The Rise of the Low Tier

Does this signal a change in investment strategies?

An increasingly common phenomenon across the county is the schism in price growth between high end and low end properties. While recent discussions suggest that the market is generally normalizing, our data reveals that there are drastically different dynamics going on at the extremes of nearly all markets. In evaluating these extremes, the investment potential appears to be leaning towards the low price tier.[1]

  • When looking at the price tier growth differences in conjunction with distressed saturation, MSAs with some of the highest distressed saturation rates like Detroit, Orlando, and Miami show low tier year-over-year growth outpacing that of the top tier by large margins, in some cases by more than 20%. This is most likely due to high levels of investor activity in the low price tiers, which also typically represent the majority of distressed activity. However, the top tiers of these markets appear to be lagging significantly in comparison.
  • The San Jose MSA was knocked off its top spot by the Detroit, MI MSA, where quarter-over-quarter growth is an impressive 2.4%. Apart from Detroit, MI, most markets appear to be slowing down for the slow fall and winter real estate seasons.  In another shakeup, Las Vegas, NV QoQ growth fell from by 0.5% from 2.0% to 1.5% QoQ growth this month.
  • For Detroit, overall QoQ growth is currently the highest in the nation at 2.4%, but there are some pretty significant differences between its high and low end properties. The Detroit low tier is showing an extremely impressive 4.2% QoQ growth, while its highest tier is growing at a much slower pace, only 0.8% QoQ.
  • The story is the same in Miami, the top tier of the housing market is growing by an otherwise impressive 0.6% QoQ and 4.9% YoY; however, the lowest tier of the market appears to be sprinting ahead with 2.7% QoQ growth and 15.5% YoY growth. These kinds of disparities between the low and top tiers are obfuscated when looking at the growth figures for the entire market as a whole, and could lead to missed opportunities for investors who are only looking at the headlining figures, or worse, disappointing returns for those who are investing on higher end properties.

“As the housing recovery continues to unfold, we are clearly seeing a growing dichotomy between the low price tier and top price tier market performance. By and large, the low price tiers of the Top and Bottom MSAs are significantly outperforming their top tier counterparts. For both first time home buyers and investors, this should signal a major opportunity in these lower tiers,” says Alex Villacorta, Ph.D., vice president of research and analytics at Clear Capital. “For any buyers of high end properties this clear trend signals the need to be highly vigilant with investment strategies in this market segment.”

[1] The low tier is defined as the bottom 25% of all transactions for each respective market, and top tier is defined as the top 25% of all transactions for each respective market.

National and Regional Markets
Market Qtr/Qtr% +/- Yr/Yr Distressed Saturation
National 0.9% 5.2% 15.9%
West 1.0% 7.3% 11.2%
Northeast 0.4% 2.0% 13.7%
South 0.9% 5.9% 19.4%
Midwest 0.9% 4.7% 18.2%

Chart 1. National and Regional Markets through October 2015. Source: Clear Capital

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