Why is the Housing Market Softening at the Top?

Some housing market observers have noticed that higher priced homes, on average, are taking much longer to sell than median priced homes in a number of the nation's real estate markets, according to a report by Collateral Analytics titled "Housing Market Softening at the Top End: Will the Bottom End Follow," this is not new, nor is it unusual.

"Perhaps the availability of such data is new to some market observers, but we have tracked Months Remaining Inventory (MRI) for a long time," said the report's authors Dr. Michael Sklarz and Dr. Norman Miller.

The importance of the MRI according to Sklarz and Miller lies in its ability to forecast shorter-term trends, especially when it comes to estimating how long it would take to exhaust the current inventory of homes for sale if sales continue at their recent rate. "This can be calculated for the market as a whole in any given geography, by property type, by price range or on average for a given geography," the report says.

According to Sklarz's and Miller's analysis, for the lower priced tiers, the bottom one-third of the price range, the normal MRI runs a little faster and a strong market would be MRI of less than two months, and at the top end for the highest price tier," say above $1.25 million, although this varies by market," the normal MRI is slower and 12 months or even a little longer, would be fairly normal.

With the caveat that lower-priced tiers run lower MRI and higher priced tiers run higher MRI in equilibrium, the analysis found. 

In the past several months the report found that there was a softening in the upper 25 percent price range in most markets. At the same time, Sklarz and Miller found that the price tier most sensitive to the recent mortgage rate increases was the bottom 25 percent, especially where FHA and VA financing was more common, suggesting "a softer and slower resale market as we enter 2019."

"In markets with significant new building over the past few years, inventories have increased and our single best indicator for overall market conditions, MRI have been increasing," Sklarz and Miller said. "Metro or CBSA prices have not yet fallen, with some exceptions, but some price flattening should be expected soon and we have already seen flattening in some select neighborhoods or zip codes. We also observe an abundance of price drops on existing listings in select neighborhoods, which tends to precede price declines."

According to the study, the ZIP codes where the average MRI exceeded 10, pointing to a softening of the market included areas near Chicago and in the Miami region in Florida. In fact, the Miami Beach, a sub-market of Miami-Dade County, revealed very high MRIs across the board at nearly all price points. "So much inventory has been added that it is affecting resales and the high MRI suggests a few years of softer prices," the study said.

However, Sklarz and Miller pointed out that in most other cases, soft markets were not based on adding too much new supply, but rather because of softness in the local economic base. "This seems to be the case in the Northeast Illinois markets including Palatine, Mount Prospect, Northbrook and Zip Code 60646 in Chicago," they said.

They observed that when the market sees unusually high MRI’s, compared to history and qualified for the appropriate price range, prices will usually soften in the following quarters. "Price declines help absorb inventory faster and then we will observe the MRIs declining," Sklarz and Miller concluded. "While most US markets are in good shape, as of the mid-fall in 2018, with solid market conditions, those averagely priced markets where the average MRI exceeds 10 are much more likely to soften."