Thursday, April 4, 2019

How does an Investor Analyze a Housing Market? A Philly Case Study!

(Click on the image to enlarge)

Philadelphia housing market demonstrated a linear growth in median prices between 2016 and 2018, rising from $175,000 ($129/SF) to $194,900 ($149/SF). However, after having peaked in 2018-Q2 and registering a solid 16% growth off 2016-Q1, it has been on a downward trajectory ever since. 

Of course, the 2019-Q1 does not include the March sales, so it's an aberration at this point.

Since the housing market in the US is highly seasonal (May through August are peak months), the quarter-over-quarter median sales analysis - though the industry standard - is quite deceptive. Seasonally adjusted quarters like 2016-Q2 ($138/SF) vs. 2017-Q2 ($143/SF) vs. 2018-Q2 ($149/SF) are more comparable in establishing the market trend and, in turn, the time adjustment factors for automated valuation modeling (AVM). 

Moreover, the Price per SF (SPSF) is a more meaningful metric for the investors than the traditional Median Sale Price (SP) considering it is normalized, thus ironing out the variations in sizes (in our example, the quarterly Median Living SFs).

When an extended time curve (twelve quarters in this case) is analyzed, the statistically smoothed trendline is a better indicator of the market. For example, the rapid rise in 10-year bond yield in early 2018 forced many buyers sitting on the fence to promptly return to market, spiking the 2018-Q2 prices. The bond yield steadily declined since 2018-Q3, stabilizing the market. The smoothed trendline is therefore more meaningful for the investors as well.

The Condo Market

(Click on the image to enlarge)

Since the condo market is often the leading indicator of the local housing market, investors try to take a little longer term view of the condo market. That is why I have shown (above) the performance of the condo market since the last recession.

First off, the condos are significantly pricier than the comparable single family homes. Two reasons contribute to the higher pricing: age (newer properties 1930 vs. 1970) and type (mostly high-rise buildings).

While the Assessor's office lagged in capturing the impact of the recession on the market -- Tax Roll Value/SF continued to front-run the market i.e. SP/SF until 2014 -- they have been on the defensive since the market peaked in 2016, meaning their values have been significantly trailing the market. Of course, one has to be careful in case of statutory fractional assessments, requiring value equalization to avoid having to compare apples with oranges. 

Needless to say, when the Assessor values front-run the market, they tend to encourage unnecessary appeals (of course, I do not know if this had occurred in this particular instance), thus forcing them to be on the defensive the next time around.

Investors tend to follow the Assessor's actions closely while buying or selling portfolios. Obviously, the prospective sellers become a bit nervous when the tax roll values start to trail the market. Conversely, it makes the potential buyers more aggressive while negotiating. 

Again, a longer term perspective is critical.

Thank you,

Sid Som
President, Homequant, Inc.

Coming Soon...Sid's New Book:

Life, Logic and the Power of Nine (Branding)

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