Housing Price Increases have been Less Than
You Think
November 28, 2016
by Keith Jurow
Over the last 7.5 years, the Case-Shiller national home price index has increased 24.9% on a
cumulative basis. But I have argued in numerous articles that that figure is grossly overstated. A new
RealtyTrac report supports my claim, and shows the actual number is only 16%. Let's take a good look
at this report to find out what has really occurred in major housing markets around the country.
In April 2016, RealtyTrac published its US Home Sales Report for the first quarter of 2016. This
included a detailed study of 125 housing markets in which a minimum of 300 sales were closed in
March. RealtyTrac analyzed all sales for which they had data on the previous sale of that property.
Here is what they found. The median percentage gain for all 125 metros studied was a 16% gross gain
(before commissions) from the time of the previous purchase of the house. Home sellers in all metros
covered by the report owned their property for an average of 7.7 years. This represents an annual gain
of only 2% per year.
In 15% of all these metros, sellers, on average, sold their property for less than what they paid. There
was no recovery at all in those markets. West Coast metros showed the largest percentage gain over
the previous sale of the home. Take a good look at the following table showing the best and worst
metros.
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The three housing markets with the highest profit percentages are all major California metros. This is
no accident and not a surprise. More than a year ago, 40% of all the outstanding bubble-era non-prime
mortgages in California had already been modified, a percentage much higher than any other large
state. This percentage has risen steadily from 17% in early 2011. Because of these modifications, the
overall delinquency rate is much lower in California.
The result has been the complete collapse of foreclosures in California – from 30,000 at the peak in
August 2008 to a mere 2,000 in August 2016 according to the highly-regarded California Real Property
Report. The removal of so many of the lowest priced homes from the market, has artificially inflated
both Case-Shiller and median sale prices in California.
Housing demand has been stimulated in California by two major factors. One is the employment boom
in Silicon Valley due to the tremendous growth of five Internet giants – Apple, Google, Amazon,
Facebook and Netflix. The other is the huge influx of wealthy buyers from China looking for a safe
haven for their money. This has caused the high-end markets in both the San Francisco and Los
Angeles metros to soar.
Excluding Los Angeles, San Francisco and San Jose (Silicon Valley), the profits of sellers in other
major metros are modest at best. As I mentioned, the median profit for all 125 metros in the report is
only 16%. If you subtract the selling commission, we are looking at net gains of only 11% over an
ownership period of more than seven years.
Even the New York City metro – largest in the nation with 20 million residents – had terrible results.
Over 7.5 years, homes sold in March 2016 showed an average gross profit of only 9%. That is
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notwithstanding the fact that servicing banks in this metro have essentially stopped foreclosing on
houses since mid-2009. Hence if you bought a home in the New York metro area in late 2008, you
would have realized a cumulative net gain of only 4%-5% after deducting the sales commission.
Another 30 metros had gross gains of only 1%-10% over this average holding period of 7.5 years. This
includes major metros such as Jacksonville, Charlotte, Tulsa, Richmond, Kansas City and Washington
DC.
The shocking statistic in RealtyTrac's report is that in 15% of all the metros studied, sellers on average
received less for their property than their purchase price. This includes major metros such as Chicago,
Cincinnati, Memphis and Cleveland.
With a median ownership period of 7.5 years, the average time of purchase was late 2008. This is well
past the bubble-era peak of mid-2006. So most of these recent home sellers had bought well below
peak home prices in their own metro. Yet they still took a loss on the sale of their house.
Welcome to the real world of changes in home prices. No indices or median prices. Just raw data the
way real owners figure it – how much did I pay for the home and how much did I sell it for? All the talk
about steady price gains throughout the nation is unsupported by the data. Price gains or losses are all
over the place and the median price gain figure hides the differences.
