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Examples like these show how vital it is to look at active market data when forecasting local real estate markets. If your model accounts only for transaction prices, you’re costing yourself (and your investors) lots of money with a really bad and latent forecast.
Check out median sold prices for condos in Miami, FL (based on transactions from county records). In late October 2009 through early January 2010, sure looked like the condo market was recovering down in Miami. Notice the 15% spike in prices from just under $140k to $160k in the Fall:
Miami Condo Sold Prices, Jan 2009-Jan 2010 (90-day rolling average of weekly observations)
So what exactly happened here? First, let’s take a look at market prices by quartile, defined as 25% price bands based on active market properties. There is a noticeable gap between the most expensive 25% of condos for sale (median price = $500k) as compared to the remaining 75% (median price < $250k):
Miami Condos: Median Ask Prices by Quartile
Next, let’s overlay the active inventory counts (black line, left axis) and the transaction counts (orange line, right axis). Notice how there are 8000-9000 condos available for sale each week, while actual transactions huddle around 175 per month during the October 2009 to January 2010 period, with a jump to 275 transactions for a single week in mid-November:
Miami, FL: Active Listings vs. Sold Count, Fall 2009 (weekly observations)
Now, let’s combine our quartile analysis with transaction counts to view “sold count by quartile” per week during this period. Notice the single-week spike in mid-November – there were 125 condos sold in the top price quartile (blue line below = condos priced in the $500k range):
Weekly transactions by Price Quartile
And finally, let’s see how the Miami Condo market is really playing out in 2010 (hint: it’s not):
Miami Condos: Sold Prices through May 2010 (90-day rolling average of weekly observations. 90-day RA values are typically used in forecasting models)
All the while, what did real-time active market indicators (Median Ask Price and the Price of New Listings) reveal? That the Miami Condo market was not, in fact, improving over the longer run, and certainly not heading into recovery mode:
Miami Condos: Real-time Market Ask Prices vs. Sold Prices
The single-week high-end transactions influenced 90-day rolling average sold prices into early January 2010, drastically altering 2010 forecasts.
What’s the lesson here? In a city with 500,000 people and 9000 condos available for sale, 125 high-end transactions during the week of 11/15/2009 duped the transaction-based home price forecasts. Additionally, remember that transaction price availability lags by at least a couple of months vs. real-time, active market indicators. This left traditional models using limited 2009 data, which came available around March 2010, indicating that the Miami Condo market was on the rise. Meanwhile, the rest of us using real-time active market data, including the thousands of remaining sellers still on the market, all knew that the one-week sales spike back in November was an aberration.
Let me know the next time you’re trading on a transaction price model. I’d like to be on the other end of that trade.
Lots of talk of late about the double dip recession, caused in many ways by ongoing housing market declines. Here’s where market conditions matter most for borrower behavior and seller psychology, impacting future housing prices.
Jacob Gaffney at HousingWire discusses the “shadow shadow inventory.” He writes:
The recent data that shows delinquencies rising, mixed with reports that a lack of borrower equity is one of two major reasons for mortgage default, is propelling mortgage finance analysts to attempt to measure the pipeline of borrowers who are likely to lose their home, via strategic default or loss of income.
Add this to a slew of strongly negative housing data reported over recent weeks:
- Our July 2010 Webcast on the post-stimulus housing market and the Altos Research August 2010 Real-time Housing Report showing our 10-city and 20-city composites moving negatively into August
- The National Association of REALTORS with home sales down 27%
- LPS reporting year-over-year delinquency volume rising
- CoreLogic’s Q2 Negative Equity Report – “An additional 2.4 million borrowers had less than five percent equity. Together, negative equity and near-negative equity mortgages accounted for nearly 28 percent of all residential properties with a mortgage nationwide.”
Enter the importance of market conditions — walkaway and default decisions are made on the margin. With a slew of borrowers on the edge of negative equity and a whole bunch more in the “just barely underwater” range (say negative 5-15% equity), a 10% drop in housing prices will mean an increase in delinquencies and housing inventory over time.
Check out how the last round of increased delinquencies in late 2008 are correlated with market conditions (click to enlarge):
Borrower psychology is pretty simple to figure out – check out Homeowner Hank down in Texas. And while all the talk in economic circles is “jobs, jobs, jobs,” the real driver of delinquencies is negative equity. Real-time market conditions are worsening across the country with inventory and price reductions rising, leading to a decline in prices and place more and more borrowers into a negative equity situation:
Altos 20-City Inventory and Price Reductions
Altos 20-City Composite: Active Market Prices
From the Wall Street Journal (as reported by media outlets far and wide today):
Home resales dropped a record 27.2%–nearly twice as much as analysts had expected–to an annual rate of 3.83 million in July, the National Association of Realtors said Tuesday. Meanwhile, inventories rose to 12.5 months from 8.9 months in June, pressuring already depressed home prices.
We certainly don’t enjoy reporting today’s market conditions (the data don’t lie, you know…), but maybe the aforementioned analysts should have attended last month’s webcast about US Housing in a post-stimulus world. Here’s the key takeaway from the presentation – inventory is up and exits are down.
Housing Supply & Listings Absorbed through August 2010
Meanwhile, more active sellers are taking price reductions and new sellers hitting the market are price lower than their competition:
Altos Research Active Seller Psychology Indicators
Here’s a preview of our August 2010 Real-time Housing Report:
This month’s housing data confirms what we’ve been saying for some time: the mini-”boom” of this spring was created by seasonal demand, with some extra help from pressure to meet deadlines for capitalizing on tax credits. Now that those are gone, buyer activity has all but come to a standstill.
Download a copy of this month’s report here. (Yep – it’s free. Registration required.)
And if you missed last month’s webcast, “The US Housing Market: It’s worse than you think,” we’ve posted the presentation slides and the recording in a previous post.
