Every year we pull together data for Forbes to publish their 500 most expensive real estate zip codes. This year’s was published a week or so ago, and is more dominated by New York City than previous years. In previous years, the most expensive real estate markets in the country are in New York and the San Francisco Bay Area, this year, despite Atherton being the top of the list, the Bay Area is absent from the Top 10. Why is that?
In a word, inventory.
Housing availability remains in chronic shortage in California and particularly around San Francisco and Silicon Valley. In previous years, for example, Los Altos Hills would have two zip codes in the top 10 most expensive – 94024 and 94022. But this year, the active inventory fell too low. We use a size of 10 properties listed as a minimum count in this project, so Los Altos Hills wasn’t even included.
Median Home Price in Los Altos Hills
The other reason some markets get prioritized in this project, is that Forbes likes to blend the prices of condos with those of single family homes to get a weighted price. The result is that the expensive condos in Manhattan bring the prices up, but in an expensive resort town like Vail, the cheaper ski condos bring the overall price down.
Check out the overall list and let us know if any other patterns jump out at you.
Today we’re publishing our first look at the 2015 housing market. Based on real-time observations of housing supply and demand, among other conclusions, we’re forecasting a 7% home price increase for 2015.
Bearish Headlines, Bullish Reality
It’s scary to be a contrarian particularly if you’re contrarian AND bullish. In retrospect this position is the most fun. If you’re right.
From the report:
In terms of home prices, the US real estate hit the absolute bottom on January 4, 2011. Home prices are 39% higher since then. Yet every day we see media headlines declaring “weakness” and “disappointment.” As recently as June 2015 housing, apparently, remains a chief concern for Fed chief Janet Yellen, who uses phrases like “much slower pace than expected” and “slowdown.”
In our view, these attitudes reflect a myopic view of actual market conditions and conflate concerns over the mortgage industry, the otherwise-constrained new construction market, and more broadly, the long-term financial stability of the US consumer with specific current housing market supply and demand dynamics. While these are valid long run concerns, the variables impacting home prices have proven to be driven by low available supply and growing household formation.
The real-time data paints a much more robust environment than the headlines would indicate. Demand remains high, transactions happen very quickly. Home prices are up another 9% year over year as of July, 2014. We’ve had a strong run and the American consumer is anxious to again buy real estate.
The report goes into depth on a number of leading indicator metrics, here’s one that captures the essence. This is year over year price changes for the US real estate market. You can see that we’ll end the year up about 8-9% from the end of 2013. That boost alone will help 2015 march to a reasonable appreciation rate.
- Year over year home price change, US single family homes. Altos 20-City Composite.
More commentary coming soon.
The report is available for download here
Housing bears are roaring about the volume of mortgage applications. The rate of purchase applications is a leading indicator of demand for housing. Demand for mortgages are down, demand for housing must be down, and that’s bad. Right?
Apparently not. Demand for mortgages is down. But the data keep telling us that demand for housing is not subsiding (as of the first week of March, 2014.) Specifically:
- All cash deals are high and climbing. 47%(!) of home purchases were all cash in December up from 27% a year ago. Here’s the important point on this phenomenon: LESS leverage is HEALTHY for a market. This is a good thing, from a price stability standpoint. Bubbles are financed with too much leverage, not too little.
- Even if mortgage demand is weak, demand for housing is still very high. Housing demand, as measured by some of our proprietary metrics, is a only little softer than last year at this time. But last year’s crazy demand levels resulted in a huge 15% price rally. Based on real-time market measurements, Altos Research forecasts home prices to climb 10-12% in 2014. Housing demand has not subsided.
- Interestingly, contrary to most casual observers’ opinions, the big institutions are not driving the cash purchases. Even with the tens-of-billions of dollars in investment firms like Blackstone, Colony, and Waypoint, that financial power amounts to around just 5% of the overall home purchase market. Buyers are cash-rich consumers and small-time investors buying a second or third property.
- Interest rates are actually falling. What?! Yes, after the spike a year ago, rates have drifted lower again. This implies that the bull market for US real estate has room to run when leverage increases again.
- 30-year fixed mortgage rates, from samples across the Altos 20-city composite. Mortgage Interest rates peaked in July 2013 and have been bumping lower since.
So what to make of the low rate of mortgages in US Housing? I attribute it three factors:
- Cash-poor consumers are afraid. They have been beaten into assuming they can’t get a loan. And with competition for the low inventory so intense, they’re not even trying.
- I suspect this cash-heavy real estate investment phenomenon is a symptom of high uncertainty and mistrust in the global financial system. Americans are afraid of the country’s financial condition and an un-leveraged, income-producing asset is a wonderful thing to have in times of trouble.
- It also seems to be tied with the income growth disparity in this country. First time homebuyers may be losing out to small, cash-rich, investors.
Low mortgage application volumes may be indeed be bearish for the long term outlook for the housing market. It may signal fear of the global financial system. But for the time being, housing demand is strong and we’re looking at another bull year for home prices.
If you pay attention to your Altos data, you’ll know that the housing market bottoms between the second and third week of January every year, like clockwork. You’ll also know that one of my favorite leading indicators of home prices for the year is the median price of the New Listings. Each week we track all the properties that got listed for sale. The prices of those properties are a marvelous “wisdom of the crowds” example. Realtors, in aggregate, know exactly where to price homes.
This year we have a few notable points in the data.
- The housing recovery is marching into its FOURTH year after bottoming January of 2011.
- We’re starting the year 12% above last year at this time. In past years, this early indicator carries around the same level through the whole year.
- The first weekly uptick is strong, seasonal, and expected. No sign yet of higher mortgage rates or new qualification requirements hurting home prices.
- Median Price of newly listed single family homes across the Altos 20- City national composite. Weekly data (red) and 90-day rolling average (green). Click for full size image.
New Listings are the first of the pricing indicator dominoes to fall. Look for the headlines to catch on to spring strength in April or May.