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 Jessica Dill, Kristopher Gerardi, Carl Hudson, and analysts, as well as the Boston Fed's Christopher Foote and Paul Willen.
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What Caused Atlanta's House Prices to Drop Again in 2011?
What happened in Atlanta real estate the second half of 2011 and the first half of 2012? I asked myself this question after looking at the recent release of the Case-Shiller Home Price Indices for August. Atlanta home prices have recently been increasing at a faster rate than the composite index. Last month, the United States saw a 12.8 percent year-over-year increase in house prices while the Atlanta index rose 18.4 percent.
It wasn't long ago that things were much worse in Atlanta. From the pre-bust peak, the city experienced a 37 percent decrease in its Case-Shiller index versus a 33.8 percent decrease for the Case-Shiller 20-metro composite. From July 2011 to March 2012, Atlanta home prices took a second nosedive, almost as large as the initial bust in 2009 (see Chart 1). So what happened?
The Case-Shiller index is a repeated sales index, which means it uses the price change between two arms-length sales of the same single-family home. One way to gauge the amount of activity in a market is to look at the number of "sales pairs" in a period. To get a sense for whether Atlanta is experiencing particularly high volumes, we can look at Atlanta's sales volume relative to the nation's. In the third quarter of 2011, Atlanta's sales began to grow substantially, and Atlanta's share of composite sales pairs peaked in March 2012 at 9.7 percent, which is a much greater percentage than the 5 percent to 6 percent range from 2000 to 2005.
Around this time, many of the Atlanta Fed's local contacts reported that some investors were buying up distressed home to convert into rental property. Case-Shiller breaks its index into three price tiers—low, middle, and high. Looking at the tiers in Atlanta for the most recent data, the high end was up 12.9 percent year over year; the middle tier, 27.7 percent; and the low tier was up 52.5 percent. Looking back, we see that the growth rate in Atlanta's low-tier index started to recover in July 2011 (see Chart 2). It was not until March 2012 when the year-over-year changes in the middle and high tiers started their recent upward trends.
The price thresholds for the three tiers are computed using all sales for each period and are set so that each tier has the same number of sales. From July 2011 to March 2012, both thresholds (low–middle and middle–high) had noticeable declines (see Chart 3). Given the methodology, either all prices declined or a greater proportion of transactions came from lower-valued houses. Note that after March 2012, the breakpoints started to increase, which was the same time as when the year-over-year growth in the middle and high tiers started to improve.
Further work is needed in order to determine whether there really was a ramp-up in activity in the low end of the market. If such activity did occur, it raises the question as to what was driving the activity—could it have been investors? If not, how was this activity financed? Was this a case of inventory being absorbed, prices adjusting, and momentum moving from investors to "normal" buyers?
The low tier warrants attention given the fact that it may have driven Atlanta's recent house price performance. Understanding the July 2011 to March 2012 period may shed light on the factors that could influence the market going forward.
Carl Hudson, Director, Center for Real Estate Analytics in the Atlanta Fed's research department
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