Over the past twelve months, average home prices in twenty of the largest U.S. markets fell 18 percent. This is according to the widely-followed, Standard & Poor’s/Case-Shiller Home Price Index. In contrast, a much wider index tabulated by the National Association of Realtors showed average price declines of only 12%. The realtor number includes various-sized markets. Cleary, the largest markets have experienced larger, and in some markets, much more drastic price drops.
It may be true. The national real estate story could very well be told in the smaller and medium size markets, which lead the way out of the national real estate recession. Because of their more stable real estate values, these smaller markets now will enjoy an intermediate-term economic advantage as well.
The Market Has Spoken: A Home’s Price is What the Next Buyer Will Pay
Throughout the housing price inflationary spiral that started between 2002-2004, the large urban markets showed the biggest price gains. As prices peaked in 2005-06, not all local markets had to adjust back down.
When the securitization and permissive lending cycle came to an end, home prices had to return to where they were five years earlier. Home prices now will have to match household income. Federal tax benefits are not as important. The securitization craze – and the reckless lending that accompanied it – drove housing prices up in the most popular and expensive markets.
Seven Big Markets with Huge Price Index Declines
According to the S&P home price index, between December 2007 and December of 2008, there were seven “sunbelt” and popular investor markets that experienced dramatic home price index declines. These are, in order of their declines: Miami, Phoenix, Las Vegas, Los Angeles, San Francisco, San Diego, and Tampa. Most of these markets are now showing price levels last seen in the 2003-2005 period. The average decline for these “disaster” markets is approximately 34%.
Mid-Size and Smaller Markets Show Smaller Declines
According to the Realtor sales statistics however, between the fourth quarter of 2007 and the fourth quarter of 2008, many mid-size markets showed only modest price declines. A representative sampling includes: Boston (12%,) Denver (12%,) Portland (11%,) Baltimore (6%,) Austin (no decline,) Minneapolis (13%,) Seattle (12%,) Houston (6%,) Raleigh (2%,) Wichita (+4%), and Jackson, Mississippi (+4%).
High-priced markets vs. less expensive markets: The biggest change in the nation’s economy due to this home price “adjustment” will be to level the economic playing field. For years, markets with high housing costs continued to grow, as long as the lending and securitization industries would finance their relative high cost of housing. Now that the lending and securitization industries are “back to the basics,” less expensive markets will enjoy an economic advantage. Places like Salt Lake City, Denver, Charlotte, Des Moines, Dallas, Houston, San Antonio, Lexington, and Raleigh should outperform the more expensive costal markets. Texas markets look to be in an enviable position for additional economic growth.
Some popular growth markets: Six markets will continue to grow, even though many other fast growth housing markets have had experienced profound price adjustments. These include Boston, Seattle, Portland, Los Angeles, Washington, and New York. These cities will remain popular with households who are attracted by high-paying jobs.
Regional centers: Some important regional centers have been affected by the recession. Cities where home prices have experienced substantial negative declines include Chicago, Minneapolis, Atlanta, Memphis, and San Francisco. These once-favored locales may not have the same level of economic activity they experienced while the real estate prices were going up.
Regional differences at a glance: Seldom in recent economic history has the housing situation been so radically different among the four major U.S. regions. The Northeast has had only a modest home price decline, because housing in that region was already scarce and expensive. High housing costs in the Northeast have been affecting that region’s growth for many years.
In this first recession of the new century, the Midwest is having a severe, unique, recession. The loss of manufacturing is rippling through the entire local economy. The permanence of this change can be seen in big price drops in several states, notably Michigan, Ohio, and Indiana. The manufacturing recession in the Midwest has cost many local markets their previous higher home price status. Midwest markets that have suffered big price declines (over 20%) include Saginaw, Akron, Cleveland, Lansing, Toledo, and Detroit. Some of the price declines indicate major economic dislocation.
The West is suffering through the worst real estate recession in decades, as the overleveraging of home values comes to a halt. California markets have undergone a profound price decline, in all parts of the state. It is a question whether the California lifestyle will recover any time soon from the substantial adjustments made to home prices. Large local markets in the state that have experienced one-year declines in excess of 30% are Anaheim, Los Angeles, Riverside, Sacramento, San Diego, San Francisco, and San Jose. Many smaller markets will also see population declines, as new construction comes to a halt.
With the exception of Florida, and maybe a couple of other metro regions, the South has never had high home prices. Economic growth there can be expected to proceed apace, as the other US regions struggle either with high housing costs, housing price deflation, or a manufacturing depression. Texas in particular is expected to take advantage of its young labor force, and moderate home prices.
Local Market Differences Will be the Key to the New Real Estate Cycle
There have been many recent adjustments to local market price levels. Over the past five years, there is a now new list of “favored” markets, and there are now “out of favor” markets. The real story is not just with the twenty largest markets, as the press frequently reports. There are profound regional and local home price differences taking place that will affect economic growth patterns over the next decade. The national press would do well to focus on local market differences, rather than on a handful of once-popular, and now fallen, Sunbelt cities.
About the Author:
Peter Fugiel, Ph.D., is a realtor with Keller Williams & Fox Associates on Chicago’s north side. His housing research web site, Chicago Realtyscape.com, provides a detailed look at the Chicago real estate market. For more information about specific properties, visit Peter’s Keller Williams real estate site.
Prior to joining Keller Williams, Peter was a vice president and senior housing analyst with Nuveen Investments for many years. At Nuveen, he specialized in housing development financings and mortgage pools in all regions of the country. Peter holds a Ph.D. in public financial management from Northern Illinois University.
NEW_SECTIONTexas: In a Class of its OwnEND_SUPP_HDR
Interestingly, the Texas housing markets have not suffered through this severe real estate recession.
In fact, for the most recently reported past four quarters, the median home price in Beaumont, Texas increased by 16%, by 5% in El Paso, and 2% percent in Amarillo.
Compared to a national decrease of 12.2% in median home prices over the past four quarters, other Texas cities also fared well. The median home price in Austin was virtually unchanged (less than a one percent decline). The average year-to-year change was down by only 3% in Corpus Christi, and by 5% in Dallas, Houston and San Antonio.
Perhaps it is because Texas learned its lesson about real estate speculation after the savings and loan fiasco. Or maybe the state’s regulatory oversight of local lending had an effect. More likely, the Texas markets never ’enjoyed’ the benefits of being popular with the fast-track lending and securitization industries that flourished in California, Arizona, and Florida.
Whatever the cause, Texas stands along among the largest states to take advantage of the economic dislocations posed by the current real estate debacle. Modest home prices and a very young labor force should propel Texas to new levels of population and economic growth. Being out of favor with fast-track financing schemes has now brought advantage to the Lone Star state. No wonder they express frustration with what the nation’s biggest and most popular real estate markets have done to themselves.