Philadelphia's market is red-hot, economist says, but not necessarily equal for all

Philadelphia home values experienced their largest first-quarter increase in nearly four decades this winter as buyers both in the city and along the East Coast scrambled to snatch up fewer available properties in a market growing increasingly hot.

Property values across the city jumped 5 percent from January through March, according to Drexel University economist Kevin Gillen's home price index, the largest first-quarter gain since the index began in 1980.

Typically, the beginning of the year is defined by a sluggish real estate market as buyers are distracted by the holidays and the weather. That means both the quarterly uptick and the even higher 11.8 jump in citywide values year-over-year were all the more significant.

Fueled by a combination of exceptionally low inventory, strong buyer demand, and new construction activity that still remains far slower than during the boom years, Philadelphia's real estate market has continued to show signs of a powerful recovery. Since the local market hit bottom at the start of 2012, home values across the city have skyrocketed nearly 45 percent, Gillen's data shows.

And people up and down the Northeast corridor are starting to take notice.

"We're seeing New Yorkers and people from D.C. come to Philadelphia in search of affordability," said Nela Richardson, chief economist at the Redfin real estate website. "And when people are coming from more high-priced areas, they're willing to spend more and be more competitive and can boost prices."

But it's happening only in certain areas, Gillen found.

According to his index, the largest year-over-year gains in property values occurred in Lower Northeast Philadelphia (14.6 percent), South Philadelphia (14 percent), and the Kensington-Frankford area (13.8 percent) — all regions that have experienced some degree of private investment and gentrification. Center City, too, enjoyed a solid 13.1 percent increase in value, while areas such as Northwest Philadelphia (up 3 percent) and Upper Northeast Philadelphia (0.6 percent) saw much more moderate appreciation.

That imbalance, Gillen found, has been fueled by the fact that more expensive houses have increased in price more steeply throughout the recovery than have lower-priced homes. Based on city sales between 2013 and 2017, Gillen found that the top 10 percent of highest-priced homes experienced a 12.4 percent increase in price per square foot. Homes in the bottom 20 percent of sales prices rose just 0.5 percent in price per square foot.

Yet such rapid growth was not all good news, and it stoked concern among local economists and observers. As home values and prices have forged ahead, median household income growth in the city has limped behind, growing just 2.1 percent from 2014 to $38,253 in 2015, raising questions about what kind of burden buyers can face when trying to buy.

"While [rising home values] may be good for individual homeowners, it is not necessarily good for all people or the city," said Gillen, senior research fellow at Drexel's Lindy Institute for Urban Innovation.

"Prices that are rising faster than incomes create affordability problems," Gillen continued. "Besides the fact that this creates general inequity in our housing stock, it adversely affects Philadelphia's ability to attract and retain new households. This is especially true of younger households, who are more limited in their ability to purchase a home."

Despite the strong rise in values, the median price of a single-family home in Philadelphia rose just 1.8 percent to $137,500 in the first quarter of 2017, up from $135,000 during the same period in 2016.

Still, Gillen's home price index is often viewed as a better measure than median prices of the health of the city's real estate market.

While median prices can often be skewed by certain factors — seasonality or physical characteristics of individual homes that sell — the index, by contrast, showcases how the city's entire housing stock has changed in value, regardless of whether the homes were purchased during a particular period. Gillen based his analysis on data from the city's Recorder of Deeds Office and Trend Multiple Listing Service, which focuses exclusively on single-family homes, not condominiums.

The surge at the market's high end is due in part to the price of new construction, observers say. Given the high cost of land, developers have chosen to build higher-end homes at higher prices. And because inventory remains so low — current supply stands at 4.4 months, far lower than the 6 months that is considered healthy — many sellers are able to fetch high prices. ("Months supply," is defined as the number of months it would take to sell all homes on the market, given the pace of sales.)

That was certainly true in the first quarter. Philadelphia recorded 30 sales of homes for greater than $1 million, the third-highest quarterly number in Philadelphia's history, Gillen said.

"A trend that we're seeing [nationwide] is that folks are moving to cheaper cities, and that is certainly true of Philadelphia," said Redfin's Richardson. Her website  recently released a report indicating that Philadelphia was the destination of choice for one in eight users of the website looking to leave the New York area. Washington, D.C., residents were the second most likely to scour the Philadelphia market.

This raises a question: Can Philadelphia's price growth be sustained?

Yes, according to Richardson.

"When your median home price is [so low], there's so much more growth to go," she said. "When you start lower, you grow faster, especially if you're getting higher-income folks coming into your city."

"We're not reaching a bubble any time soon because demand is so hot," she continued. "For every new listing, it seems like we have more buyers who are interested. The economy is coming along ... There's nothing on the horizon that says this momentum is going to burst like a bubble."