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Philly Real Estate: Mixed Signals Suggests Transition
By Kevin Gillen & Ed Goppelt
Thursday, 08/23/07
(1187886945532)
In the real estate market, both prices and volume typically take a nice, robust up-tick in the spring—what realtors refer to as “the spring bounce”. This spring, prices and volume for Philadelphia real estate bounced, but in different directions.
While volume rose from winter to spring, it fell sharply from where it was a year ago according to the latest analysis by Wharton economist Kevin Gillen. And while prices rose from winter to spring, they were sharply higher than what they were a year ago.
6,058 homes changed hands under arms-length conditions during the second quarter, the slowest second quarter since 2003. Volume was up 17% from this past winter, but down 16% from a year ago.
The price indices indicated that prices rose a healthy 3.7% on a quality- and seasonally-adjusted basis, a shade less than last year’s increase of 4.4%.
House values and sales rise during booms, and fall during busts. When they move in opposite directions, it typically indicates that the market is transitioning from one part of the cycle to another.
Another explanation could be how the national subprime crisis is affecting local conditions. Transactions could fall while reported prices keep rising if most transactions were taking place at the high end of the market. A recent report by the Philadelphia Inquirer showed, most subprime lending in Philadelphia is concentrated in the relatively lower-valued areas of West and North Philadelphia.
We did find some—but not overwhelming—evidence that this was true. From winter to spring, the number of home sales rose 36% in relatively high-priced neighborhoods, while low-priced neighborhoods saw a corresponding increase of only 14% during the same period. However, as a percent of all transactions, high-priced neighborhoods’ share is still pretty small.
As the mortgage sector continues to work through its own problems, we can likely expect continued tightening of mortgage credit. With less availability of mortgages, we should expect a commensurate decrease the number of homes changing hands.
As for prices, the conventional wisdom indicates that Philadelphia is due for a correction, but only a modest one. Research by both Hallwatch and independent sources indicate that Philadelphia’s housing is overvalued by approximately 15%. The most likely correction is that prices would decline by less than 15%, and then remain flat while rents and household incomes catch up.
In the near term, downward pressure will remain on prices as the large and growing number of homes available for sale persists. After declining this winter, the number of homes listed for sale has started to grow again, and remains well above its historic average. More homes minus fewer buyers equals fewer sales: for every home that sold this spring, ten more homes were listed for sale.
Sellers remain resistant to the fact that buyers now have the upper hand, and still cling to 2005 and 2006 prices. We compared average list prices to average transaction prices, by Zip code, and found that the prices sellers want exceed the prices buyers are willing to pay by an average of 46%.
Whether Philadelphia real estate market experiences a soft or a hard landing could depend as much on national conditions as local ones. A large number of outstanding subprime loans will reset to higher payments over the next 8 months, squeezing even more people out of their homes and adding to foreclosures and inventories. In addition, there is already evidence that the growing credit crunch is starting to spread beyond subprime to the more well-heeled and creditworthy buyers in the upper segment of the market.
In real estate, fundamentals may dominate in the long-term, but perceptions dominate in the short-term. While the fundamentals may point to a soft landing for Philadelphia, local pessimism could turn it into a hard landing.
Webmaster's note: Dr. Kevin Gillen is Research Fellow of the University of Pennsylvania and a V.P. of Econsult Corp. Using data provided by Hallwatch, Gillen publishes his Philadelphia House Price Indices on a quarterly basis as a public service to the Philadelphia real estate community. The production of these indices is made possible with the generous support of Econsult Corporation.