Beachfront Condo Foreclosure with Direct Ocean View at The Bath Club

Here is my take on case-shiller and why you can’t simply take it at face value right now.

As the foreclosures and REO enter the market these units that are part of the shadow market are becoming part of the actual listed inventory. The majority of these units are of a lower quality than the regular units on the market. As these units become a larger and larger apart of the market this is leading to the bifurcation of the market.

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This first chart shows the median value of new listings by market segment in a 20 city composite index like case-shiller. The black line is the bottom 25% of the market. As you can see the new listings in this market segment are increasing while new listings in more expensive markets are decreasing.

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In this chart you can see that the price of the new listings is what is taking the market lower.

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Here you can see that after the expiration of the tax credit the higher priced listings took a nose dive. The new listing coming on to the market are actually now at a price lower the what is currently selling.

Here is a summary of the effect on valuation modeling:

“Like it or not, the net result will wreak havoc on valuation models based traditional HPIs such as the S&P/Case-Shiller or the FHFA. Both are a form of repeat sales modeling (see their methodology documentation – S&P/Case-Shiller here and FHFA here). For example, FHFA includes these sales only if the buyer purchases the property with a loan that is bought or guaranteed by Fannie Mae or Freddie Mac. Because of the generally low quality of these homes comprising the active market, it is all too possible that many of these homes will not show up in the FHFA index because the borrower using an FHA loan backed by Fannie and Freddie likely does not have the disposable cash required to make the property livable. While banks do invest some money into the REOs that get marketed and sold, often these properties have major issues that require immediate cash investments by the buyer. A first-time home buyer using a 3.5% down payment loan likely isn’t the person that has the $10- $20-, $30k necessary to sink into the home right away. If these homes are instead purchased by investors and then resold to “traditional” buyers (as shown here), the FHA may omit these sales from their index.”

Here in Miami condos under $200k make up 76% of the market. But these cheap condos aren’t in direct competition with units in prime locations like Brickell. That why you can see a difference between the regular case-shiller and the case-shiller tiered price index.

So if you’re looking at a $300k condo then case-shiller isn’t really tracking the value of whats happening to these units.