February 2015 Market Update

The month of January in the Detroit metropolitan area followed the pattern we had expected with written contracts up 18% over January 2014. Much of the jump was weather-related. Last January written contracts were off 18%, so the better weather this winter (relatively speaking) brought sales back to a normal level. Compared to January 2013, written contracts were off by 3% (2013 was the peak release of buyer demand). The rise of written contacts indicates that the market is still strong, but not as wild as the stats show (this will be true for February and March, too). New listings entering the market continue to rise, but with sales rising even faster, the Months Supply of Inventory (MSI) continues to fall. Most of that MSI decline is in the under $250,000 markets, meaning buyers in those markets will continue to have inventory shortages going into the spring season. The over $250,000 markets are more balanced with greater competition for sellers and less pricing pressure for buyers. Both the price per square foot and the median sale price keep increasing with January hitting over 8%, a surprisingly strong gain.

Slow wage growth is holding back buyer demand, particularly in the first time home buying category. While household net worth has recovered to pre-recession levels (see Chart 1) and economic optimism and activity in Michigan remains strong (see Chart 2), home values are still off by an average of 20% from their peak in 2005. Overall, we have stable economic growth. Household net worth as well as low interest rates are being offset by home equities that are still falling about 20% short of peak 2005 levels and slow wage growth. The net result is still a surprisingly strong real estate market with the good economic forces outweighing the challenging ones. As home values/equities rise back to 2005 peak levels and beyond over the next 3-5 years, the remaining pent-up housing activity will be released, giving the real estate markets some extra “juice” to keep the sales pace healthier through the end of the decade.

Chart 1: Cumulative Household Net Worth   Chart 2: Michigan Economic Index

We thought it would be interesting to compare the real estate stats for different cities in the metro area. Here we focus on four upper end markets and three mid-value markets. The Months Supply of Inventory shows at the current rate of home sales, how many months it would take to sell the homes currently on the market. A rising MSI is a slowing market, giving more opportunity to buyers. A declining MSI is a growing opportunity for sellers.

The four upper end markets all follow the same pattern of a rising MSI, meaning the available homes for sale are rising faster than the rate of sale, confirming that the upper end markets are settling down from the peak 2013 activity. The middle markets, represented here with Livonia/Redford, Royal Oak/Berkley and Sterling Heights, show a lower MSI, as would be expected with a stronger demand in that segment. Different from the upper end markets, their MSI’s have been falling as inventories have declined. In the last 90 days inventories have begun to rise again, pushing up the MSI for Royal Oak and Sterling Heights, giving a little relief to home buyers.