Low-End Home Prices More Useful in Predicting Big-Picture

In the most recent issue of CoreLogic’s MarketPulse on-line magazine Sam Khaterrnsuggests that low-end home prices can be useful in predicting the futurerndirection of all home prices.  Analysts,rnhe says, frequently base their forecasts on aggregate national price trends orrnon geography.  The former can sometimesrnmask large changes in different price segments that could provide usefulrninformation. </p

Khater uses the example of low-endrnprices hitting bottom in March 2011, nearly a full year earlier than the troughrnfor high-end properties and for prices overall. rn”Not only can turning points be different,” he says, “so can thernmomentum in low-end versus high-end price changes.”</p

Pre-crisis year-over-year house pricernincreases peaked at 19.3 percent for low-cost houses in March 2005 then deceleratedrnto 9.3 percent 12 months later.  On thernhigh-end of the price range however, prices in March 2005 were up 15.2 percentrnfrom the previous year and 12 months later the annual increase was still 10.8rnpercent. </p

Khater says that looking at high versusrnlow-end price trends reveals that low-end changes and levels lead high-end counterpartsrnby six months to a year and that prices at the low-end are much more volatilernthan those at the high end.  The latterrnoccurs because there are three major buyers at that price level; first-timernbuyers, lower income repeat buyers, and investors.  Although there are different reasons, eachrnsegment is more sensitive to economic trends than high-end buyers.  </p

The high-end/low-end variances are morernmarked still when viewed on the metropolitan statistical area level.   Thernauthor looked at prices in 21 geographically diverse markets and found thatrnover the last six months low end price growth decelerated in six while high-endrnslowed in four.  But while that is not arnsignificant number, the intensity at the low end was very large compared to thernhigh end.  In Boston for example thernannual price increase in March 2013 was 17.0 percent, in September it hadrndropped to 4.2 percent.  High-end pricesrnin contrast have risen in recent months.</p

Likewise in Las Vegas the price grow onrnthe low end has decelerated from 34.1 percent in March to 25.9 percent in Septemberrnand in Phoenix from 23.3 percent to 15.5 percent.  Among the 21 markets studied for high-endrnpatterns the largest decrease was in Phoenix, a decline in growth from 16.2rnpercent to 14.6 percent.</p

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There are some markets where low-endrnprice increases have picked up over the referenced six month period.  Khater singles out Chicago where prices wentrnfrom flat to a 9.8 percent annual increase by September.  Chicago has also shown the most rapid growthrnin owner-occupied home purchases over the last two years of any market in therncountry.  Raleigh, North Carolina hasrngone from a 1.4 percent annual loss in March to a 9.1 percent gain in low endrnprices.  On the high-end the strongestrnacceleration has been in California, particularly San Diego and Riverside.  </p

Khater says that while there are caveats,rnlower end home prices are clearly decelerating, especially in the Southwest andrnthat “the magnitude of the declines presages lower growth for prices overall.”  When prices bottomed out in early 2012 pricesrnon the low end were still 14 percentage points (growth rate) above those on thernhigh end; currently the difference is 22 percentage points, the biggest gap inrntwo decades.  “This indicates that thernlow-end price correction is over and overall price growth will be markedlyrnslower heading into 2014.”

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