The Year in Review: Harrisburg Housing Remains in Doldrums

The Central PA Multi-List (CPML) recently published year-end statistics for residential sales. As is often the case the statistics are somewhat contradictory. On the one hand there is good news: based on average sale price, housing appreciated 1.85% in 2010. The previous year it had depreciated 3.75%. On the other hand sales volume decreased about $132,000,000 (or 10%) and average days-on-market drifted steadily upwards to 102 days in the 4th quarter, the highest number since I started selling real estate in 1995.

From the 2nd quarter to the 3rd quarter the number of homes sold dropped 732 units. This represents a 30% change. Normally about the same number of units sell in the 2nd as the 3rd quarter. With a high degree of confidence we can attribute this abrupt slowdown to the end of the federal government’s homebuyer tax credit program on June 30th. This took away a big incentive for 1st-time buyers; much of the subsequent drop in housing sales occurred in the under-$200,000 market.

Based on the last half of the year about 485 homes are sold each month in the Harrisburg metro area. At year’s end there were 4,502 homes on the market, representing a 9-month supply of homes. A 6-month supply is generally considered a neutral market, i.e., not favoring buyers or sellers.

Already low at the start of 2010, mortgage rates trended lower throughout the year, bottoming out at 4.25% in November. Low rates help all homebuyers: arguably they provide a bigger incentive for high-end buyers than low-end buyers. This is borne out by the numbers. For the year the number of units sold above $300,000 increased 8.4%, while the number of units sold below $300,000 dropped 14%.

The 1.85% increase in the average sale price is somewhat illusory as all the other sales statistics suggest a weak, possibly declining, housing market. According to the Wall Street Journal (“Home Prices Sink Further,” January 31, 2011), citing market research by Zillow.com, declining markets are the norm in cities across the country. Home prices in Philadelphia reportedly fell 8.8% this past year.

In a declining market buyers and sellers often fail to come to terms. Homes just sit on the market or discouraged sellers pull them off the market. So rather than focus on average sale price in central PA, a better gauge is probably home inventory and days-on-market. When these numbers start to drop it likely signals a true change in market direction.

Bottom line: the Harrisburg housing market is still in the doldrums, where it has been since housing prices peaked in 2007.

Metro Harrisburg Housing Price Trends

OK fellow real estate wonks…let’s finish the topic of trending house prices.

As noted in an earlier post Harrisburg is not one of the twenty metro areas in the S&P/Case-Shiller Index. Presumably its small size would make it difficult to collect a sufficient number of repeat sales to have a statistically significant sample size without either extending the collection period and/or expanding the metro area, both of which would make the resulting index less useful to someone selling homes in Harrisburg.

Therefore, in small metro areas, such as Harrisburg, PA, the multi-list is typically the best (or only) source of housing market statistics. My local multi-list, the Central PA Multi-List, publishes mean (average) and median house prices quarterly.

The historical residential sales figures I have collected date back to 1991. The statistics reported in 1991 were rudimentary—units sold, sales volume, and average price. Gradually the Central PA Multi-List added more statistics—average days on market, number of active listings, median sale price, and breakdowns by county and price range. Today a motivated real estate wonk can download the entire multi-list database to Excel and analyze to his/her heart’s content.

For reasons never made clear (to me anyways) the Central PA Multi-List based all its sales statistics through 2006 on settled and pending (under contract) properties in any quarter or year, presumably using the list price of pending properties. Inclusion of pending properties doesn’t make sense as a) actual sale price is historically 97% of the list price at the time a property goes under contract, and b) some deals fall through. All of which suggests that pending properties would tend to artificially inflate the average and median house price figures. Curiously, when the Central PA Multi-List recomputed sales statistics for the years 2002 through 2006 without pending properties, the average and median increased--go figure! 

The chart above shows trendlines for Harrisburg housing sales from 1991 to present.  The old-style average sale price (including pending sales) is the blue line from 1991 to 2006.  The new-style average sale price (excluding pending sales) is the red line from 2002 to 2009.  Note slight discrepancy between the two sets of average sale prices in the overlap years 2002 to 2006.
 
The Central PA Multi-List has only published the median sale price from 2002 to the present.  I have previously argued the median is more useful than the average as a measure of "typicalness" for housing. Here it is displayed as the green line from 2002 to present.  All median house prices exclude pending sales (thankfully).  The new-style average and new-style median trendlines closely follow each other separated by about $25,000.

