Housing Price Increases Have Been Less Than You Think

Over the last 7.5 years, the Case-Shiller national home price index has increased 24.9% on a cumulative basis. But I have argued in numerous articles that that figure is grossly overstated. A new RealtyTrac report supports my claim, and shows the actual number is only 16%. Let's take a good look at this report to find out what has really occurred in major housing markets around the country.

In April 2016, RealtyTrac published its US Home Sales Report for the first quarter of 2016. This included a detailed study of 125 housing markets in which a minimum of 300 sales were closed in March. RealtyTrac analyzed all sales for which they had data on the previous sale of that property.

Here is what they found. The median percentage gain for all 125 metros studied was a 16% gross gain (before commissions) from the time of the previous purchase of the house. Home sellers in all metros covered by the report owned their property for an average of 7.7 years. This represents an annual gain of only 2% per year.

In 15% of all these metros, sellers, on average, sold their property for less than what they paid. There was no recovery at all in those markets. West Coast metros showed the largest percentage gain over the previous sale of the home. Take a good look at the following table showing the best and worst metros.

The three housing markets with the highest profit percentages are all major California metros. This is no accident and not a surprise. More than a year ago, 40% of all the outstanding bubble-era non-prime mortgages in California had already been modified, a percentage much higher than any other large state. This percentage has risen steadily from 17% in early 2011. Because of these modifications, the overall delinquency rate is much lower in California.

The result has been the complete collapse of foreclosures in California – from 30,000 at the peak in August 2008 to a mere 2,000 in August 2016 according to the highly-regarded California Real Property Report. The removal of so many of the lowest priced homes from the market, has artificially inflated both Case-Shiller and median sale prices in California.

Housing demand has been stimulated in California by two major factors. One is the employment boom in Silicon Valley due to the tremendous growth of five Internet giants – Apple, Google, Amazon, Facebook and Netflix. The other is the huge influx of wealthy buyers from China looking for a safe haven for their money. This has caused the high-end markets in both the San Francisco and Los Angeles metros to soar.

Excluding Los Angeles, San Francisco and San Jose (Silicon Valley), the profits of sellers in other major metros are modest at best. As I mentioned, the median profit for all 125 metros in the report is only 16%. If you subtract the selling commission, we are looking at net gains of only 11% over an ownership period of more than seven years.

Even the New York City metro – largest in the nation with 20 million residents – had terrible results. Over 7.5 years, homes sold in March 2016 showed an average gross profit of only 9%. That is notwithstanding the fact that servicing banks in this metro have essentially stopped foreclosing on houses since mid-2009. Hence if you bought a home in the New York metro area in late 2008, you would have realized a cumulative net gain of only 4%-5% after deducting the sales commission.

Another 30 metros had gross gains of only 1%-10% over this average holding period of 7.5 years. This includes major metros such as Jacksonville, Charlotte, Tulsa, Richmond, Kansas City and Washington DC.

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