In Three Key Markets, REOs Mask Gains in Home Prices

BIG BUILDER

REO warp: in private home sale transactions prices head upward in markets
Big Builder's Bill Gloede is a good-natured contrarian, be it in ideology, economics, society, or what goes into his pipe. Here, pointing up the absurdity and unhelpfulness of attributing outsized degrees of relevance and importance to the monthly trend analysis of Professors Karl Case and Robert Shiller, Gloede notes that in real, in the-trenches ways, house prices are heading upwards based on transactions in key markets. Gloede writes, "an analysis of data from Real Estate Economics for April for three markets, compared with the S&P/Case-Shiller Home Price Indices for April, shows that sales of bank-owned foreclosures are skewing home price data downward, in some cases wildly. The persistent reporting of continuing declines in home prices is thus misleading if not altogether factually inaccurate."

Back in May, in his company's second quarter earnings release, Toll Brothers Executive Chairman Robert I. Toll chose to include this statement: "We question the recent media headlines announcing that home prices continue to fall. Many studies quoted in the media combine distressed sales data, including foreclosures and short sales, with new and/or non-distressed existing home sales data. We believe that averaging distressed and non-distressed sales data provides a misleading picture to the public regarding home price direction."

Bob Toll was right.

Based on an analysis of data from Real Estate Economics for April for three markets, compared with the S&P/Case-Shiller Home Price Indices for April, shows that sales of bank-owned foreclosures are skewing home price data downward, in some cases wildly. The persistent reporting of continuing declines in home prices is thus misleading if not altogether factually inaccurate.

Based on our analysis, it is the prices of bank-owned foreclosed properties, which are often in poor condition and in less-than-desirable neighborhoods, that is driving the purported decline in home prices. Prices for private sale homes, which include short-sales, in the three markets we examined, are actually moving up.

After Toll's statement, a loyal and much-appreciated reader from a big builder in Texas put WS&M onto REE by sending an REE price report for the Austin market. Bingo. There they were, prices broken down in a way in which bank-owned foreclosure sales could be isolated and removed. We contacted REE and found Sandy Rivera, who offered to run reports for WS&M that might prove that what Toll said was correct. She put us in touch with John Mulville, senior vp of the consulting group at REE.

REE, which uses actual government records compiled by county recorders and gathered by DataQuick, does most of its work in the West and thus does not have data that matches all the Case-Shiller major markets. So we chose three markets in order to do a comparison.

The first was Las Vegas as it is both a Case-Shiller market and pretty much the national capital of foreclosures. The second was Dallas, which we chose because it has remained more stable than most markets during the economic and housing downturns. The third was Seattle, which fared well early in the housing slump but began feeling more pressure as it wore on.

In Las Vegas, Case-Shiller for April had prices down 0.7% from March and 6.2% from April 2010. In Vegas, more than half the transactions in April involved foreclosures. Of a total 8,061 sales during the month, 2,529 were from owner to owner, including short sales, 368 were from builder to owner, 2,459 were from owner to bank via foreclosure and 2,705 were from bank to new owner (REOs). The vast majority, as in the other markets, were single-family homes.

The overall average price for all transactions was flat with March and down 9.9% to $162,010 year-over-year. The average price in the owner-to-owner category rose 4.6% from March to $175,926. The average price of REOs dropped 2.7% to $128,585. The average price for a new home, meantime, rose from $195,585 in March to $206,941 in April (square footage was up marginally).

Compared with last April, the average owner-to-owner price fell 2.4% from $180,236 last year to $175,926 this year. The average new-home price, however, plummeted 21.4% to $206,941 even as square footage rose to 2,156 from 1,834. A look into the cost per square foot, however, shows that it dropped from $242.51 in April 2010 to $92.87 this April, indicating a significant product-mix shift from luxury to entry-level.

REOs, meantime, saw the average price drop 8.2% to $128,585.

Even though the new-home price took the biggest dip, with 368 sales versus 2,705 sales of REOs, the impact of the REOs on the average price is clear.

Dallas is a different story with the same ending. According to Case-Shiller, prices were up 0.5% from March to April but down 4% from April last year.

According to REE, of 4,140 sales in April, 2,416 were owner to owner, 322 were builder to owner, 696 were owner to bank (foreclosure) and 706 were bank to owner (REOs). The average price of all transactions fell 2.3% from $215,131 in March to $210,679 in April but were up 3.4% from April last year.

Prices for owner-to-owner transactions increased 5.4% to $238,371. New home sales prices slid 16.6%, but square footage also declined, from 2,618 in March to 2,373 in April. REO prices were relatively flat, going to $182,384 in March to $183,739 in April.

Year-over-year, the owner-to-owner average sale price rose from $210,182 in April 2010 to $238,371 this April, the new-home average price slid from $251,139 to $237,875 but, again, square footage was down from 2,664 to 2,373, and the REO average price fell from $187,902 to $183,739.

Not quite as dramatic as Las Vegas, but the impact of REOs on price data is clear.

In Seattle, Case-Shiller reported a 1.6% rise in home prices from March to April. The REE data showed a total of 3,523 homes were sold in April, 1,833 from owner-to-owner, 266 from builder to owner, 698 from owner to bank via foreclosure and 726 from banks to new owners. Overall, there was a 1.5% increase in average home price, according to REE.

However, the average price for owner-to-owner sales, which includes short sales, rose 4.25% to $426,868. Bank REO sales, on the other hand, dropped 4.1% to $238,988.

On an annual basis in Seattle, Case Shiller reported a 6.9% drop in home prices from April, 2010. REE put the year-over-year decline at 5.4%. But the average owner-to-owner sale price increased to $426,868 from $401,466 a year earlier. The average REO price, meantime, fell to $238,988 from $276,153.

Again, the REO sales are skewing marketwise price data data downward.

The average price of a new home in Seattle dropped in April to $407,984 from $412,637 in March but was up substantially from $386,853 a year earlier. Part of the month-to-month decline can be attributed to a drop in average square footage from 1,955 in March to 1,604 in April.

WS&M believes this pattern would continue across most if not all markets with perhaps the exception of Washington D.C., where nearly two decades of government expansion and increased spending have allowed the region to escape the brunt of the housing downturn.

Case-Shiller is not to be faulted. It was not designed for a market in which foreclosures are so prevalent.

Fact is, the housing market is now very likely healing itself, without government intervention -- and without housing "policy experts" having been able to influence that intervention. Mulville thinks the market is doing just that, at least in the markets on which he focuses.

"There are parts of the West where we would have thought the 4th quarter of 2010 was our trough," he told WS&M. He does expect more foreclosures in the rest of this year and in 2012 as banks work through their inventory. He noted, however, that "Foreclosures and short sales have not been able to meet the demand from prospective owner-occupants."

That is a nice way of saying that many if not most qualified home buyers do not want to live in neighborhoods where foreclosures are concentrated. Therefore, those homes do not -- and will not -- compete with the rest of the market. This explains the historically high percentage of investors among buyers in most markets, a new generation of would-be slumlords.

"2013, hopefully, has a new look on it," said Mulville. Still, he added, "If you're in a decent employment market, you are very close to or at the bottom."

URL to original article: http://www.bigbuilderonline.com/post.asp?BlogId=gloedesblog&postid=638321§ionID=392&cid=NWBD110630002

For further information on Fresno Real Estate check: http://www.londonproperties.com