Housing Activity: Isolated to the Bottom Price Segment

Using current housing market ask prices (a.k.a. “list prices” of on-market properties) to track the cities in the Case-Shiller Composite-10 Index, there’s clear evidence that prices are increasing across the country so far this year:

click to enlarge

An increase in list prices generally signals a strengthening market. As transacted properties establish contract prices, new properties entering the market will set their ask price based on these market-clearing contract prices, and homes already on the market will either hold steady or adjust at the local level. As list prices increase, this illustrates pricing strength in the transactions that contract and will eventually close and record over the next 30-90 day period.

So the pricing strength is a good thing, right? Well, maybe or maybe not. February’s “good” news reported by the National Association of REALTORS (NAR) with existing home sales up 5.1% and by the National Association of Home Builders (NAHB) with a 4.7% rise in new home sales, may be a little misleading once you dig into the specifics of where the real housing market activity appears to be taking place.

It’s been noted that the national housing market is bipolar – with the REO/short sale/pre-foreclosure homes representing one part of the market and “traditional” resale properties market representing the other segment of the market. In short, the increase in list prices is likely due to a compositional change in the on-market properties. The housing market is clearing out the existing inventory at the mostly lower end of the market – lower priced homes are getting snapped up or taken off the market via foreclosure. This clearly represents an upward trend in housing activity so the increases in the current ask price signals positive movement in the short term. The remaining price segments, experiencing little activity, are properties in the traditional resale at the higher price levels.

Activity isolated to the bottom segment

Examining weekly data sets through the end of March 2009 shows a continuation of this trend – strong activity at the low end of the market and less activity in the remaining market segments. Yes, it’s a positive step to clear out the bottom of the market, but there is certainly evidence that more homes are continuing to enter the market this year at all price levels, and will continue to do so in 2010. Once the “spring-time bounce” subsides, inventory levels will likely remain elevated which will depress price levels as 2009 progresses.

The Altos Research Market Action Index (MAI) offers an at-a-glance answer to “How’s the market?” (An MAI > 30 indicates market conditions favoring sellers, while an MAI < 30 favors buyers.) Using the Market Action Index as a proxy, the national housing market continues to indicate conditions that strongly favor buyers, but more significantly, is not showing an upward trend towards sellers in recent months on the Composite-10 City Index:

Additionally, there have not been significant weekly changes in the number of new listings entering the market or listings exiting the market on a national level:

The evidence seems to show that activity is isolated to the bottom end of the market, and this positive activity is counteracted by relative inactivity in the other price zones. Dividing the on-market inventory into 25% “Price Quartiles” and evaluating market activity using the Market Action Index, there’s further evidence on this with an upward trend in the 4^th quartile (the least expensive 25% of homes) and downward trends in the remaining 75% of the market:

Furthermore, taking a dive into a few individual markets by examining some additional real-time market statistics offers more support that the housing market activity in 2009 is isolated mostly to the bottom market segment. (All market stats employed reflect market activity as of the week of 3/23/09.)

Phoenix, Arizona

Inventory levels are falling and median prices are stabilizing:

While still solidly in a “buyer’s zone,” the MAI is clearly trending towards the “seller’s zone” for the when examining the market overall:

Dividing up the existing inventory in Phoenix by Price Quartile, there is heavy activity in the bottom 25% of the market, moderate activity in the two middle market segments, and very little activity in the luxury segment:

A year ago, there were consistently more properties entering the market (“New Listings”) than exiting (“Listings Absorbed). After converging in the second half of 2008, the number of listings exiting the market is now consistently greater than number entering the market.

Here’s the catch - the market activity clearly falls at the bottom segment of the market. Looking at the price levels of homes entering and exiting the market:

Median Price New Listings	$110,000
Median Prices of Listings Absorbed	$99,900

Properties leaving the market are priced at 40% below the median price of all on-market properties (currently at $165,000) and the new listings entering the market also enter the market well below the current median ask prices. There is a recent spike in the number of properties absorbed, which would indicate that the absorption is experienced at the low end of the market and the stabilization in the listing prices are resulting from those “bottom of the market” properties exiting the market:

San Diego, California

Like Phoenix, median prices are stabilizing and inventory levels are consistently falling:

There’s a recent jump in the properties leaving the market:

However, the properties exiting the market are priced considerable below the overall median price:

Median Price New Listings	$439,900
Median Prices of Listings Absorbed	$387,450

This is causing inventory levels to fall, and new properties entering the market are priced considerably above the price of properties exiting the market and very close to the overall median price of on-market properties. This would indicate a more “healthy” market since new listings are priced closer to the current median price, instead of significantly below it as seen in Phoenix.

