Phoenix AZ housing market forecast

But in some metros the recovery lags behind — as is the case in Cleveland.

 A Foreclosure-Heavy Market

Though employment rates and job growth are on the upswing, our data indicates that Cleveland is still a step or two behind Phoenix’s recovery — just now in the early stages of nursing a market back to solid fundamentals.

Cleveland snapshot:

Cleveland OH housing market trend

As it stands, Cleveland’s foreclosures are on the higher side – one of the main reasons that the CBSA appears in our “Bottom 10” this month.

However, unlike Phoenix, Cleveland’s REO foreclosure issue faces further challenges than just a late start.

Ohio is a judicial state, meaning that every foreclosure must cycle through a court proceeding before being eligible for purchase (unlike Arizona, where speedier non-judicial foreclosures cleared up the bulk of REO inventory by 2012).  This adds a substantial amount of time to the process (up to 2 years) and slows down the expediency of a recovery.

Graphing the foreclosure discount brings this clearly to light.  While Cleveland’s REO discount has been 53% to 65% over the last three years, Phoenix has been between 9% and 19%.

REO vs Regular Sold Price Cleveland


REO vs Regular Sold Price Phoenix

Despite some positive gains, Cleveland’s recovery is still in its infancy, and the metro has more challenges to overcome than markets like Phoenix that worked through their foreclosures more quickly.  A true market turnaround and a return to sustainable market fundamentals may not be achieved in the short-term (less than five years).  The Collateral Analytics forecast below brings this fact clearly to light:

Cleveland OH Housing Market forecast

CBSA Winners and Losers

Each month, Home Value Forecast uses a number of leading real estate market-based indicators to rank the single family home markets in the top 200 CBSAs to highlight the strongest and weakest metros.

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 that 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

April 2014 top performing housing marketsCalifornia keeps leading the charge, with eight of our top 10 metros from the state.

Three years ago, much of the bad news was centered on California, a non-judicial state. Foreclosures were driving down prices, there were massive losses, and people were wondering where the bottom of the market was and when it would be reached. The glut of low priced foreclosures were snatched up, primarily by large investors who saw the ‘REO to rental’ opportunity, peak foreclosure activity came and went, and now markets are leading the recovery.

Bottom 10 CBSAs

April 2014 bottom performing housing markets

Positive (green) trends are much more evident in our bottom 10 than in previous months.

Also of note is all of the CBSAs in our bottom 10 except for Little Rock, AR are from “judicial states” where the foreclosure process is drawn out like in Ohio.  To learn more, please read our earlier post, The Timeline of a Turnaround.