Tiered pricing revisited

S&P Dow Jones Indices publishes tiered price data for 16 of the 20 cities (MSAs) we cover. The tier breakpoints are price levels that divide monthly sales pairs into thirds in each MSA.

With the recent good news about home prices, there has been some discussion as to where the improvement has been concentrated.

As we have observed in the past, home price trends do not behave the same across the cities or within their tiers. During the most recent housing crisis we have observed at least three regional characteristics: (1) cities where the low tiered markets continue to underperform the mid- and high-tiered markets; (2) cities where the low tiered market was almost even with or somewhat outperformed the mid- and high-tiered markets; and (3) cities where the low-tiered market saw the biggest increase and subsequent decrease in home prices, but in the past few months has almost caught up with the mid- and high-tiered markets.

Home price trends can be measured in many ways. The analysis to follow is based on price performance as measured by the index levels themselves. Since we base all of our indices to January 2000 = 100, we are able to see where the relative value in average home prices are versus each other. It does not take into account the amplitude or volatility in home prices changes (or percent change) during the that time, but gives you an idea of where home prices are in terms of relative value either preserved or lost during a given time period. It is just one of many ways to look at home price trends, and is intended to show you where a given market stands today versus where it was during the various phases of the boom/bust cycle.

Some examples of the first type of city cited above are Atlanta, Chicago, Las Vegas, Phoenix and San Francisco. We will highlight their characteristics using Atlanta and Chicago, where both saw their low-tiered markets go into a steep decline beginning in 2010, and remain significantly weaker than their mid- and high-tiered markets when you look at changes in average home prices through July 2012.

In Atlanta, all three tiered indices closely followed each other until about the middle of 2009. When the Atlanta market peaked in July 2007, all of the tiers saw price appreciation of about 30-40% from their January 2000 levels. After that, the low-tiered market fell sharply, far outpacing the decline in the other tiers, particularly since late-2010. The low-tiered market reached the lowest level in its 21-year history in March 2012 with an index level of 47.16. While not historic lows, the middle-tiered and high-tiered markets reached post-bubble lows in March.

S&P/Case-Shiller Atlanta Tiered Home Price Indices. Sources: S&P Indices and FiServ

The chart above shows that as of July 2012 Atlanta’s low-tiered market saw average home prices about 46% below what they were in January 2000, more than 12 years ago; whereas the mid-tiered market was about 20% below and the high-tiered market was 5% above 2000 levels. Over the 12 months since July 2011, the low-tiered market fell by 14.6%, the mid-tiered market was down 13.2%, and the high-tiered market fell 4.8%. From their peak, Atlanta low-tiered home prices were down 61.1%, the mid-tiered market was down 39.5% and the high-tiered market was down 24.2%.

Since 2010, the Chicago market was displaying similar behavior. While the low tiered market had risen more than the others at its 2006 peak, the rate of decline in that market had far outpaced other home prices in that region. The low-tiered market reached its crisis low in March 2012 with an index level of 79.95. This is the same level as April 1995; 17 years ago.

S&P/Case-Shiller Chicago Tiered Home Price Indices. Sources: S&P Indices and FiServ

The chart above shows that as of July 2012 Chicago’s low-tiered market saw average home prices about 11.5% below what they were in January 2000; whereas the mid-tiered market was about 9.0% above and the high-tiered market was 20% above 2000 levels. Over the 12 months since July 2011, the low-tiered market fell by 3.5%, the mid-tiered market was down 1.1%, and the high-tiered market fell 0.4%. From their peak, Chicago low-tiered home prices were down 51.9%, the mid-tiered market was down 37.6% and the high-tiered market was down 25.2%.

Some examples of the second type of city cited above are Boston, New York and San Diego. We will detail their characteristics using Boston and New York.

