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Rising Home Prices Can't Keep Up With Rent Increases

Posted: 07/05/2012 11:50 am

The Trulia Price Monitor and Trulia Rent Monitor are the earliest leading indicators of how asking prices and rents are trending nationally and locally. They adjust for the changing mix of listed homes and therefore show what's really happening to asking prices and rents. Because asking prices lead sales prices by approximately two or more months, the Monitors reveal trends before other price indexes do. With that, here's the scoop on where prices and rents are headed.

Rent Increases Outpace Price Gains In June

Asking prices were up once again month over month in June, by 0.3 percent. Aside from May, when asking prices increased by so little that they were essentially unchanged, asking prices have moved up every month since February. Now, even the year-over-year price change is positive. Foreclosures hold back price gains; when we exclude foreclosed homes, prices are up 1.7 percent year-over-year. At the local level, prices have risen quarter-over-quarter in 84 of the 100 largest metros, seasonally adjusted -- these widespread gains are in addition to the typical springtime boost. Now that's real progress.

June 2012 Trulia Price Monitor Summary

% change in asking prices # of 100 largest metros with asking-price increases % change in asking prices, excluding foreclosures
Month-over-month, seasonally adjusted 0.3 percent (not reported) 0.8 percent
Quarter-over-quarter, seasonally adjusted 0.8 percent 84 2.2 percent
Year-over-year 0.3 percent 44 1.7 percent

Although prices have increased, rents have risen faster, at 5.4 percent year over year. In 22 of the 25 largest rental markets, rents are outpacing prices. This means that buying a home is becoming an even better deal relative to renting -- that is, for those who can qualify for a mortgage and put up the down payment.

Are there any signs of rents slowing down? Not really. In most markets, the year-over-year increase in June was higher than in March. In San Francisco, for instance, rents were up 14.7 percent year over year in June compared with 10.9 percent in March. Oakland, Portland, Philadelphia and Houston have also seen rent increases accelerate since March. Check out the chart below to see for yourself.

Metros with Largest Rent Increases
# U.S. Metro Y-o-Y % Change in Asking Rent, June 2012 Y-o-Y % Change in Asking Rent, March 2012
1 San Francisco, CA 14.7 percent 10.9 percent
2 Oakland, CA 11.2 percent 7.0 percent
3 Denver, CO 10.9 percent 9.4 percent
4 Miami 10.5 percent 11.2 percent
5 Boston 10.3 percent 8.6 percent
6 Seattle 9.5 percent 9.4 percent
7 Portland, OR-WA 8.4 percent 5.9 percent
8 Philadelphia 6.9 percent 1.2 percent
9 Houston 6.6 percent 3.2 percent
10 New York, NY-NJ 5.9 percent 5.8 percent

Note: Among the 25 largest rental markets.

Where Are Price Gains At Risk? And Where Is Recovery In the Clear?
Phoenix and Miami have seen asking prices shoot up more than 15 percent year over year. But other metros shouldn't envy them. Phoenix, many Florida metros, and Detroit and its suburbs all rank among the top ten metros for price increases, but their gains are at risk due to their large foreclosure overhang. According to RealtyTrac, those metros have a far higher share of homes still in the foreclosure process than the national average. Because foreclosures tend to hold prices back, price gains could shrink or reverse in those metros as their foreclosures come onto the market.

In Denver, San Jose, Pittsburgh, Little Rock, Austin and Colorado Springs (which, with those wildfires, deserves some good news), prices rose 4 percent or more year over year, and they all have a moderate or low share of homes in foreclosure relative to the national average. Because their price gains aren't threatened by a future local foreclosure wave, we're calling these markets "in the clear."

Metros with Largest Price Increases
# U.S. Metro Y-o-Y % Change in Asking Prices, June 2012 Homes in Foreclosure, per 1,000 Housing Units
1 Phoenix 18.9 percent 25.5
2 Miami 16.1 percent 33.7
3 Cape Coral-Fort Myers, FL 14.9 percent 30.5
4 West Palm Beach, FL 9.6 percent 26.1
5 Denver, CO 7.2 percent 11.9
6 Orlando, FL 6.8 percent 29.3
7 Warren-Troy-Farmington Hills, MI 6.5 percent 17.5
8 San Jose, CA 6.2 percent 10.0
9 Detroit, MI 5.2 percent 21.2
10 Pittsburgh, PA 5.1 percent 4.4

Note: Among 100 largest metros. (Want to see the full list of price and rent changes for all 100 metros? You can download it here.) Foreclosure data provided by RealtyTrac. The national average is 10.2 homes in the foreclosure process per 1,000 housing units.

The "at risk" and "in the clear" metros look different in other ways, too. Of the 44 metros (out of 100) that had price increases year over year, 15 have a high share of homes in the foreclosure process (15 or more foreclosures per 1,000 units) and are therefore "at risk," while the other 29 are "in the clear" thanks to the moderate or low share of homes in foreclosure. The "at risk" metros suffered much bigger price drops after the bubble burst. They have had slower job growth in the past year than the "in the clear" metros, as well as a slower construction recovery: new residential building permits in 2011 for the at-risk markets were just 28 percent of the average level from 1990 to 2010, compared with 57 percent for the "in the clear" metros.

Most importantly, the main reason for price increases is different for the at-risk and in-the-clear metros. Prices are rising in at-risk metros because prices have fallen so far that they've attracted interest from prospective investors and international homebuyers, whose interest in U.S. homes can be volatile; in contrast, prices are rising in the in-the-clear metros primarily due to job growth.

At risk (15 metros) In the clear (29 metros)
Examples (see table above) Miami, Phoenix, Detroit Denver, San Jose, Pittsburgh
Price change,  from peak of bubble to trough (FHFA) -- 45 percent -- 12 percent
Employment growth, year, May 2012 (BLS) 0.9 percent 1.5 percent
Construction permits, 2011, relative to 1990-2010 local average (Census) 28 percent 57 percent
Main reason for price increases Rebound after big price decline Employment growth

Note: price change peak-to-trough, employment growth, and construction permits are unweighted averages across each set of metros.

What about all the metros that haven't seen year-over-year price gains yet? Most of the metros with price declines have relatively few homes still in foreclosure, as shown below by all the gray dots in the bottom-left of the graph below. But in a few unfortunate metros, such as Chicago, Atlanta and Sacramento, prices have fallen year over year AND there's more pain to come from a high share of homes still in the foreclosure process.

To sum it all up: Price changes are a key indicator of housing recovery, especially alongside other indicators. Some markets with gains are at-risk from coming foreclosures, while others seem to be in the clear, with jobs and construction recovering in step with prices. Even as prices continue to rise nationally, each local market is recovering at its own pace.

We'll report on July price and rent trends on Tuesday, Aug. 7, 2012 at 10 a.m. EST.

How did we put this report together? To recap the methodology, the Trulia Price Monitor and the Trulia Rent Monitor track asking home prices and rents on a monthly basis, adjusting for the changing composition of listed homes, including foreclosures provided by RealtyTrac. The Trulia Price Monitor also accounts for the regular seasonal fluctuations in asking prices in order to reveal the underlying trend in prices. The Monitors can detect price movements at least three months before the major sales-price indexes do. Our FAQs provide all the technical details.

 

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