More Housing Market Woes

Over at Business Week, the cover story is on the "sinking housing market."

Las Vegas was once the hottest of the red-hot real estate markets. But when sales really started choking up last year, developer KB Home (KBH ) did something drastic. Determined not to be caught with a big backlog of unsold homes through one of the industry's notorious down cycles, the builder started slashing prices. A lot. In the 1,400-home Huntington community, a subdivision of two-story stucco houses west of the famed Strip, homes that started at $320,000 a year ago are now listed for $270,000--just a starting point for potential deal.

This was easy to predict. When lots of folks pointed at Las Vegas as a growth machine (and thorn in the side of the creative class theory), we sat back and said look at the creativity index as a leading indicator of growth and real estate trends. In other words, it's a bad bet.  Joe Gyourko's superstar city analysis said the same thing.  It's short term blip up was an abberation.  Like I said, not hard to predict.

The reality is there's really two housing markets. What's interesting is how well high creativity index and high superstar cities' markets and holding up.  Joe was visiting here last week and we had a great conversation. I told Joe we essentially broke even on our DC house and sold it very quickly (in less than a week). He reiterated what he said in his papers:  Even superstar markets dip down in the short-run but they bounce back in the long-run. So, sure, the market in places like San Francisco, Seattle, or San Diego may slide a bit. But not like Las Vegas or Miami.  "If you had kept it for ten," Joe added, "then you would have made a killing."

We are increasingly looking at a split housing market. Driving this is economic fundamentals, long run concentration of growth in spiky places and the globalization of these places and their real estate markets.  Even Robert Shiller is surprised at how well real estate prices are holding up in core creative/superstar markets.  While other markets will crash, our guess is superstar markets will stagnate and perhaps decline somewhat.  But after a relatively short period of time, as incomes and demand rise, they will come raging back.  See, the housing market in these places is sticky and adjusts in bursts.  Rather then come crashing down as in in  Miami or Las Vegas, they will stagnate for a period (losing value along the way) until incomes rise and push them back up in a big burst.

Your thoughts?

Comments

[Michael Wells]

I'd guess there are (at least) three housing markets:
• Creative Class/Superstar cities where the long term trend is up, driven by influx of creative class and high tech industry.
• Boom/Bust cities like Miami & Las Vegas, with shorter term and more volatile cycles that follow fashion.
• Dead Zones like Wheeling W.V., much of the former farming Midwest and possibly cities like Detroit. They don't rise, don't fall, don't move.

The dead zones may be the real problems for economic growth, let alone real estate. I think multicultural Miami has potential and even Vegas is attracting some creative industry. But in the dead zones, lacking all three T's and with their young leaving, it's hard to see a future.

[RF]

Michael - Very nice segmentation: I agree.

[Michael Wells]

Some 20+ years ago I went to Eastern Ohio with my father (I was born in Martins Ferry, Ohio across from Wheeling.) We went to Adena, Ohio where my family had lived and my cousin still owns my grandmother's house. I asked a realtor-relative at a family gathering what the house would be worth. He said "Maybe $500 if anyone wanted to buy in Adena, but nobody does." (At that time in Portland it would have been an $60,000 house, today probably $200,000). With the real estate boom I recently decided to look it up on Zillow. Zillow doesn't show any house values for Adena, I suspect it's been too long since anybody bought/sold anything there.

Adena is about 65 miles from Pittsburgh, 130 from Cleveland. In California people commute that far to find cheap housing.