Clear Capital: No bounty for housing harvest

Western housing region could be canary in the coal mine

Clear Capital’s home data index suggests that as the housing industry heads into fall, the Western region could be the canary in the coalmine.

September home price data marks the 11th straight month of moderating gains.

Nationally, yearly gains decreased from a high of 11.7% in October 2013 to just 7.8% through September 2014.

This trend is amplified in the West, where annual gains are cut nearly in half, from highs of 19.5% in October 2013 to 10.9% in September 2014. If the ongoing moderation in the West, still the recovery leader, continues at its current pace it will be a foreboding sign of future declines.

“Heading into fall, home price gains continue to drop,” said Alex Villacorta, vice president of research and analytics at Clear Capital. “September marks the 11th month of moderating gains with home price levels back in line with long run averages. With less fuel stoking investors’ fire and the consumer yet to feel confident in the market, we expect at best either a return to pre-bubble norms or a departure into negative territory.

“While the housing market has enjoyed abnormally high rates of growth during the last two and a half years of recovery, prices are back to long run historic levels, signaling an effective end to the correction to the correction. True market growth will be dependent on consumer confidence and re-engagement which will be tested over the next few months,” he said.

Metro market trends will continue to keep buyers on their toes, as national and regional recoveries wane at varying velocities. Detroit is a great example. Discounted opportunities helped push prices up 21.9% year-over-year in September.

Meanwhile the Hartford MSA is experiencing declines, -1.1% over the quarter and -0.4% over the year, highlighting the type of market performance disparity that characterizes the present market. Each of the lowest performing 15 markets posted less than a 1% gain over the last quarter. This group remains subject to short term declines which could eventually turn into yearly losses.

Distressed inventory is no longer reinforcing a strong housing market recovery. Discounted distressed deals continue to dry up, down from a national high of 38.4% in 2011 to just 16.5% in September 2014. While this is generally a positive sign, distressed sales helped drive the investor demand that kick started the recovery. Historically, we’ve observed rising prices as distressed saturation declined. While reduction of distressed saturation is a healthy move for markets long term, over the short term it removes a key demand segment at a time when full buyer momentum has yet to be established. The correlation between drastic declines in price gains and declines in distressed saturation is most visible in the West. Distressed saturation was at an all-time high of 50.5% in 2009 falling to just 12.6% in September 2014.

As distressed saturation fell, so did price gains. Yearly price gains in the West have fallen to 10.9%. This nearly 50% drop in price gains since October 2013 is in sync with declines in distressed saturation.

Perception is reality—for consumer confidence in housing. Future home price gains are more dependent on owner occupied purchases as the rising price floor and dwindling discounted deals leave investors with fewer opportunities. Owner occupied demand is in part driven by consumer sentiment, among other key drivers, like jobs.

While consumer sentiment levels reached a 14-month high in September, according to the University of Michigan’s Consumer Sentiment index, momentum has tempered—like home prices.

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