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What’s Happening to the Most Important Homes in Real Estate?


What’s really happening with homes in the bottom price tiers?

These are the most important homes in the entire real estate economy.  They are where the housing ladder begins: they are then entry point for new buyers, the starter homes that MUST be available and affordable for Millennials if the housing economy is to ever function again as it was meant to.  Until families ready to move up lists their starter homes, nothing is available to buy.

Reams have been written about tight credit stopping first time buyers but almost nothing about an equally serious problem. Homes on the lowest tier haven’t appreciated sufficiently for owners to sell—or even to make it possible for them to sell.

Despite the progress that has made since the housing crash, some 5.1 million homes, or 10.3 percent of all residential properties with a mortgage, were still in negative equity as of Q3 2014, according to CoreLogic.  Another 9.4 million had less than 20-percent equity (referred to as “under-equitied”), making it virtually impossible for them to sell or refinance.  That totals some 14.3 million homes or about 28 percent of homes with a mortgage are frozen in place.

A disproportionate number of lower cost homes are among this total, according to a new analysis from Black Knight Financial Services released this week. Black Knight’s latest Mortgage Monitor Report, based on data through the end of November 2014, found that home price recovery varies significantly for properties within different tiers of home values.  .A decade after the housing crash, some 85 percent of homes valued at less than $200,000 of no equity while 94 percent of homes valued at greater than $200,000 have equity.  Home price recovery for the lowest 20 percent of property values has lagged behind those it the top price tiers.

“We looked at HPI appreciation from pre-crisis peaks to today in the 10 states currently trailing the furthest behind their pre-crisis housing maximums,” said Barnes. “The data showed a clear difference in the levels of recovery among home price tiers. The Black Knight HPI separates home values for every geographical division into five equal tiers; those in the lowest 20 percent of home values have been lagging behind their higher-valued counterparts in recovery to pre-crisis peaks, sometimes considerably.

Today Zillow released a report by its Senior Director of Economic Research, Svenja Gudell, that seems to take an opposite tack.

The studies agree that lower cost homes were more likely to be in negative equity than the most expensive homes—roughly three times as likely Gudell said. Some 27.4 percent of homes in the bottom tier were underwater in the third quarter, compared to 9.3 percent of homes in the top tier.

However, Gueell reported that home values in the bottom one-third of all homes rose 6.8 percent year-over-year in 2014, outpacing the 6.6 percent annual growth in all homes over the same period, U.S. homes valued in the lowest one-third of all homes – typically the kind of entry-level starter homes sought by younger, first-time buyers – rose 6.8 percent year-over-year in December, outpacing the 6.6 percent appreciation pace of all homes overall. Home values in the bottom tier bottomed out in January 2012 with a median value of $84,100. By December, they had bounced back to a median value of $101,400. In the fourth quarter, home values in the bottom tier were up 1.5 percent over the third quarter, Zillow reported.

If the increase in low cost valuation it has yet to encourage owners to list lower priced properties.  Zillow report that inventory shortages ‘are particularly acute among typical entry-level starter homes in the bottom tier of homes by home value. This supply tightness at the lower end of the market will continue to impact first-time home buyers and others trying to buy a lower-priced home, although we expect this tightness to loosen over the next year as those homes continue to gain equity.’

There are some areas where bottom tier homes are more readily available. The share of homes available for sale in the bottom tier is 35 percent or higher in San Jose (46 percent), San Francisco (41 percent), Seattle (38 percent), New York (38 percent), Philadelphia (36 percent), Baltimore (36 percent), Boston (35 percent), and Washington, DC (35 percent).

To add some more data to the discussion, we accessed current data from RealEstate Business Intelligence, derived from the MRIS MLS, the nation’s largest. It’s in the Mid-Atlantic and covers Baltimore and Washington markets.







Here are my findings from current MLS in inventory and sold and list price data:

There is no serious shortage today among low and mid-level listings.  On the other hand there is no new influx; levels ae about the same as a year ago.  Listings under $200,000 make up about 24% of current listing inventory, which is 11.5% higher than a year ago.  However December generally is a time of low inventories and in actual numbers, the region as a whole is down 5000 listings from a year ago.

That there is no shortage or surplus in December is relatively meaningless since it’s too early to catch the spring season run up.

Prices have barely budged from ten years ago among homes less than $250,000.  In fact, over ten years they have declined more than 4% for those under $50,000.  Other tiers between $50,000 and $250,000 have increased 0.1 and 1.6% over the total ten years.  For the MLS as a whole all homes appreciated 26% over the past decade.

These data clearly supports Black Knight over Zillow.

Lower tiered homes are not leading the price recovery.  There has been no net gain in prices for homes priced under $250,000 over the past year; none of the tiers rose as much as 1% and two recorded declines.

Again, this favors Black Knight over Zillow.

Our experiment certainly has not settled the question.  First, these data are from one only region.  Second, the kind of price increases described by Zillow’s valuation tool may be forward looking and not found in the sold data that Black Knight uses—and trails the actual transaction by months.

As the spring season nears and launches, by keeping a close eye on the lower tier inventories will you’ll be able to tell if the high hopes many have for a breakthrough year are going to come true.

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