State of the Markets - 8/3/2009
This post first Appeared in the August edition of Cirios Trends: Getting to the Bottom of the Housing Market
If there is a single trend we have been focused on here at Cirios throughout 2009, it’s the divergence between high-end real estate markets and broad measures of home prices. That is, even as recent housing market data shows encouraging signs of stabilization, most well-to-do areas continue to see material home price declines.
This divergence has persisted all year, and is now being covered widely in the financial press (See The Wall Street Journal’s recent article entitled “High-End Homes Miss Out in the Rebound”).
Behind this trend is a deterioration in the fundamentals in the Jumbo Prime mortgage market, as well as the impact from job losses among even high wage earners. According to the Field Check Group, a mortgage data analysis firm, Jumbo Prime mortgages are now entering foreclosure at a faster clip than any other segment of the market.
In other words, just like subprime mortgages saw a spike in defaults that predated swift home price declines, mortgages held by formerly low-risk borrowers are now going delinquent at an alarming rate. This does not bode well for expensive real estate markets.
And here is where it gets interesting.
The Chart of the Month in the top right corner of this page shows the Case-Shiller Home Price Index, a widely quoted measure of property values, which registered its first monthly increase in 3-years. So that’s it, we’ve bottomed, right?
Not exactly.
The Case Shiller Index is a value-weighted metric, meaning more expensive homes are given more weight than cheaper ones. And as higher end markets become increasingly distressed and sales activity picks up, these more expensive sales will start to drag up broad measures of home prices, like the Case Shiller. This is a dynamic we discussed back in April, which is now becoming reality.
So even as pundits and real estate professionals everywhere scramble to call yet another bottom in the housing market, savvy buyers should be wary of such proclamations. Sure, while certain lower end markets are seeing signs of stabilization (against the backdrop of artificially low supply due to government intervention into the housing market), this is not so for high-end markets.
Real estate will remain, as it always has been and always will be, local. As such, any recovery will be extremely market-specific. In other words, saying the “housing market” has bottomed, or is bottoming, is meaningless.
You don’t buy a house that’s in the “California” market, or even the “San Mateo” market — homes are in neighborhoods and on streets. No amount of number crunching can tell you the direction of the value of a single house. Keep this in mind next time a real estate professional tells you “It’s a great time to buy.” It may be — but how do they know?
Tags: case shiller, Cirios Trends, high-end