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A better way to forecast micro-market prices?

Dian Hymer
Inman News

The wealth created by the housing bubble has been wiped out, according to Lawrence Yun, chief economist for the National Association of Realtors who spoke at the group's annual conference in November 2009. Does this mean that if you bought your home in 2005 in an area that experienced rapid appreciation from 2004-07, you'll lose money if you sell today?

NAR tracks home-sale price trends nationally and by regions. Relying on national, regional or even statewide home-sale price data to determine home values in a given micro market could lead to misleading conclusions.

Norm Miller, director of the Real Estate Academic Program at University of San Diego, analyzes several factors to determine the health of housing markets. During a presentation at the UC Berkeley Haas Business School Real Estate and Economics Symposium, Miller advocated a ZIP code analysis to get an accurate picture of the local market.

A ZIP code approach can reveal that home-sale price trends in a given ZIP code could be higher or lower than what the widely used S&P/Case-Shiller Home Price Index indicates for the entire city. For example, the Case-Shiller index for Los Angeles in January 2009 was quite a bit lower than it was in Pacific Palisades, a high-demand district in Los Angeles.

In addition to other factors, Miller looks at foreclosure sales (REOs) in an area. He believes that foreclosure sales need to be tracked separately from regular sales. The price discounts on REOs in relation to regular sales can run from 25 to 50 percent or more. An abundance of REOs have a big affect on local sale prices. A low number of REOs will have very little, if any, price impact.

Although Miller's approach to assessing current home values and where they might be headed is more informative than broader indices currently used, a ZIP code analysis may not be narrow enough to give an accurate picture of a niche market where you are considering buying or selling.

It wouldn't work well for large cities like Oakland or San Francisco, where there is significant price variability between neighborhoods and within price ranges. There are micro markets within ZIP codes.

HOUSE HUNTING TIP: To obtain an accurate micro-market assessment on which to base a decision about buying or selling at a point in time, you need to find out the following information about home-sale activity in the local neighborhood:

• Look at the sales of listings that are similar to one you'd consider buying or selling that closed within the last three months. Did the listings sell close to the asking price or were they discounted? How long did they take to sell? How much inventory is there on the market now? Is the market dominated by REOs and short sales? Your real estate agent can help you with this analysis.
• You also need data on pending sales. These are listings that are under contract but have not yet closed. Were there multiple offers? Were they priced higher or lower than the sold listings? If lower, this indicates a declining market.
• How much standing inventory of unsold homes is there in the area? More standing inventory gives buyers an advantage because they have a lot to choose from. They can afford to be picky, and they will negotiate for the lowest price possible. Low-inventory, high-demand markets tend to favor sellers, and may have a positive impact on home prices.

THE CLOSING: Supply and demand of homes for sale in the area, along with the state of the local economy, have a profound effect on local home prices.

Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide."

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