Real Estate Research provides analysis of topical research and current issues in the fields of housing and real estate economics. Authors for the blog include the Atlanta Fed's Kristopher Gerardi, Carl Hudson, and analysts, as well as the Boston Fed's Christopher Foote and Paul Willen.
December 04, 2013
Part 2: What Caused Atlanta's House Prices to Drop Again in 2011?
Note: This post is a follow-up to the November 8 post, "What Caused Atlanta's House Prices to Drop Again in 2011?"
Case-Shiller recently released its September data. Once again, the data show that Atlanta's year-over-year performance outpaced Case-Shiller's 20 metro area index—18.7 percent versus 13.3 percent, and Atlanta's low tier experienced its fifth consecutive month of year-over-year returns in excess of 50 percent (53.2 percent).
In the November 8 post, which explored the Case-Shiller house price tiers, we noted that from July 2011 to March 2012, both Atlanta thresholds—the low–middle and the middle-high—had noticeable declines, which corresponded to the time when the low tier's year-over-year performance began to recover. Given the methodology, we said that either all prices declined or a greater proportion of transactions came from lower-valued houses. Data on mortgage closings provide evidence consistent with the idea that investor activity in Atlanta's low tier influenced the market.
We can distinguish investor activity from "typical" house purchases by looking at the form of financing. Most owner-occupiers use mortgage financing whereas investors usually purchase with cash. Thus, if there is substantial investor activity in one of the three tiers, then we would expect that tier to be underrepresented in the number of mortgage closings.
To dig further into the issue of the 2011 house price drop, we looked at the distribution of mortgage closings by tier in the Lender Processing Services (LPS) Applied Analytics database. Residential mortgage servicing data from that database contain records from the servicing portfolios of the largest residential mortgage servicers in the United States. It covers about two-thirds of installment-type loans in the residential mortgage servicing market.
The chart displays the fraction of mortgage closings by Case-Shiller by tier from third-quarter 2008 to third-quarter 2013. We created the data for the chart by using each mortgage's sales price and assigning it to a tier as defined by the Case-Shiller thresholds for the month the mortgage closed (we excluded refinances). Once we'd bucketed the data this way, we calculated each bucket's percentage of the month's closing. If cash purchases were evenly distributed and the set of servicers in the LPS database is representative of Atlanta's overall market, we would expect each bucket to be one-third of the total.
From September 2008 to October 2011, the closings appear to be evenly distributed among the three buckets, with the shares varying between 25 and 43 percent. The average share for the low, middle, and upper tiers were 36 percent, 30 percent, and 34 percent, respectively. After November 2011, the low tier's share fell to an average of 18 percent, with a low share of 12.8 percent in May 2012.
Although the chart does not conclusively prove that investors entered the market en masse to purchase houses in Atlanta's low tier, the timing of the noticeable decline in the low tier's share of mortgage closings does coincide with the fall in Atlanta's low–middle and middle–high thresholds and the bottoming of the low tier's year-over-year price declines. More recently, the low tier's share of mortgage closings has been at its highest since November 2011—perhaps a sign that investor interest has cooled and we are now looking at a more normal market.
But with year-over-year prices in the low tier rising rapidly, let's hope buyers aren't expecting 50 percent year-over-year gains to be normal.
Carl Hudson, Director, Center for Real Estate Analytics in the Atlanta Fed's research department
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