Why Real Estate Prices Soar — And Fall — At The Same Time

residential real estateThe real estate market continues its divided course and there’s no better example than existing home sales: According to the National Association of Realtors transaction volume in May increased 4.9 percent when compared with April — but were down 5.0 percent when compared with May 2013.

The grim reality is that when experts talk about an improving market and other, equally-qualified, authority figures suggest that the marketplace remains fragile they’re both right. As we have explained before what we are seeing is marketplace segmentation, something you can see in two ways:

Dividing Lines Mark Real Estate Prices

First, the marketplace is being divided into areas of prosperity while other areas lag behind. We see some metro areas which are booming and some that are falling behind. NAR reports that for the first quarter 37 metro areas had double-digit price increases while 45 areas actually showed lower median prices. Depending on where you live the local market is either booming or in a trough.

Second, even in areas where price appreciation has been strong it may not be strong for everyone. A study by RealtyTrac, a leading real estate data company, shows that when we look at homes priced at $200,000 or less we can see that home values are declining.

This is a very big deal because slightly more than half of all existing real estate sales involve properties priced at $200,000 or less. In other words it is entry-level housing which has yet to recover, in large measure because household incomes remain 9 percent below 1999 levels according to the Census Bureau.

Without a viable first-time buyer market there can’t be a viable move-up market, especially when sale values are weak. The result is an uneven market where the poor and middle-class struggle to buy new homes and move up.

Appreciation varies by price range

 Islands of Prosperity

Graham Lock, director and co-founder of House Network, which is described as the UK’s largest online estate brokerage, explains that in his country “London has become an island in terms of house prices, never before has the gap been wider compared to the rest of the country. Many people claim the rise is unsustainable but they said this at increases of 10%, 15% & 20%. Once an area becomes separated the rule book is torn up and it’s difficult to call the top of the market.”

He adds that “the bigger UK picture is rising no-where near as fast as London, we need much more clarity and indeed separation of the London market vs the rest of the country, these big headlines only seem to create a degree of panic and concern. In my opinion London should be firmly detached from the rest of the country when reporting these figures as it just muddies the waters.”

Anybody see a parallel here with the US market? Don’t we have our islands of prosperity in terms of both geography and price points?

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