For the first time we now know that, except for a half dozen major west coast metros, the so-called
housing recovery has been extremely weak at best. From the table with the 10 worst metros, we can
reasonably deduce that it is almost impossible for homeowners in those metros who bought any time
after mid-2008 to trade up to a larger or nicer house. Except with a new purchase FHA loan with its
3.5% minimum, there is not enough equity in their home to make a new down payment. The
prospective seller would need to obtain the down payment from somewhere else in order to trade up.
What about the Case-Shiller home price index?
Skeptics will throw up this objection: Why are these figures much weaker than the Case-Shiller index?
After all, it is the gold-standard of home price indices.
That is a fair question. Case-Shiller has more credibility than any other home price index. Standard &
Poors – publisher of the index – publishes a lengthy explanation of the methodology behind it.
The Index uses what is called a “repeat sales” model because it takes recent home sales and matches
them with a previous sale of the same property. However, assumptions underlie the Index. The most
important one is that a very different weighting is assigned to matched pairs of home sales.
A paired sale is assigned a weight that could be anywhere from zero to one depending on how far the
pair differs from the “average price change for the entire market.” The purpose of this is to smooth out
distortions caused by price changes that differ markedly from most other price changes in a given
metro area.
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The most questionable weighting factor is the time interval between paired sales; a home that has a
longer time interval between its two paired sales is given considerably less weight than one where the
interval is much shorter. For example, a home in which the interval between sales is 15 years could be
assigned a weight of only 70% of that of a paired sale with a nine-month interval. S & P explains that
the weight could be as low as 55% of the paired sale with only a six-month interval.
Why does the Index weight home sales so differently? S & P describes it this way: “over longer time
intervals, the price changes for individual homes are more likely caused by non-market factors” (i.e.,
physical changes in the property such as adding a bedroom). That is a very arbitrary assumption that
could dramatically distort the raw numbers. The RealtyTrac home sales report draws only on raw
numbers without the use of any index. It more accurately conveys what has happened to home prices
since 2008.
Artificial home price rise since 2012
During the bubble years of 2004-2006, speculative home buying soared. As a result, both prices and
sales volume rose at a torrid clip. This has not occurred during the so-called housing price recovery
since 2012. Can we determine why?
It has been well documented that the bulk of foreclosures that occurred during the crash of 2008-2012
were lower priced homes in the major metros. For example, two-thirds of the foreclosure filings in
California in December 2012 were on homes valued at less than $300,000 according to the California
Real Property Report. This was in a state where the median sale price had soared to nearly $600,000
at the peak of the bubble.
Why is this so significant? In most major metros where home prices had soared, foreclosure sales
removed much of the lower end homes from the market. This was disclosed in a February 2013 Redfin
report (no longer available on line) on home listings. It showed that in the 23 major markets they
covered, overall listings were down 18% over the preceding 12 months.
However, listings of non-distressed properties had declined by only 2.3%. It was listings of
repossessed properties and short sales which had plunged – by 46% and 54% respectively. In half of
their markets, Redfin noted that non-distressed listings had actually climbed. When you remove so
much of the lower priced properties from the MLS inventory, it skews home buying toward higher
priced homes and pushes up the median price of homes sold.
This became clear by early 2013. It was total listings of homes in the hottest markets that had plunged
the most from two years earlier. For example, inventory for sale had fallen by 80% in San Francisco, by
66% in Los Angeles and by 62% in Seattle.
What effect did this collapse in listings have on home prices? Let's go back to the RealtyTrac report
whose table appears earlier. They sent me a spreadsheet going back to 2000. Sellers in San Francisco
in January 2011 had an average gross loss of 15%, Los Angeles home sellers lost an average of 6%
and sellers in Seattle had an average loss of 8%.
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Two years later, the plunge in listings had turned around these three markets. By January 2013, sellers
in San Francisco had a gross profit of 10% and Los Angeles sellers a profit of 12%. By June 2013,
Seattle sellers were showing an average gross profit of 23%. These percentage gains increased over
the next three years as we saw in the RealtyTrac table.
