August Figures
The latest print from August
Posted: September 16, 2013 by John McClelland
The August price numbers appear to be a continuance of the trends we have been observing for the past several months. On a price per-square foot basis, sale prices are again higher in the latest print, with the median price hitting $100 per square-foot. That is a figure we haven't seen for a long time. As our readers may recall, we have been encouraging likely sellers to place their homes on the market sooner rather than later and the broad based increase in inventory has largely validated our hypothesis that the summer market represented a lot of seller power. While inventory remains historically low and at about two months of supply, the increase in the level of active listings has been abrupt.
After a really strong summer for residential demand, as well extremely low supply, prices have moved substantially. They now appear to be approaching fair value. While the Case-Shiller has significant lag and therefore shows the results of two months past, it provides a benefit of a long timeline for a nice frame of reference.
A naive trendline is shown in the exhibit below. Other fundamental measures we are employing include price-to-rent ratios and price-to-income measures in order to estimate what we call "fair value." While some commentators have focused exclusively on year-over-year increases and using that as evidence of a bubble, we view these price changes along several dimensions. Markets often overreact to information. On the downside, home prices in Las Vegas reacted very strongly on the downside, falling below the long-run trend. Investors and owner-occupants recognized this and started buying. This is one reason why prices should have naturally had support. Secondly, on the supply side, legal restrictions to foreclosure and negative equity caused some inventory to be held off of the market. A third, rarely discussed component has been the lack of bank owned homes hitting the market. Our prior research conducted during the depths of the foreclosure crisis indicated that bank owned homes typically trade at 10% or more discount to similar homes. The fact that we remove most of this distress implies an increase.