Residential Mortgages Down 7.2% in PHL

By Stacey Mosley

Real estate is a cyclical industry. Philadelphia, like many cities across the country, has experienced consistent wins and successes since the last recession, but as 2018 comes to a close one question is undoubtedly at the forefront of many minds:

How much longer can these favorable conditions continue?

It’s hard to not look for the signals of emerging market stress. Year to date citywide new construction permit issuance in Philadelphia is down 4.7% compared to 2017. Prices, however, have continued to creep upward at particularly fast rates in some parts of the city. Meanwhile, over $3 Billion in light residential home value was mortgaged for properties purchased in 2017, $1 Billion more than the $1.95 Billion mortgaged in 2013.

This report looks exclusively at sales and mortgage information for properties in Philadelphia zoned for light residential use sold and mortgaged within their year of sale since January 2013, excluding properties sold at Sheriff Sale. We answer the following questions:

Key highlights:

$13 Billion, But Slowing

Since January 2013, over $13.5 Billion in light residential home value has been mortgaged within Philadelphia and the average home values mortgaged over time have increased by 26%.

Table 1.1: Summary Mortgage Issuance in Philadelphia Since 2013

  2013 2014 2015 2016 2017 2018 (As of August)
Properties Sold & Mortgaged (within 1 year) 9,893 10,393 11,938 11,454 12,640 8,447
Average Home Value Mortgaged $197,515 $189,067 $196,139 $208,817 $239,368 $249,569
Citywide Home Value Mortgaged (In Billions) $1.95 $1.96 $2.34 $2.39 $3.03 $2.11

The 2018 mortgage issuance data, however, suggests a slowdown is already upon us. Relative to 2017, the rate of mortgage issuance through August 2018 is lagging by 7.2%. One culprit is the upward trajectory of interest rates. The current Federal Funds rate of 2.25% (at the time of this report) is up 100bps from last year. Meanwhile, on the light residential lending side, Freddie Mac’s 30-year fixed rate mortgage rate excluding fees reached a 7-year high of 4.94% earlier this month and is expected to inch up, as well.

Interestingly, while two-thirds of neighborhoods citywide are experiencing a decline, one-third of neighborhoods are experiencing increases in sale related mortgage issuance. Neighborhoods such as Feltonville, Grays Ferry, Dickinson Narrows, Roxborough, and Brewerytown have each seen a 17-21% increase in issuance when compared to 2017. At the other end, neighborhoods like West Kensington and Francisville are realizing a 28% decrease. These trends align with similar signals in recent sales activity data, which show market contraction already starting to set in to certain parts of the city, but not yet others.

Volume of Debt

Of the $13.5 Billion in light residential home value mortgaged in Philadelphia since 2013, four neighborhoods alone (out of over 150) house over 15% of the debt - Fishtown, Point Breeze, Graduate Hospital, and Fairmount.

Meanwhile, the annual sum of leveraged home values has increased 10-20x in East Poplar, Ludlow, Brewerytown, and Sharswood. In the case of Brewerytown, the annual cumulative home value mortgaged went from $2.4M in 2013 to over $34.4M in 2017. In Greenwich, $1.8M to $15.9M. Ludlow went from $405,000 to over $10M in 2017. West Kensington - $2.3M to $17.3M. Emerging markets across the city are seeing varying rates of change - in sale volume, sale prices, mortgage issuance and consequently, leveraged debt.

Are some of these neighborhoods growing faster than their own good? Let’s take a look at Brewerytown. Assuming the average home buyer puts down 5 to 10%, and we see a 10% dip in the overall market, how many recently purchased homes in the top tier of the market might go underwater?

Table 2.1: Brewerytown Sale & Mortgage Trends

  2013 2014 2015 2016 2017 2018 (As of August)
Average of Top 20% in Sale Values $161,120 $176,018 $200,553 $238,554 $409,542 $412,517
Properties Issued Mortgages (within 1 yr of sale) 30 44 88 121 164 113
Total Property Value Mortgaged (within 1 yr of sale) 2.4 4.0 8.4 13.5 34.4 28.0

Table 2.2: Estimated Number of Properties in Brewerytown Purchased in 2017 and 2018 Potentially Overleveraged in Event of Market Decline, Top 20% of the Market

Assumed Market Decline Estimated Home Value at Top 20% of Market Assuming Owner Put 5% Down Assuming Owner Put 10% Down
10% Dip $371,265 21 19
15% Dip $350,639 25 22

Assuming buyers put down between 5 - 10% and the market declined between 10% to 15%, 6% to 14% of the properties purchased in Brewerytown since January 2017 would be overleveraged.

In Conclusion

The increase in mortgaged home values, concentration of debt in a handful of submarkets, and decreasing number of mortgages issued overall suggest an impending change for Philadelphia’s light residential market, likely not in a positive direction. But will this change happen in 2019? 2020?

The answer will depend on which corners of Philadelphia have stabilized enough to at least plateau and which move in a more macro downward direction. At the city level, investment activity in the Opportunity Zones has the potential to prolong the market’s otherwise downward shifting course. Granular and current information will be critical as the market further shifts. To better understand the manifesting sub-market trends, you can sign up for a 30-minute consultation here.

Stay tuned for Stepwise’s upcoming 2019 New Construction Market Report, an annual recap (see 2018, 2017) which will further add insight to the discussion of what’s in store for Philadelphia’s light residential real estate market, in addition to Baltimore and DC.

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