Most home price analysis is based on aggregate price changes for the nation or by geography. While the overall change in prices is a useful single metric, it can sometimes mask large changes in different segments of the price continuum, which can provide valuable information. For example, low-end prices bottomed in March 2011, nearly a full year earlier than overall and high-end home prices that both reached their trough in February 2012. Not only can turning points be different, so can the momentum in low-end versus high-end price changes. At the height of the price boom, low-end year-over-year price changes peaked at 19.3 percent in March 2005. Twelve months later, price growth had decelerated to a 9.3 percent year-over-year increase. Conversely, in March 2005, high-end prices were up 15.2 percent year over year, and 12 months later they were still up 10.8 percent – a much smaller decline.
Analyzing low-end versus high-end price trends reveals two stylized facts. First, low-end price changes and levels lead high-end prices and levels by six months to a year. The low-end price trough in March 2011 was clearly foreshadowing that the market was set to recover. Second, low-end prices are much more volatile than high-end prices, which sometimes makes turning points easier to catch. The primary reason for this is that the three major buyers of low-end priced homes are typically first-time buyers, lower-income repeat buyers and investors. For different reasons, each of these buyer segments is more sensitive to economic trends than buyers at the higher-end of the market. Low-end prices can serve as a forward-looking barometer for overall real estate prices that is magnified when looking at metropolitan markets.
Analyzing 20 geographically diverse metropolitan markets reveals very different price trends in the chart. Over the last six months, low-end price growth decelerated in six out of 20 markets, but high-end prices only slowed down in four markets. While the numerical difference is not large, the intensity of the deceleration in low-end markets is very large relative to high-end markets. For example, in September 2013, Boston’s low-end prices were up 4.2 percent from the prior year, down from a 17.0 percent year-over-year growth rate in March – a very large slow down in only six months. During the same time frame, low-end year-over year price growth decelerated from 34.1 percent in March to 25.9 percent in Las Vegas. In Phoenix, price growth fell from 23.2 percent year over year in March to 15.5 percent in September. Among the 20 markets examined for high-end price movements, Phoenix had the largest deceleration with high-end price growth slowing from 16.2 percent in March to 14.6 percent in September, which is very small compared to the low-end slowdown.
While some low-end price segments are declining, some remain strong. Chicago and Raleigh experienced the largest acceleration in home prices over the last six months. In Chicago, low-end prices were flat, but by September, they were up 9.8 percent from the prior year – a rapid increase in such a short time span. That acceleration is consistent with our prior analysis, which showed that Chicago has had the most rapid growth of any market for owner-occupied purchase transactions in the past two years. In Raleigh, year-over-year low-end prices were down 1.4 percent in March, but by September, they were up by 9.1 percent, driven by the increased presence of investors. For upper-end prices, the markets with the strongest acceleration in home prices were in California, particularly in San Diego and Riverside.
While there are some caveats, clearly lower-end home prices are decelerating, especially in the former boom/bust markets of the Southwest. More importantly, the magnitude of the declines presages lower growth for prices overall. Between 2000 and the height of home prices at the peak in 2006, low-end prices increased 20 percentage points more than high-end prices. At the price trough in 2012, low-end prices were still 14 percentage points above their high-end counterparts. Currently, low-end prices are 22 percentage points above high-end prices, the biggest gap during the last two decades. This indicates that the low-end price correction is over and that overall price growth will be markedly slower heading into 2014.
Low-end and high-end prices are 25 percent below and above the median, respectively. The same analysis was conducted for low-end versus overall prices and the findings were similar.
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