Los Angeles, California

There is a very high correlation between the number of properties exiting the market and the number of new listings in recent months, which is stabilizing inventory and price levels:

However, new listings are priced only 6% above price of homes exiting the market, and the median price of new listings remains below the current median price of homes already on the market (currently at $375,000):

Median Price New Listings	$325,000
Median Prices of Listings Absorbed	$305,950

Chicago, Illinois

The number of properties exiting the market consistently exceeded the number of new listings, causing inventory levels to drop over time.

However, new listings are priced very closely to the market price of those leaving the market, and are priced below the current median price of on-market homes:

Median Price New Listings	$199,900
Median Prices of Listings Absorbed	$191,200

These are similar traits to those exhibited in Phoenix and would indicate that Chicago isn’t out of the woods quite yet. Additionally, Chicago has demonstrated a “spring-time bounce each in 2007 and 2008, with prices stabilizing early in the year, only to deteriorate further later in the year.

Atlanta, Georgia

Activity clearly favors buyers at the bottom part of the market, and new sellers entering the market are doing so at prices above the market clearing price, but below the overall median price, which has risen overall because of the compositional change.

Median Price New Listings	$150,000
Median Prices of Listings Absorbed	$118,500

One aspect of the Atlanta market that differs from the others examined is that new listings are entering the market at a rate faster than homes are exiting. This could mean tough times ahead for sellers if inventory levels begin to increase as the year continues:

Now what?

Yes, transactions are up over previous months and are higher than in 2008. That’s a positive step. However, in Atlanta, San Diego, Phoenix, and Los Angeles where inventory levels have fallen from their previous highs, they are stabilizing on the downside through the end of March. Unless homes begin leaving the market at an accelerated pace, once the spring season passes, the total number of homes for sale will remain at higher levels than the current demand can absorb and this higher supply will exert price pressure as we progress through 2009. The strength shown in the current listing price will short-lived.

Additionally, there is ample evidence that another wave of foreclosures may hit the market in 2010 in the middle to higher end market segments. Five-year ARMs from 2005 purchases (levels shown below) will be hitting the market in 2010 if they are not refinanced, which many will not be because of the mortgage-to-value ratios of individual properties under water on their loans. This would lead to additional supply further downward price pressure.

(Sourced from “How Housing Busts End: House Prices, User Cost and Rigidities During Down Cycles” by Case & Quigley)

The housing market is active – that should be noted and appreciated – but let’s see how the market does in the post-July 4 period to see if we’re on the way to recovery, or simply taking a break on the way to lower price levels later this year and into 2010.

Disclosure: no positions

Comments

[Mad Hedge F...:]

Nice chart's, but they don't reflect the reality that is out there, at least in California. I am more convinced than ever that real estate has another 25% to fall, and best case, it is dead money for another five to ten years. The New York Times produced some insightful data on inflation adjusted home prices for the last 120 years, which baselines at a $100,000 for a single family home in 1890. Few people realize how superheated the recent real estate bubble really got. Past bubbles very consistently peaked at $125,000 in 1896, 1979, and 1989. This last one peaked at $205,000 in 2005, almost double the previous record highs. And while we have dropped 34% since then, to $135,000, we haven’t even fallen to the past all time highs yet. If you look at historical lows, my call for a further 25% slump looks positively bullish. We saw lows consistently around $66,000 in 1920, 1932, and 1942. Postwar lows came in at $105,000 in 1976, 1983, and 1996. These figures suggest the best case low is down a further 28%, and the worst case is down another 51%. I think I’ll go find something else to trade.

Mar 30 12:31 PM

[Jimmy K:]

You need a new line... i have read this exact same statement in at least 150+ different blogs. I think i'll go find something else to trade.