For you skeptics, there is now further confirmation of my argument. The online brokerage firm Trulia
began publishing a new quarterly Inventory and Price Watch starting in March 2016. The report breaks
down homes for sale into three groupings – what it calls “starter homes,” trade-up homes” and
premium homes.” Starter homes – as the name suggests – are the lowest priced homes aimed at the
first-time buyer. Trade-up homes are the mid-priced homes geared toward the trade-up buyer. The
premium home listings are the most expensive homes in a metro's market.
The first issue of Trulia's new report revealed was that the number of starter home listings in the 100
largest metros plunged by nearly 44% since 2012. Listing of trade-up homes declined by nearly as
much – 41%. The number of premium homes on the market shrank the least – down by 33%.
This plunge in the number of low-priced homes on the market is confirmed by CoreLogic's latest
distressed property sales report. A mere 5% of all homes sold throughout the country in June 2016
were repossessed properties. That is down a whopping 23 percentage points from the peak in January
2009. With few foreclosed properties for sale, hapless buyers were compelled to look at higher priced
non-distressed homes.
The specifics in the third issue of Trulia's new report published at the end of September revealed the
connection between the plunge in foreclosed homes on the market and the rise in prices.
More homes were foreclosed in Phoenix during the crash than in any other major metro. Hence these
properties were removed from the low-end of the market. This is shown in the third-quarter Trulia
figures. A mere 13% of all Phoenix listings are starter homes while 60% of its homes-for-sale inventory
consists of high-priced premium homes.
The same thing is shown with Miami listings. Miami also suffered a huge number of foreclosures
during its post-bubble crash. Trulia reported that only 13% of all Miami listings were starter homes. An
enormous 66% of homes for sale were premium homes. The figures for listings in Los Angeles in the
third quarter of 2016 showed that only 23% of listings were starter homes. Luxury home listings
accounted for 52%.
Recall that all three of these metros were among the top 10 showing the greatest gross profit for home
sellers in March 2016.
Why are home prices still rising in the strong markets while sales are so weak?
If the housing bubble in 2004-2007 witnessed soaring sales volume as prices climbed sharply in the
hottest markets, why have prices been able to rise in the strongest markets over the last four years
without an increase in sales volume?
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In really strong bull markets – whether stocks or real estate – rising prices are almost always
accompanied by increasing sales volume. This has definitely been missing since 2012 in housing
markets. Prices have risen in the stronger housing markets because of a sharp fall in supply, not an
increase in demand.
Notwithstanding anecdotal stories of bidding wars in the hottest markets on the west coast, no major
market is crawling with hungry buyers today. The potential home sellers have gone on strike since
2012 and that has pushed up prices.
The all-cash buyer
There is still one more important factor to consider. With home sales so tepid even in the strongest
markets, prices would not have been nearly as strong had it not been for the continued presence of the
all-cash buyer.
Back in 2009-2012, purchases of foreclosed properties by all-cash investors kept sales from collapsing
and moderated the plunge in home prices. In Phoenix, for example, more than 60% of all sales in mid2009 were all-cash deals. Las Vegas had almost as high a percentage. As late as the spring of 2014,
the online brokerage firm Redfin reported that 69% of all homes that sold for between $50,000 and
$100,000 in 17 major markets it covered were all-cash. These were largely foreclosed or short-sale
properties.
Although the percentage of sales that were all-cash has declined considerably since the peak in
January 2011, they are still a major factor in all large metros. As recently as June 2016, CoreLogic
reported that 56% of all home sales in the Detroit metro were cash deals, 48% in Miami and 44% in
both the NYC metro and in Philadelphia. Does anyone believe that prices would not have been
considerably lower in these metros and others had there not been so many willing all-cash buyers?
If all-cash buying were to return to pre-bubble levels, what do you suppose would happen to home
sales and prices? The answer seems obvious – they would both plunge.
Keith Jurow is a real estate analyst and former author of Minyanville’s Housing Market Report. His
new report – Capital Preservation Real Estate Report – launched in 2013.
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