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Housing Supply & Home Values this Spring

New listings hitting the market this year are down sharply so far, and the trend is markedly different from the tax credit years.  Why? The bears will reach for the easy “it’s a double-dip” answer, but seems there are other factors at play.

In 2009-10, sellers priced more optimistically – setting their initial ask prices at higher levels and above the prices where homes exited the market – based on a combination of constrained supply, 2007-08 price correction, low interest rates, and the housing stimulus. That trend has now inverted:

Altos 20 City Composite: Price of New Listings vs. Price of Listings Absorbed (Spring 2009 - present)

But, are sellers really less optimistic now on a property by property basis, or is there another force acting on the market? Notice how new sellers entering the market each week in the bottom quartile (black line below) are pricing far below their counterparts already on the market, and well below the overall market ratio (orange line below). With this ratio moving down to the 70% range, do new sellers really think that their homes will sell only if priced at a 30% discount relative to their neighbors?

Altos 20-City Composite: Ratio of each week's new sellers' initial ask price relative to existing sellers' ask price

The answer might lie squarely on the “other housing supply problem” – it’s a matter of quality.  In 2009-10, there far fewer distressed properties in the active market as banks struggled to push foreclosures through the pipeline.  Properties are heterogeneous, and as distressed and foreclosure inventory enters the active market, it mixes in with non-distressed “normal” properties.  This intermingling affects property values across the board and future transactions prices.  We’ve seen this play out over the past two years:

Altos 20-City Composite: Bottom Price Quartile Transaction Prices vs. Asking Prices since April 2009

Normalizing prices by square footage shows similar trends:

Altos 20-City Composite: Asking Price per Square Foot vs Transaction Prices per Square foot for the Botttom Price Quartile

Then comparing bottom quartile transaction price trends to the overall market, there’s a clear divergence in price trends:

Altos 20-City Composite: Transaction prices per square foot - Bottom Price Quartile vs. All Quartiles

So what does all this mean?  One view is that sellers (individual sellers and banks disposing of REOs) aren’t any more or less optimistic than in 2009-10 – it’s just that they are realistic about the values of their properties for sale.  Lower quality means lower prices and lower values.

Diving into weekly active supply values (instead of the 90-rolling average values shown in the chart above), the seasonal inventory trough is now hitting the market and will begin to rise as the snow melts and Spring season emerges:

Altos 20-City Composite: Active Housing Supply since Sept '10 (7-day average)

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