On Mar 30 12:31 PM Mad Hedge Fund Trader wrote:

> Nice chart's, but they don't reflect the reality that is out there,
> at least in California. I am more convinced than ever that real estate
> has another 25% to fall, and best case, it is dead money for another
> five to ten years. The New York Times produced some insightful data
> on inflation adjusted home prices for the last 120 years, which baselines
> at a $100,000 for a single family home in 1890. Few people realize
> how superheated the recent real estate bubble really got. Past bubbles
> very consistently peaked at $125,000 in 1896, 1979, and 1989. This
> last one peaked at $205,000 in 2005, almost double the previous record
> highs. And while we have dropped 34% since then, to $135,000, we
> haven’t even fallen to the past all time highs yet. If you look at
> historical lows, my call for a further 25% slump looks positively
> bullish. We saw lows consistently around $66,000 in 1920, 1932, and
> 1942. Postwar lows came in at $105,000 in 1976, 1983, and 1996. These
> figures suggest the best case low is down a further 28%, and the
> worst case is down another 51%. I think I’ll go find something else
> to trade.

Mar 31 07:36 AM

[cynewulf:]

Only inflation, will eventually stabilize house prices, because ,otherwise ,the real, natural bottom, and overshoot on the downside are too far away, and too far down for our leveraged financial system. Too many banks,would fail, and contribute to the downward spiral, credit crunch etc.Inflation is the only "tool" left in the Fed.'s ''toolbox".They do not even have the backbone not to throw more money at the U.A.W..

Mar 31 09:42 AM

[Jimmy K.:]

I need a new line... I have wrote this exact same statement in at least 150+ different blogs. I don't like reading the truth 150+ times because I bought a house for more then I could afford because I believed everything I was told..that houses never drop in value. Please stop writing the truth...or I'll keep complaining...even if I have to lie.

Mar 31 01:06 PM

[Scott Sambucci:]

Thanks for your comment. It's not that what's being written is all that unique - the housing market is down - not a surprise. I'll never fool myself into thinking that I'm laying the groundwork for a Nobel Prize. My goal in postings like these is to give some unique visibility to local data and real numbers at the individual market level, and to assemble information for those that might be unaware of the acute problems of the housing market. Hope you'll keep reading!


On Mar 31 01:06 PM User 386374 wrote:

> I need a new line... I have wrote this exact same statement in at
> least 150+ different blogs. I don't like reading the truth 150+ times
> because I bought a house for more then I could afford because I believed
> everything I was told..that houses never drop in value. Please stop
> writing the truth...or I'll keep complaining...even if I have to
> lie.

Mar 31 01:22 PM

[HardwoodFlo...:]

Great Charts!! Great Post!!

Of course prices are falling! Look at what people are buying- foreclosed homes and people who "have" to sell. Moreover the sales are happening inthe overheated markets where prices have Fallen from 30-70%. Bottom feeders will seep-up the inventory over the next several months so prices will continue to fall.

Moreover, jumbo loans are impossible to get and still expensive. So the big ticket stuff isn't on the market.

There is a fair amount of backside demand out there. I agree that the job market needs to stabalize before a housing "recovery" takes place.

The truth is that 400,000 units of single family homes is a pitance of a pace for residential housing. While the remodel numbers have been in the tank for the past 3 years, as home equity lines were the first to go, people are just begining to spend real income on their up grades. I think you will see a uptick in home remodel as the consumer (M2-M3 Money Supply) retrenches.

Still, new housing contruction won't take hold for a while. When it does, there will be lot of catching up to do. Specifically, the fact that housing starts have never been this low for this long ever. It's like the remodel factor. For a while it's like pushing rope, then the slack goes out and there will be a whiplash.

The economy is so different than it was in the past. the huge amount of government workers, health care representing 30% of GDP, tech, manufacturing and the rest is so much broader now. In a way this whole cycle has seemed a bit like Y2K- with experts telling us to buy gold, stock pile guns and prepare for civil unrest- it's just crazy.

Will there be a "fast" housing recovery- no. Will there be one-yes. Will it be a more senseable recovery- yes. By all acounts 1MM single family units is below demand. That's a 100+% increase from where we are now.

Apr 02 06:11 PM