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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2014

Special Report: The Real Estate Recovery Is Local

National trends paint a rosy picture, but local data is more telling

There is a lot of good news being reported about the recovery in the U.S. real estate market. Although national trends make for interesting headlines, these trends do not tell the whole story.

The industry is in the midst of a recovery, but it is an uneven recovery that is being fueled at different rates by a multitude of supply and demand drivers. DataQuick recently completed an in-depth study of 12 large U.S. markets to document and compare the magnitude of property appreciation and sales volumes in different geographies. This study helps industry professionals to better understand how different drivers are impacting the overall metrics of market health.

The results of the analysis paint a picture of a localized recovery and point to the need to dispense with national headlines when making lending decisions. Mortgage professionals should instead opt for the most granular geographic intelligence possible when evaluating market drivers to improve quality and reduce risk.

There are several factors driving supply and demand in today’s market. Key drivers of supply include:

  • Distressed inventory
  • New pre-foreclosure filings
  • New listings
  • New construction

On the demand side, mortgage professionals should keep an eye on:

  • Unemployment 
  • Population growth 
  • Rental investments

These factors indicate where the market is headed in different areas of the country. Each driver is impacting local markets in different ways, but it is the interaction of all of the drivers that best explains the overall performance and health of the current market.

Distressed inventory

Distressed inventory has made up a large portion of the available supply of homes for sale in many markets since the housing crisis reached its peak. Over the past two years, however, distressed property levels have started to fall in some, but not all, markets. Declining distressed inventory levels is good news because this typically leads to higher appreciation (the available pool of properties for sale includes fewer lower-priced properties), but it also can impact a market negatively if the inventory is not replaced by nondistressed properties.

This is precisely what was experienced in Los Angeles County, Calif., in the past year. Distressed inventory levels fell by 47 percent, which was far above the study average of 9 percent. This contributed to a 19 percent increase in property values (compared to the study average of 15 percent). Because there was little new supply entering the market, overall sales volume increased by just 9 percent, which was below the 12 percent study average.

It was essentially the opposite story in Cuyahoga County, Ohio. Distressed inventory levels there actually increased 27 percent year over year. This did lead to an above-average sales volume increase of 14 percent, but property appreciation was only up 7 percent.

New inventory

In the current market and the market of the not-too-distant past, the three primary ways to boost supply is an influx of new distressed properties, new nondistressed listings or new construction. Like many other areas in the study, new-inventory activity has been uneven across the country. Orange County, Calif., provides a great example of how new distressed properties and new listings have interacted to impact overall performance, leading to a definite good news/bad news scenario. The good news is that new year-over-year pre-foreclosure filings in the county decreased 64 percent compared to a study average decrease of 31 percent. Fewer distressed properties on the market translated to fewer lower-priced properties for sale, which led to an above-average increase of 18 percent in property appreciation in the year.

The bad news, however, is that even with this increase potential home sellers in the county still did not have tremendous confidence in the market and were hesitant to list their properties. Specifically, the percentage of all properties in the county that were listed for sale from July to September 2013 was 0.35 percent compared to a study average of 0.46 percent. There were not enough new listings to fill the supply void. As a result, sales volume in the county rose by only 10 percent year over year compared to the study average of 12 percent.

This lack of confidence by potential home sellers in markets experiencing above-average property-appreciation gains was common across Southern California, as Los Angeles and San Diego also showed sluggish listing activity in the same period.

When it comes to new construction, the expectation is that markets facing limited supply (as indicated by below-average year-over-year sales-volume increases) would be experiencing above-average permit activity. This is definitely true for some markets, but others defy this logic based on other dynamics of the real estate landscape.

Maricopa County, Ariz., is a perfect example of a county behaving “normally.” Year-over-year sales volume increased by only 4 percent compared to a study average of 12 percent, indicating a dearth of supply. Not surprisingly, building-permit activity was up 116 percent in 2013 compared to 2010. The average increase across all of the markets in the study was 68 percent. The story is the same in Orange County, Calif., where a slightly below-average year-over-year sales-volume increase of 10 percent is contributing to a 145 percent increase in building permits compared to 2010.

