Local real estate market soft, outlook uncertain

In a sign that buyers and sellers of Philadelphia real estate remain locked in a staring contest, sales of single-family homes fell to their lowest level in four years this past quarter. The number of homes that changed hands this winter was just over 5,000; the lowest volume since 2003.

On a seasonally and quality-adjusted basis, house price appreciation was essentially flat during the first quarter of 2007 according to the latest analysis by Wharton economist Kevin Gillen. Citywide, Philadelphia homes appreciated an average of just 0.6% over the previous quarter.

House prices are still up 6.9% citywide compared to this time last year, but this is primarily due to price growth that occurred earlier during 2006. Across neighborhoods, the majority of quarterly price changes, either up or down, were statistically negligible during the quarter.

With the arrival of the typically active spring selling season, the number of homes listed for sale has begun to inch back up again. While this normally happens in the spring, this could further delay resumption in price appreciation as inventories remain at historical highs, relative to sales activity.

The turnover rate, a measure of supply vs. demand, is half what it was two years ago and at 10% about the same as a year ago. The turnover rate is the ratio of the number of homes that sold to the number of homes listed for sale.

A declining turnover rate suggests a transition from a seller’s to a buyer’s market. In addition, the average number of days it took for a listed home to sell in Philadelphia during the first quarter was 62 days, which is 20 days longer than it took at the same time two years ago.

High inventories, low transactions and flat prices cumulatively suggest a metaphorical staring contest between buyers and sellers over prices and terms. The resolution of this contest could be determined by whether inventories continue to grow.

Winter is typically a slow time of year for home sales and prices, whatever the overall state of the market. Now that the peak spring selling season has arrived, the inventory numbers will be the key indicator to watch for the next several months.

If the number of homes offered for sale continues to increase and demand remains flat, expect real price reductions and a subsequent decline in the general level of house prices. Conversely, if inventories fall—or at least hold steady relative to sales activity—then prices should remain stable as we return to a more balanced market between buyers and sellers.

Additional wild cards in the near-term outlook include the BRT’s move to Full Valuation and growing uncertainty over the future of Philadelphia’s Ten-Year Tax Abatement. Both the abatement and the deferred re-assessment have acted to increase the general level of home values in Philadelphia.

Assessments have lagged the increase in property values for the last several years. Although the BRT’s move to Full Value would improve the accuracy and fairness of property assessments, if it is not counteracted by cut in property tax rates by City Council and the Mayor, it will act as a significant property tax hike.

On top of this, any elimination or reduction of the Abatement program, combined with the expiration of many abatements starting in 2009, will also act to reduce the general level of property values in the City. When you combine these two dynamics with an already slowing market, it could make the difference between a soft landing versus a hard one.

Compared to other markets in the US,

Philadelphia is still a relatively affordable city (prices are only 2-3 times incomes).

The City’s exposure to the risks associated with extensive subprime lending here has been relatively modest and default and foreclosure rates still remain well below many other so-called “bubble” markets in the Sun Belt.
The City hasn’t experienced the same boom in home construction boom that other cities have had.

But recent reports indicate that sales levels will continue to decline in the near term, while mainstream prognosticators predict that we have yet to hit bottom. So keep an eye on those inventory numbers.


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