Today’s home price increases often don’t reflect true increases in home values.
In fact, today’s home price increases may be well off real home value increases in some metropolitan areas. In other areas, prices and values are more aligned.
First, a home’s price begins with what the seller is asking. The value is what someone is willing to pay for it.
The difference – more or less – is affected by a host of factors – the property’s location, condition, age, square footage, floor plan, supply and demand and lots more.
In it’s “RPX Monthly Housing Market Report for October 2012″ Radar Logic says in today’s market, home price increases are “driven by a change in the composition of sales rather than price appreciation.”
To point out the market anomaly Radar Logic emblazoned it’s press release with the sub headline: “Beware distorted view of indexes due to shifts in market composition.”
Home prices and home values are rising, but home values aren’t moving up as fast as home prices.
In today’s housing market, the market share of traditional listings are rising. The share of cheaper distressed properties is shrinking. Distressed properties sell at a discount.
Foreclosures and short sales sold for 20 percent and 16 percent respectively less than traditional listings in November, but together accounted for only 22 percent of all sales. The share is down from 24 percent in October and 29 percent in November 2011, according to the National Association of Realtors.
By Radar Logic’s numbers, as of October, 23 of 25 metropolitan statistical areas (MSAs) saw a decline in sales of foreclosures and REOs. Those distressed sales represented just 13 percent of all sales in the 25 MSAs, down from 24 percent a year ago. In addition, this group of distressed sales were priced 32 percent lower than non-motivated sales in the 25 metros.
With fewer, cheaper distressed properties in the mix, median and average prices and price indexes are rising.
“The decline in relatively low-priced motivated (distressed) sales as a percentage of total sales has put upward pressure on RPX (index) prices for many MSAs, as well as the RPX Composite,” index of home prices, according according to Radar Logic.
When Radar Logic examined traditional sales separately from distressed sales, however, Radar Logic found “prices in such sales have not increased nearly as much as the aggregate figures suggest.”
For traditional sales, prices increased 2.7 percent during the same time period, less than half of the overall RPX composite increase of 6.9 percent.
Local market differences
“Keep in mind that non-motivated (traditional) sales include short sales, as the seller in a short sale is an individual or household as opposed to a financial institution. Thus, increasing short sales will weigh on aggregate non-motivated (traditional) prices to the extent that homes sold in short sales sell for less than homes in other non-motivated sales,” Radar Logic reported.
Among the 25 metro areas Radar Logic covers, price vs. value differences abound.
For example, the 10 percent year-over-year increase in the RPX price for Washington, DC, can be attributed to the decline in distressed sales from 16 percent of total sales to just eight percent. For traditional sales, prices in Washington-area increased just 1.5 percent year over year. Cleveland, Las Vegas, Seattle and San Diego show similar patterns.
In San Jose, CA (Silicon Valley | Santa Clara County) prices in traditional sales improved considerably in San Jose, but the decline in distressed sales from 14 percent of total sales to 7 percent, pushed the San Jose price index even higher.
The San Jose area price index for just traditional sales was up 12.9 percent year over year in October, while the San Jose index for all sales increased 14.2 percent. Chicago, Milwaukee and Phoenix followed similar patterns.