On the other hand, Los Angeles County, Calif., and Cook County, Ill., provide examples of markets defying logic. Los Angeles’ year-over-year sales-volume increase of 9 percent is below the study average, yet the county’s 41 percent increase in building-permit activity from 2010 to 2013 also is far below average. These results, along with the below-average listing activity outlined above, strongly suggest that Los Angeles’ supply woes are likely to continue for some time.

Cook County presents a different kind of “not normal.” In a market still in the early stages of recovery and where an ample supply of distressed properties fueled an above-average 20 percent year-over-year increase in sales volume, building-permit activity still increased 74 percent in the past three years.


Just as the various kinds of inventory are affecting the levels of supply differently depending on the market, the factors affecting demand are also market specific. Lingering high unemployment can cast a long shadow over the overall results within a specific geographic market. But based on the results of the study, the impact of a region’s employment trends seems to have a different type of effect on the key recovery metrics.

In half of the counties in the study, when unemployment was above or below study averages, the overall recovery metric of year-over-year sales-volume change was also above or below average, respectively. Based on July 2013 unemployment figures:

  • Broward County, Fla., had a 6.2 percent unemployment rate, compared to the study average of 7.9 percent, and year-over-year sales-volume increases of 15 percent, compared to the study average of 12 percent.
  • Conversely, Clark County, Nev., had a 9.7 percent unemployment rate and year-over-year sales volume increased by only 6 percent.

The other half of the counties in the study, however, reported mixed results:

  • Maricopa County, Ariz., had a 6.8 percent unemployment rate and year-over-year sales volume increased by only 4 percent.
  • Wayne County, Mich., had an 11.9 percent unemployment rate and year-over-year sales volume increased by 21 percent.

Like all of the other drivers considered in the study, it is difficult to consider unemployment alone. The drivers interact with each other to produce the overall results. With unemployment, it is a safe bet that higher-than-average unemployment is slowing the recovery even in the healthiest of markets.

Population growth

There is no disputing that population-growth rates have a long-term impact on the health of local real estate markets. What is also interesting is that the study shows that short-term population-growth trends also tend to be good predictors of overall market health. Specifically, of the eight counties in the study with above-average year-over-year property appreciation, seven (Broward County, Fla.; Clark County, Nev.; King County, Wash.; Maricopa County, Ariz.; Miami-Dade, Fla.; Orange County, Calif.; and San Diego County, Calif.) also reported above-average population growth between 2010 and 2013.

The average population-growth rate for all markets in the study in this time was 2.5 percent. Conversely, of the three counties in the study with below-average year-over-year property appreciation, all three (Cuyahoga County, Ohio; Cook County, Ill.; and Wayne County, Mich.) also reported negative population growth between 2010 and 2013.

Rental investments

Rental investments are another demand driver, and although not specifically addressed in the study, they still have a major impact on local recovery. Limited supply, tightened credit requirements and a new demographic of recent mortgage defaulters has resulted in a large increase in rental demand. Combined with the significant increase in real estate owned (REO) inventory, this development provides investors with attractive investment opportunities. Investors typically require discounts on the distressed properties they acquire, so one clear impact of this trend is a general decline in property values — which stunts recovery in many areas.

Investors who purchase single-family properties as rental investments have found that the largest driver of their returns is appreciation in property values and not the level of rental income earned. Investors are seeing good returns in markets with increased property appreciation, but this advance is countered by dwindling REO inventory levels — and that reduces the discounts investors can achieve.

Additionally, as valuation returns to pre-crash levels, returns will start to fall. Overall, rental investments have impacted the market’s recovery, but as the other supply-and-demand drivers take greater hold, this impact will lessen, which should help accelerate improvements. 

•  •  •

The impact of these diverse market drivers is clearly having a different effect on each market, leading to an uneven recovery across the nation. This is a great start to understanding where to find the best opportunities this year, but also where the greatest risk still remains. Taking it a step farther, applying this type of view to micro-markets — looking at the impact and health of markets at the zip code level — will yield the most actionable and valuable intelligence mortgage professionals need to compete successfully in today’s complex marketplace. 


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