In Phila. area, home prices still stable

By Alan J. Heavens

Inquirer Real Estate Writer

Sometimes, owning a house in a really dull real estate market isn’t such a bad thing: When price bubbles don’t inflate wildly, neither do they burst painfully.

Take the metropolitan Philadelphia area’s median home price, which was just $1,000 higher at the end of last year, to $228,300, than it was when real estate values began bubbling nationwide in the fourth quarter of 2005, according to a new report by IHS Global Insight of Lexington, Mass.

(The median price is the middle value; half the houses sold for more, half for less.)

Local-market observers think stable prices are likely to continue in this region in the near term.

“I don’t think house prices in the Philadelphia eight-county area will be going anywhere fast in the next six to 18 months,” said Mark Zandi, chief economist at Moody’s Economy.com in West Chester. “There is still plenty of inventory as more foreclosure and short sales are in train; the job market is soft, albeit soon to be improving; and mortgage rates are likely to drift higher.”

The moment of truth will come, experts say, when the home buyers’ tax credit ends April 30.

“If home prices don’t resume their downward slide, then we can pretty much say we’ve hit our bottom,” said Kevin Gillen, vice president of Econsult Corp. in Philadelphia. “I wouldn’t expect any sharp rebound, but I wouldn’t expect any further big declines either.”

Art Herling, regional vice president for Long & Foster Real Estate, believes a lot depends on whether interest rates remain below 5.5 percent when the Fed stops buying mortgage-backed securities next week. Most experts say rates are unlikely to rise sharply in the near term.

What makes Philadelphia so stable, when other areas aren’t?

Part of it is the local job market, “with the largest employers colleges, hospitals, and pharmaceutical companies,” said Herling. “We don’t gain as many jobs, so we can’t lose as many.

“Philadelphia people grow up and stay here,” he said. It doesn’t have the comings and goings of more “glamorous” cities such as Los Angeles or Las Vegas – both of which saw huge spikes in home prices, then even-greater drops.

IHS Global Insight’s look at this region’s home-price trends over 16 quarters yielded the following information:

In 2005′s fourth quarter, the median price was $227,300.

In 2006′s fourth quarter, the median was $237,900, reflecting the belated housing boom here.

Prices continued to rise modestly into the 2007 fourth quarter, to $239,800.

The median slid to $229,800 in fourth-quarter 2008, then to $228,300 in the final three months of 2009.

In 2005, IHS Global Insight considered the region’s median price overvalued 17 percent; today’s price is undervalued 1.1 percent, though the difference is only $1,000.

“Our approach to determining statistical normal house values,” said senior economist Jeannine Cataldi, “considers not only house prices and interest rates, but household incomes, population densities, and other, less important factors.”

By examining 330 metropolitan areas and looking at prices from 1985 to 2008, the analysis determines what prices “should be,” she said.

Interest rates for fixed-rate mortgages were near 6 percent in 2005; today, they are less than 5 percent, for example, so that would be one factor in pushing slightly higher prices closer to “fair value.”

Econsult’s Gillen said the Philadelphia area showed up later to the boom than most, with housing prices actually peaking in the fourth quarter of 2007 instead of in 2006.

But lateness was not as important as “smallness.”

“We are essentially an underperforming city,” Gillen said. House prices began rising in most urban areas in 1998; here, it was 2002. Increases averaged 172 percent in most large U.S. cities; here, it was 100 percent.

Philadelphia’s total housing stock increased only 2 percent in the last decade, compared with nearly 30 percent in the Sun Belt cities, 10 percent nationwide, and 9 percent in this region’s suburbs.

That 2 percent – 13,000 units – was the largest increase since the post-World War II boom, Gillen said.

“This last statistic is the most damning one,” he said, “since that is driven by the city’s own fundamentals, whereas the price increases were largely driven by the national factors of easy credit and consumer euphoria over homes.”

In Philadelphia proper, the typical home is still valued below its replacement cost an average of 28 percent, Gillen said. Even with a doubling in the level of home prices, “our prices still aren’t sufficient to cover our high cost of construction – fourth highest in the country.”

“Other cities experienced a housing boom,” Gillen said. “We experienced a housing nudge.”