In July 2012, Boston’s low-tier market saw average home prices about 64% above what they were in January 2000; whereas the high-tiered market was about 53% above 2000 levels. In other words, since 2000 low-tiered homes have hung on to a bit more of their value than the high-tiered market, completely different than what we see in Atlanta and Chicago. Over the 12 months since July 2011, the low-tiered market rose by 1.0%; doing better than the high-tiered market which was up only 0.1%; however, the mid-tier market outperformed both, up 3.3%. From their peak, Boston low-tiered home prices were down 25.1%, the mid-tiered market was down 15.9% and the high-tiered market was down 9.9%.

S&P/Case-Shiller Boston Tiered Home Price Indices. Sources: S&P Indices and FiServ

In July 2012, New York’s low-tier market saw average home prices about 72% above January 2000; whereas the high-tiered market was about 59% above 2000 levels; another case where low-tiered homes have hung on to a bit more of their value than the high-tiered market. Over the 12 months since July 2011, the low-tiered market fell by 3.7%; close to the high-tiered market which was down 2.6%; like Boston, the mid-tiered market outperformed both over that time, down 1.5%. From their peak New York’s low-tiered home prices are down 33.7%, the mid-tiered market is down 26.3% and the high-tiered market is down 17.7%.

S&P/Case-Shiller New York Tiered Home Price Indices. Sources: S&P Indices and FiServ

Some examples of the third type of city cited above are Los Angeles, Miami and Washington DC. We will detail their characteristics using Los Angeles and Washington DC.

At their 2006 peak, Los Angeles’ low-tier market saw average home prices about 240% above what they were in January 2000; whereas the high-tiered market was about 140% above 2000 levels. In other words, during the six-plus years of price appreciation the low-tiered homes significantly outperformed the high-tiered market As of July 2012, Los Angeles low-tier market saw average home prices about 64% above what they were in January 2000; whereas the high-tiered market was about 72% above 2000 levels. So the following six years of price decline saw the low-tiered homes fall by more than the high-tiered market, but the absolute wealth preservation was about the same from the beginning-to-end of the 12+-year span, around 65-70%. From their peak, Los Angeles low-tiered home prices are down 51.81%, the mid-tiered market is down 40.0% and the high-tiered market is down 28.4%. Over the 12 months through July 2012, the low-tiered market was up 1.5%, the mid-tiered market was up 0.1%, and the high-tiered market fell 0.1%.

S&P/Case-Shiller Los Angeles Tiered Home Price Indices. Sources: S&P Indices and FiServ

At their 2006 peak, Washington DC’s low-tier market saw average home prices about 197% above what they were in January 2000; whereas the high-tiered market was about 123% above 2000 levels. Like LA above, during the six-plus years of price appreciation the low-tiered homes significantly outperformed the high-tiered market. As of July 2012, DC’s low-tier market saw average home prices about 83% above what they were in January 2000; whereas the high-tiered market was about 89% above 2000 levels. Again, the following six years of price decline saw the low-tiered homes fall by more than the high-tiered market, but the absolute wealth preservation was about the same from the beginning-to-end of the 12+-year span, around 85-90%. From their peak, DC’s low-tiered home prices were down 38.2%, the mid-tiered market was down 26.7% and the high-tiered market was down 15.2%. Over the 12 months through July 2012, the low-tiered market was up 8.9%, the mid-tiered market was up 4.6%, and the high-tiered market was up 1.9%.

S&P/Case-Shiller Washington DC Tiered Home Price Indices. Sources: S&P Indices and FiServ.

Over the housing crisis, Atlanta and Chicago stand out as two cities where low-tiered home prices went through, and are still in, very steep declines. Five years after the bubble burst, it seems that the sub-prime crisis is not even close to over for these two markets. We are barely even seeing signs of stability. For Boston and New York it is more a story of low tiered markets having been able to hold on to at least as much wealth as the other markets throughout the crisis. And for LA and DC, while the markets are about even now, the low-tiered markets saw more volatility over the prior 12 years. Each of these markets has its own story to tell; and it all goes back to local economies, jobs, housing surplus and the foreclosure activity in these markets – location. Many share similarities, many differences, but all have been through some sort of housing crisis over the past six years.

The posts on this blog are opinions, not advice.
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