Coldwell Banker Premier Realty

A look at the reported price increases


Median Price, Case-Shiller
Posted: July 03, 2012 by John McClelland

Home prices due appear to be on a pretty abrubt increase. Constrained supply, combined with continued demand from investors and owner occupants is leading to higher bids.



We are beginning to see these same trends manifest in the Case-Shiller indices in the levels, first and second derivatives, as seen below.


So we know that in general, prices are on the increase. What we don't know is how sustainable they are if more supply is placed on the market. Recently, new listings have been nearly equivelent to closings, so we haven't had any near-term relief. However, we know that there are homes that are in various stages of default or foreclosure or unlisted bank owned. So the question would be, how much of this knowledge is priced into today's prices? A lot of academic research indicates that at best, residential real estate is weak-form efficient. I don't fully see the market in terms of how much of this knowledge is known by naive buyers, rather how they see the risks going forward. In many cases it costs less to buy than to rent, buyers have a long-term horizon and they need a place to live, now.

For investors, the recognition of yields multiples greater than treasuries indicates long-term mispricing and an exploitable opportunity. All in all, we could see prices slip in the seasonally weaker months, so it may be a good time to list homes. For buyers with a long-term view, I fear little in this market as we are seeing improving local economic trends. As always, this is the bset we can do with the information we have. Overall, many world economies are weak and a few events could shift a recovery to a decline. Meanwhile, few assets look attractive, so residential real estate in Nevada, Arizona and a few  other states moves towards the top of the list. While we believe that home prices in Southern Nevada are undervalued, a very large increase in prices is more of a signal of inefficiencies in delivering product to the market rather than a full realization of fundamental values. The quick increases in Phoenix area pricing makes us question the reliability of this price signal going forward. A more gentle increase would be comforting. Nevertheless, for yield seekers, its still pretty hard to beat.

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