Low-End Home Values Foreshadow Future Price Slowdown

The performance of low-end home values might be a better indicator for future price growth rather than national aggregate data, according to CoreLogic’s December 2013 MarketPulse report.

Collective data on national home prices, though a common method in analyzing the performance of the real estate market, often hides the progress of different pricing segments, says CoreLogic Deputy Chief Economist Sam Khater. 

“While the overall change in prices is a useful single metric, it can sometimes mask large changes in different segments of the price continuum, which can provide valuable information,” Khater says.

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An example he provides is when low-end prices bottomed in March 2011, nearly a full year earlier than overall and high-end home prices, which reached their trough in February 2012. 

The momentum at which low-end and high-end prices accelerate or decelerate also differs between the two price segments. 

On a year-over-year basis, low-end home price changes peaked at 19.3% in March 2005 at the height of the price boom, while 12 months later, price growth decelerated to a 9.3% year-over-year increase.

Conversely, high-end prices were up 15.2% year-over-year during this time. Twelve months later, they were still up 10.8%—a smaller decline than on the low-end side.

Since low-end price changes lead their high-end counterparts by six months to a year, according to Khater, the low-end price trough in March 2011 was foreshadowing that the market was set to recover.

Another differentiator between the two price segments is that low-end home values are more volatile than high-end values.

Reason for this, Khater says, is due to the three groups of major buyers for low-end homes, which are typically first-time buyers, lower-income repeat buyers and investors—all of which are more sensitive to economic trends than buyers at the high-end of the market. 

Between 2000 and 2006—when home prices peaked—low-end prices increased 20 percentage points more than high-end prices.

Low-end prices were still 14 percentage points above their high-end counterparts during the home price trough in 2012, and are currently 22 percentage points above high-end prices—the biggest gap during the last two decades, according to CoreLogic. 

“This indicates that the low-end price correction is over and that overall price growth will be markedly slowed heading into 2014,” Khater says. 

Written by Jason Oliva

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  • Most builders and developers have been aware of these trends for decades. Without movement in the low-end housing market, there is movement into the next rug of housing prices. Each segment moves up until the momentum reaches the priciest homes. Declines are a little different but work fundamentally in the same way.

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