Tuesday, May 16, 2006

Statistics (Lies With): House Price Data Edition

by Tom Bozzo

The National Association of Realtors just issued its latest release on metropolitan area house prices, reported in the W$J and elsewhere. Here's the NAR headline and lede:

Metro Home Prices Begin to Cool but Appreciation Remains Strong

WASHINGTON (May 15, 2006) – The growth in single-family home prices continued to cool in the first quarter, but many metropolitan areas are still showing double-digit annual gains, according to the latest survey by National Association of Realtors®.
Nationwide, the year-over-year increase in the median house price was 10.3 percent, indeed in the double digits. But take a look at the data (PDF). The appreciation is highly concentrated in the early part of last year; for most metro areas, prices peaked or plateaued around quarter 2 or quarter 3 of 2005. So while the year-over-year increases appear to be "cooling," the sequential increases have ground to a halt.

So, either prices will pick up again — bucking the late trend in mortgage interest rates, recent increases in the supply of existing-home listings, and price-slashing by new house builders trying to unload their inventory — or the measured housing market "cooling" will rapidly turn into a deep freeze as the bubble-era quarters fall out of the price increase calculations.
Alot has been made of the "cooling" of the real estate market in the media recently, but I'm not sure that the effect of second homes and investment properties has adequately been taken into account. If homes and real estate are being considered more like investments, an ebb and flow of housing prices by quarter may be expected.

The other trend that I've noticed recently is that there are less "higher quality" homes on the market in my neighborhood, which would help to explain the recent decrease in median home sales. But that observation is entirely anecdotal ... i have no evidence to back it up.
I've read elsewhere that speculative demand is drying up first (see, e.g., the recent reports from Toll Brothers). But that would really suggest that there's more downside potential than the standard narrative has admitted, as that source of demand -- and, specifically, a source of demand that was somewhat indifferent to price levels as long as the expectation of rapid appreciation was there -- dries up.

In Madison, relatively affordable houses seem to be moving fairly briskly. However, the supply of "luxury" houses (by local standards) has increased dramatically -- to nearly a year's supply at the present sales rate -- and it seems to be starting to show on the price side.

Nationwide, listings are up substantially relative to the sales pace. You can hear it said that the inventory levels are just back to historical normality, but the question of course is whether normal supply and demand can sustain current prices.
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