What Is the "Best" Statistical Measure of Home Prices?

In my last post I discuss various statistical methods used to track housing prices.  I suggest that the Case-Shiller Index, which uses the repeat-sales method, is the current gold standard. 

Case-Shiller's utility is limited by the relatively few metro areas it covers--twenty to be precise.  I happen to live and work in the Harrisburg, PA metro area. The nearest city included in the Case-Shiller Index is Washington, DC, one hundred miles south and a far different housing market than Harrisburg (trust me).

So...if you live in a smaller metro area you probably depend on your local multi-list service to periodically report sales statistics, usually the mean (average) and median home price.  Personally I like to present this data to home sellers when I talk about the market they are selling into.  As my local multi-list reports both the mean and median, I wondered which stat better represents central tendency for my marketplace. 

To this end I collected a year's worth of home sales data for the West Shore of the Harrisburg metro area (the collection of munipalities west of the Susquehanna River).  For 2009 there were 1,962 residential units sold.  The histogram below shows the distibution of home sales.  It has a Bell Curvish shape skewed to the high end.  Thirteen sales over $700,000 largely account for the long "tail" on the distribution.  I suspect this is a characteristic of many real estate markets that include very high-end communities.

Superimpose the mean and median on this distribution (see below) and you "see" a $20,000 gap between the two measures of central tendency.  Visually the median appears closer than the mean to what most people would consider the typical house price.  Also, in this case, the median corresponds with the mode, which is the most frequent value in a distribution.

The conclusion of my simple test is that the median seems the more appropriate measure of central tendency or typical-ness in the housing market.  As it is less sensitive than the mean to outlying values, i.e., the relatively few high-priced home sales, it should also be less volatile quarter-to-quarter or year-to-year, and therefore a better statistic with which to trend housing prices.

The CPI and U.S. Housing Prices

In the early years of the 21st century, as home prices started taking off, I went to the font of real estate knowledge, i.e., http://www.realtor.org/, to seek enlightenment. What I read, or what I remember reading, is that based on historical behavior home prices over time should not increase much faster than the rate of inflation, or else, and brace yourself here, eventually no one could afford to buy a house. This seemed a keep-it-simple-stupid (KISS) explanation of the way things ought to work.

Several years later home prices continued an upward trajectory. No longer were real estate gurus talking about home prices eventually falling back to earth—OK there was some talk about housing coming in for a “soft landing.” More typically anyone with a masters degree in economics and 5 minutes of air time was postulating reasons why the housing boom was likely to continue indefinitely: immigration was fueling demand, people were buying more 2nd homes, Wall Street had devised can’t fail investment products (can you spell collateralized mortgage obligations?) funneling money into mortgages, etc.

There was undoubtedly an element of truth to all this speculation, but it glossed over the cold hard fact that housing prices were increasing faster than people’s income and housing inflation was disproportionately high relative to all the other things measured by the Consumer Price Index (CPI). If you buy the KISS explanation above, something had to give; eventually it did, and we’re still working through the economic fallout.

With the luxury of hindsight I decided to see for myself how home prices behaved relative to the CPI before, during, and after the housing bubble years. Arbitrarily I started my comparison in 1990, using that year’s median U.S. house price as a basis and applying the annual CPI measure of inflation to obtain a CPI-predicted price from 1991 to present. The graph shows actual median house price (blue) and CPI-predicted median house price (red). From 1990 to 2000 actual home prices lagged behind the inflation rate. Starting around 2000 house prices caught up to the CPI and then surged ahead reaching a peak about 2007. Since then, as every real estate agent knows, house prices crashed. Today, for practical purposes, the median house price is back on the CPI-predicted line, suggesting much of the air is out of the housing bubble.

OK this may not be the most sophisticated analysis of the housing market; however, when we rely on pundits to interpret the world for us, a simple model sometimes serves as reality-check, sort of like the little boy who cried the emperor has no clothes.

Notes: As it turns out the CPI is easily found on the web. Surprisingly median U.S. house price are not as readily obtained, at least not if you want 20 years of data. Nevertheless I found several sites that listed historical median house prices. The data was presented as quarterly not annual median price, so I had to do a little massaging. I don’t believe anything I did compromised the validity of the data, at least not for the purposes employed here.