Tuesday, October 31, 2006

Hottest housing market in the country

The Wall Street Journal's latest analysis of the housing market has Houston as the hottest housing market in the country out of 27 major metros. We are one of only three markets where homes are still going up in value, and we have the lowest inventory increase (a sign of housing weakness) and the strongest employment outlook. Despite that, they spend more space talking about Seattle and Charlotte, and their paragraph on Houston is accurate but kind of lame.
Houston's market is benefiting from job growth at energy and technology companies and draws newcomers because of its low home prices. The median price in the second quarter was $152,700, compared with a national median of $227,500, according to the National Association of Realtors.
Something about Blogger makes the graphic table below not very readable, but if you click on it, it will load in its own browser window and be more readable.
Business Week also has a recent article on the national housing bust (thanks to Erik for the link). Their point is that many markets weakening now can be expected to bounce back strongly over time if history is any guide. Their graphics (one, two) are not very hot on Houston, because, well, we allow plenty of new construction and competition to keep prices in check. But their text is a little more positive, and it makes some very good points near the end.
How do you know if your own local market is the kind that will snap back or the kind that will languish indefinitely? One key factor is the ease or difficulty of building new homes. Places where new home construction is a long and expensive process, such as Boston and San Francisco, tend to experience big price movements, both up and down. "Restricted supply leads to more volatility in prices," says Edward L. Glaeser, a Harvard University economist who has studied big-city housing markets.

Glaeser isn't ready to predict where prices are headed market by market, but the cities with tight housing do usually boom again after a bust. In places such as Atlanta and Houston, by contrast, price cycles are usually mild, because the supply of housing is flexible. Traditionally, flexible markets have gone through booms and busts only when there was a wrenching change in demand, such as during the oil-patch roller-coaster of the 1980s.
Looking at the supply side's effect on boom-and-bust behavior isn't the usual way of assessing housing prices. The more common approach is to determine, by measures such as price-to-income ratios, which markets seem to be overvalued and which undervalued, and then assume they will converge toward fair value. Moody's Economy.com Inc. (MCO ) has a projection of house prices out to 2015 that shows most of the biggest 10-year gains in apparently cheap markets such as Pittsburgh, Nashville, Houston, St. Louis, and Austin.

(St. Louis? Recently ranked crime capital of America? Ironically, they came in first and Detroit second, just like the World Series.)

Economy.com's approach is consistent with textbook economics. But it would have done a bad job of predicting what happened in the past 10 years, wherein the pricey got pricier and the cheap cheaper. For example, even though Houston has had a long stretch of healthy growth, it's so easy to build homes there that inflation-adjusted prices are still 19% below their 1983 peak.
In an era of globalization, cities with international reputations can get an edge over blander neighbors if they're perceived as scarce commodities. For example, Nashville, as the capital of country music, has at least the potential to convert its fame into wealth, says Gleb L. Nechayev, an economist at Boston-based Torto Wheaton Research, a unit of CB Richard Ellis. Miami developers have parlayed the city's international fame into booming sales of condos to Latin Americans and Europeans. But while the uniqueness phenomenon may help growth in those cities, it won't necessarily keep prices up, because it's easy to build: Witness the current glut of Miami condos.

What makes the housing supply inflexible in markets like Boston isn't necessarily a lack of land. Far more often, the cause is regulatory constraints like minimum lot sizes. "There's a pretty strong correlation between volatility [of housing prices] and regulatory constraint," says Stephen Malpezzi, a housing economist at the University of Wisconsin School of Business. Glaeser says that because of zoning regulations, the density of housing in many metro Boston communities is actually lower than in growing areas of the supposedly wide-open Southwest. "In Wellesley [Mass.], they should be building apartment buildings around the train stations, but it's all single-family housing," says Richard K. Green, a finance professor at George Washington University.

At this stage in the slump, restricting the supply of housing may sound like a good thing. It's not. Sure, it can make current owners richer by increasing the scarcity value of their homes. But it's murder on first-time buyers. And in the long run, it's bad for the local economy. As Glaeser notes, companies tend to migrate away from areas with costly housing to avoid paying the higher salaries needed to compensate employees for their home costs. He notes that between 2003 and 2005, high-cost Massachusetts lost 0.3% of its population, more than any other state. "The economy cannot grow unless the population grows, and the population cannot grow without new housing," he wrote in a May paper.


At 6:27 PM, November 02, 2006, Anonymous Anonymous said...

The ranking of St. Louis as the most dangerous city in the US is pretty meaningless. The St. Louis city that they are talking about has 330,000 people - it includes only the downtown and some of the worst areas of the St. Louis PMSA. That would be like taking downtown Houston and the immediate vicinity. They should compare PMSAs or at least do some sort of apples to apples comparison based on radius, population density, etc.

Still, I would be somewhat surprised to see areas like St. Louis, Austin, and Houston see significant property value appreciation over the next 10 years. For one thing, in Texas we have every incentive to keep our property values down, due to high property taxes. Second, I don't see these areas competing with the coasts for the insane price increases we have seen over the past decade.


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