Philadelphia Housing Market Picks Up in Q2. By Kevin Guillen
Despite high-profile concerns over AVI and tax delinquencies, both sales and prices increase across the city.
July 15, 2013: After hitting bottom just over a year ago and struggling to rebound, Philadelphia’s housing market finally exhibited some signs of vitality this past spring.
The average house value in Philadelphia increased by 3.1 percent in Q2, according to the latest data from the City’s Recorder of Deeds. This increase comes on the heels of several years of bumpy declines before the market bottomed out last winter.
House price gains were generally experienced citywide, with only two exceptions. From smallest to largest, the average change in house prices by neighborhood in Q2 were: University City (-7.8%), West Philadelphia (-5.9%), Upper Northeast Philadelphia (+1.2%), Lower Northeast Philadelphia (+2.6%), Kensington/Frankford (+3.8%), Center City/Fairmount (+3.8%), Northwest Philadelphia (+3.9%), South Philadelphia (+5.4%), and North Philadelphia (+7.9%).
The median house price in Philadelphia increased to $132,000 in Q2, a 6.3% increase over the median price of $124,000 in the previous quarter and a 5.5% increase over the median price of $125,000 one year ago.
These most recent gains in house values seem to indicate that Philadelphia is finally making significant inroads in regaining the value lost since the housing bubble burst. From peak to trough, house values in Philadelphia declined an average of 21%. This quarter’s recent gains have recovered 8% of the lost value, implying that house values need to appreciate another 13% to return to their pre-bust levels.
Home sales activity also showed some gains this past quarter. There were 3,614 arms-length transactions in Q2, up from 2,849 in the previous quarter and up from 3,079 sales that took place in the same quarter last year. This was the strongest second quarter for home sales since 2010 Q2.
The recovery also appears to be becoming more democratic and widespread. While house prices and sales began to recover in the higher-end segment of the market over a year ago, this recovery had—until now—been confined to the relatively upper-income neighborhoods in Philadelphia. In most neighborhoods, prices and sales had remained stagnant. In Q2, there were 16 sales at a price point of $1m or more, up from 13 sales in Q1, and well above the quarterly average of just 9. However, the largest price jump this past spring was in North Philadelphia (+7.9%); which is historically Philadelphia’s lowest-priced and lowest-income neighborhood. Moreover, the lower-priced segment of the market also saw the biggest percentage price increase in Q2. From Q1 to Q2, the bottom fifth of the market (i.e. the 20 percent lowest-priced homes in Philadelphia) saw their average price increase from $25 per square foot to $50 per square foot; a doubling in value.
This recovery is especially notable in light of the citywide property re-assessment (known as the Actual Value Initiative, or AVI) and the increase in Philadelphia’s property tax delinquency rate; both of which were the subject of vocal criticism from many community groups, public officials and activists this past spring1. The predicted exodus of households and subsequent decline in house values that many critics contended would be the outcome of the (supposedly) flawed assessments and lax tax collection practices not only didn’t materialize, but if anything, the market seems to have largely reacted positively to both the new assessments and the City’s announced intention to improve its collection of delinquent taxes.
While Philadelphia’s long-awaited housing recovery is still lagging the recovery that is already well underway in most other U.S. cities, leading indicators continue to indicate a positive near-term outlook:
- The average price-to-rent ratio for Philadelphia homes has begun to trend upwards again, after declining for several years since the housing bubble burst. After falling from a peak of 13.3 in 2007 to a low of 9.5 in early 2012, the ratio has since increased to 10.0. A rising price-rent ratio is typically associated with a bullish outlook on house prices.
- The inflation-adjusted house price index has also begun to trend upwards, after declining for several years. This suggests that the recent house price gains are not just due to general price inflation in the overall macroeconomy.
- Days-On-Market, which is the average number of days it takes for a listed home in Philadelphia to sell, is down to 70 days from its peak of 95 days just over one year ago.
- A particularly notable threshold was crossed by the National Association of Homebuilders Housing Market Index this past spring. Based upon a scale of 0 to 100, the index recently crossed 50, indicating that for the first time since 2006, more homebuilders are optimistic than pessimistic about the near-term outlook for housing.
An especially notable sign of improvement in Philadelphia’s housing market are the significant improvements in both the market’s housing inventory and absorption rate this past spring. After declining markedly since the market bottomed last winter, the number of home listed for sale in Philadelphia is down to approximately 8,000 from its all-time peak of just over 12,000. Such a large supply relative to demand had been placing significant downward pressure on house prices over the last several years. Moreover, the absorption rate—which measures the percent of listed homes that sell in a given period—increased sharply this past to nearly 16%, up from its all-time low of 6% two years ago. Both indicators suggest that supply and demand are returning to a relative balance that is in line with their historic averages.
While this most recent data suggest that the long-awaited recovery is finally happening in Philadelphia, there is growing concern in many other cities that the news is actually too positive. House prices have been rebounding sharply in many other cities over the past year, at a rate that significantly exceeds not only inflation, but also their fundamentals, such as population, income and rents. Combined with an outlook for higher mortgage rates in the near term, many economists are forecasting a ‘cool down’ in housing market activity over the course of the next year. But, given that good news about housing has taken so long to arrive to Philadelphia, and that it came at a critical time in reforms to the city’s housing policy (i.e. AVI, delinquencies), it would seem that most Philadelphia households would be justified in at least momentarily savoring the good news before beginning to worry again.