Beware The False Bottom

Minyanville Professor and friend of mine, Andrew Jeffrey, writes Keepin' It Real Estate: Beware The False Bottom in Housing

In the coming months, housing-market data is likely to show price stabilization in many of the country’s hardest hit areas. Pundits, government officials and real-estate professionals will loudly proclaim the worst of our real estate woes are behind us. Back in reality, however, this data will simply reinforce the axiom that there are lies, damn lies, and statistics.

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Since the market peaked, however, notice how the percentage of sales of homes under $400,000 shot up to more than 50% of sales in the first quarter of this year, from as low as 9% in 2007.

Conversely, sales over $1,000,000 that accounted for almost a quarter of transactions in 2007 now make up less than 9% of total sales so far in 2009.

This heavy concentration of sales in low-end markets is skewing home price data to the downside, exaggerating the impact of depressed markets on broad measures of prices.

As the foreclosure epidemic spreads outwards to more well-to-do areas, and job losses force previously stable homeowners to sell into a weak high-end market, more expensive homes will begin to make up a greater percentage of total transactions. This dynamic -- not an overall rise in property values -- is likely to push up average and median home price measures.

In other words, high-end markets will be falling as price discovery rears its ugly head, while low-end markets are flat at best, as price declines reach exhaustion levels and investors step in to buy. High levels of supply and looming shadow inventory of foreclosures will prevent meaningful appreciation in these distressed areas for the foreseeable future.

Meanwhile, data will show a housing market on the rebound.

No doubt, banks like Wells Fargo, Citigroup and Bank of America will cheer the end of the real-estate slump. Real estate professionals will pound the table that now's the time to buy (just like they said back in 2007). Government officials will proudly assert their mortgage-relief efforts were a success.

Nothing, however, could be further from the truth.